When facing a serious threat it pays to remain as calm as possible. The temptation to panic is inevitably strong but it should be resisted.

A kind of intellectual panic is evident in the discussion of the material impact of COVID-19. The reference here is not to the medically vulnerable who face a mortal threat from the virus. That is naturally of supreme importance. 

It is rather to those who are trying to discern its likely impact. It is all too common to read comments along the lines that the crisis will hit GDP by a particular estimated amount. Or to discuss whether the downturn will be relatively short-lived or protracted. Few seem willing or able to carefully delineate what is going on.

At least three key distinctions need to be made.

First, there is the direct impact of the pandemic. That includes lost output caused by illness, healthcare costs, the cost of precautions and the huge hit to business cash flow.

Second, it is important to recognise that the impact of the pandemic is not pre-determined. To a substantial extent it depends on how we react to it. If the response is resilient it will have much less of an effect than if we are overly fearful.

Understanding the pandemic’s impact

Of course that is hugely easier said than done. Even those who are young and healthy will feel under pressure to retreat into their homes. That is even after they are compelled to do so by the authorities or advised to confine themselves by medical experts. But it is crucial that those who are able to return to normality do so as quickly as possible.

Policymakers will also have to tread a devilishly fine line. They do so in the face of immense pressure to take action. But, in some cases at least, the right decision is to resist demands to take particular measures. Resilience in the face of the threat of pandemic will make a big difference to minimising its impact.

Finally, it should be remembered that, before the emergence of the pandemic, the financial markets and economy already suffered from serious underlying weaknesses. Quantitative easing had inflated the price of financial assets, productivity growth was weak and capital investment was low. Many ‘zombie’ companies were already on the brink before the pandemic arrived.

If the underlying economy had been stronger it would have been in a better position to face its current challenges. For example, there would be scope for even more monetary easing if necessary.

Many will find it both tempting and convenient to blame the severe dislocation entirely on the pandemic. Those who want to truly understand current developments should staunchly resist this temptation.

Daniel Ben-Ami, Deputy Editor

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