When millions of people across the United States and around the world entered a lockdown in March 2020, a ripple effect throughout the economy was inevitable. As necessary as these steps were to bring the coronavirus outbreak under control from a medical standpoint, there was a flip side: Large swaths of the economy ground to a halt. And because this pandemic is global, the repercussions have been felt globally as well.
Just how severely has COVID-19 impacted the economy? The Federal Reserve Bank (Fed) of St. Louis notes that the economic slump in the early months of the pandemic rivaled the initial declines of the Great Depression.
Fortunately, the U.S. economy started to rebound later in 2020, following the introduction of unprecedented stimulus measures. The economy was then given another much-needed boost by the swift arrival of vaccinations and the U.S. government’s efforts to encourage everyone to get these injections and immunize themselves.
Still, the pandemic and its economic impact are far from over, particularly as new, highly contagious variants of the virus continue to emerge.
- Before COVID-19, the biggest pandemic in modern history was the Spanish Flu of 1918 and 1919, during which many service-based businesses suffered double-digit losses.
- The International Monetary Fund (IMF) estimates that the global economy declined more than 3% in 2020, grew 5.9% in 2021, and will grow 4.9% in 2022.
- Though certain industries, such as travel and hospitality, felt the pandemic’s impact most directly, the effect also spread to unrelated industries.
- Government interventions during the pandemic, such as several stimulus packages, helped the U.S. economy rebound.
- Vaccinations have helped to slow the spread of the virus, although new, highly contagious coronavirus variants continue to surface and jeopardize progress.
- The advent of a pandemic is a good time to analyze your financial situation and plan for the worst. It’s never too late.
The Interconnected Economy
Certain industries, such as travel and hospitality, felt the pandemic’s impact most directly. Shops and restaurants closed their doors altogether or opened with low seating capacity and low demand to dine in. Nonessential travel evaporated, causing massive lost revenue for not only airlines and cruise ship operators but also smaller businesses that rely on tourism dollars.
Those employed in seemingly unrelated industries also felt the secondary effects of social distancing. For example, manufacturers—especially outside the medical field—saw fewer orders as shopping slowed down and demand dwindled for nonessential goods, such as new clothes. Banks absorbed the loss of mortgage payments due to government-mandated forbearance rules. And oil companies saw prices plummet as demand weakened due to a sharp decline in everyday travel.
Fear of the unknown only exacerbated these economic impacts. Even individuals and families with ostensibly stable employment limited their purchases in case the financial aftershock couldn’t be contained.
Measuring the Effect of a Pandemic
Every pandemic is unique, which makes measuring the repercussions of this type of crisis especially challenging. What’s more, there simply aren’t many examples that compare to the worst-case estimates of COVID-19’s effects. For example, the H1N1 flu of 2009 was widespread but not as deadly. The U.S. Centers for Disease Control and Prevention (CDC) estimates that there were 61 million H1N1 cases in the United States, resulting in fewer than 13,000 deaths.
The closest modern comparison to the COVID-19 pandemic occurred more than a century ago, when the so-called Spanish Flu (another H1N1 virus, though a different strain than the 2009 version) ravaged the globe from 1918 to 1919. According to CDC estimates, roughly 500 million people became ill with the disease, which ultimately took about 50 million lives worldwide.
Economic data from the early 20th century is scarce. However, an analysis by the Fed of St. Louis estimated that many businesses, particularly service- and entertainment-oriented ones, “suffered double-digit losses in revenue.” Back then, the economic disruption was short-lived, as the underlying health emergency subsided in 1919.
How does the current pandemic compare? Though the mortality rate of COVID-19 has been significantly lower than that of the Spanish Flu, its economic toll is already severe. Because the underlying virus is so contagious—a group of researchers from the University of Hong Kong and Harvard University estimated that one-quarter to one-half of the world’s population would likely contract the virus “absent drastic control measures or a vaccine”—governments around the world took drastic measures to control its spread. But those actions, which included keeping most shoppers and restaurant patrons at home, came at a big economic price.
The number of COVID-19 cases reported in the United States as of March 19, 2022, which so far have resulted in over 969,000 deaths. The World Health Organization (WHO), meanwhile, reported roughly 271 million confirmed cases and 6.06 million deaths worldwide.
The Economic Impact of COVID-19
Many workers and potential shoppers sequestered themselves in the early days of the COVID-19 pandemic, which had a momentous impact on the global economy, as well as that of the United States. For example, U.S. retail sales plunged in April 2020 before recovering by July 2020. On top of that, Fed data showed the worst dip in manufacturing output since the 1940s, although it has since rebounded.
Of course, that sudden drop in demand had a disastrous effect on employment. The national unemployment rate climbed as high as 14.8% in April 2020 before dropping to 6.2% in February 2021. By November 2021, it had dropped to 4.2%. Additional estimates indicated more than 25.7 million workers were affected by the pandemic. This figure included those whose hours or compensation were cut and those who were completely unemployed, among others.
Those economic shockwaves were felt from Beijing to Madrid, creating a drag on the world economy that hasn’t been seen for decades. In October 2021, the International Monetary Fund (IMF) revealed that the global economy contracted by 3.1% in 2020—the worst slide in recent memory. However, the economy did bounce back in 2021 and is projected by the IMF to grow 4.9% in 2022.
That’s not to say that a swift return to the pre-pandemic days is near. Notably, many other economists have since lowered their growth rates for 2022, following a bout of inflation and a surge in cases linked to new variants of the virus.
A recent rise in COVID-19 infections due to the highly contagious Omicron variant could hinder the global economic recovery by exacerbating supply chain problems and depressing demand, U.S. Treasury Secretary Janet Yellen warned.
The Role of Government Intervention
In an ideal scenario, legislatures and central banks use the power of the purse to help mitigate an economic crisis. The United States passed several rounds of stimulus legislation. In March 2020, U.S. lawmakers passed the first of these: a $2 trillion stimulus bill, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, to blunt the economic impact of the global coronavirus pandemic. On March 27, 2020, then-President Donald Trump signed the bill into law, with a number of measures aimed at helping the American public.
Efforts to open up the U.S. Treasury and send money directly to households helped newly unemployed individuals and those with reduced working hours. And interest rate cuts helped to boost liquidity at a time when money was tight. The Fed slashed a key rate to near zero in March 2020.
Those aren’t the only devices that governments have in their tool kits. They can activate short-term financing mechanisms that help businesses stay afloat and retain workers during the crisis. And they can bolster unemployment insurance and provide other safety nets that keep the most vulnerable residents from losing their homes or going hungry. The U.S. stimulus packages included measures to address these issues.
Preparing Yourself Financially
Though pandemics can cause significant economic damage, at least in the short term, there are steps that you can take to protect your finances as much as possible. It’s never too late, and you never know when an emergency will strike. Here are a few of the measures that you might consider to emergency-proof your finances:
Build Up Your Emergency Fund
Conventional wisdom dictates that you should have three to six months’ worth of expenses readily available in your bank account at all times. A pandemic is one of the scenarios for which they’re intended. So if you’re a little short of the mark, now is the time to build up your reserve if you can—you never know if you might need it.
Dust Off Your Resume
As businesses continue to reopen fully, more jobs are becoming available. Start connecting with people who might be able to aid your job search, and make sure that your resume is in good shape. If you work in a hard-hit industry, now might be the time to start looking at other job opportunities.
Seek Financial Relief
Those who saw their incomes drop or evaporate as a result of the pandemic might find it hard to make payments on their mortgage, rent, or student loans. As part of the stimulus packages, the U.S. government provided relief for many of those who couldn’t pay these bills as a result of the economic impact of the pandemic.
If you are struggling financially, it’s always better to reach out to your lenders as soon as possible, rather than fall behind on payments without contacting them. The worst thing you can do when you miss a payment is to keep your creditors in the dark.
If you missed out on getting a stimulus payment or did not receive the full amount to which you were entitled, you can claim it as a Recovery Rebate Credit on your 2021 taxes (filed in 2022).
What Has Been the Economic Impact of the COVID-19 Pandemic?
The International Monetary Fund (IMF) said the global economy contracted by 3.1% in 2020. Mandatory lockdowns around the world significantly impacted job security, spending, and the production of goods and services—leading, among other things, to the stock market crashing.
In the United States, two consecutive quarters of declines in gross domestic product (GDP) were registered, with the decrease of 9.1% in the second quarter (Q2) of 2020 marking the steepest quarterly drop in economic output since modern record keeping began in 1947.
Though the economic fallout of the pandemic has been widespread, it has been particularly damaging to Black, Latino, Indigenous, and immigrant households, according to the Center on Budget and Policy Priorities, a nonprofit research institute.
The good news is that the U.S. economy started to rebound later in 2020. Also, despite the virus continuing to cause disruptions, there is hope that the vaccination of the population and growing immunity should pave the way for a brighter future.
What Is the Economic Relief Payment for the COVID-19 Pandemic?
The U.S. Congress passed several bills to address the financial fallout of the COVID-19 crisis. First was the Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed in March 2020. The CARES Act included a direct $1,200 payment for each family and the Paycheck Protection Program (PPP) for each affected business, which ended on May 31, 2021.
An additional direct stimulus payment of $600 was included in the Consolidated Appropriations Act (CAA) of 2021, which was signed into law in December 2020, while a third stimulus check of $1,400 to qualifying adults and each of their dependents was authorized in March 2021 through the American Rescue Plan Act of 2021. Some lawmakers are now pushing for a fourth round of aid.
How Will the U.S. Economy Fare in 2022?
While the United States is unlikely to experience a repeat of what went down in 2020, COVID-19 is unpredictable and remains a real threat to the economy. Avoiding future lockdowns will be critical, as will keeping inflation under control and ironing out supply chain bottlenecks.
The Bottom Line
The initial economic impact of the COVID-19 pandemic was catastrophic and widespread, with the disruption to the world economy resulting in millions of people losing their livelihoods. Things certainly look much better now, although the pandemic hasn’t gone away and considerable uncertainty remains.
Whenever life appears to be returning to normal, a new variant surfaces and causes panic. These waves suggest that the virus isn’t just going to vanish and that it could be years before we see the end of periodic lockdowns and economic uncertainty.
Against this tricky backdrop, it is important, among other things, to analyze your financial situation and plan for the worst.