We’re Several Months into the COVID Economy. What Have We Learned?
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Economics Aug 26, 2020

We’re Several Months into the COVID Economy. What Have We Learned?

From household spending to the strength of the dollar, an economist sees some clear trends—and signs of what’s to come.

Lisa Röper

Based on insights from

Sergio Rebelo

Editor’s note: This is part of a series of articles based on Kellogg Executive Education webinars focused on COVID-19 and crisis management.


Even months into the pandemic, it feels as though much of the information that shapes our future remains unknown: Will schools be open? Will people go out to shop and eat out this week? Will my community’s positivity rate go up or down?

Still, it is worth taking stock of what we do know—or at least know more about now than we did when the pandemic began.

According to Sergio Rebelo, a finance professor at the Kellogg School, some stable trends are emerging with respect to the economy. In a recent webinar with Kellogg Executive Education, Rebelo discussed what we’ve learned about the economic impact of COVID-19, and what this information can tell us about the future. Below is a sampling of what he presented.

Each Thursday, Kellogg faculty are offering free webinars on how COVID-19 is impacting businesses, markets, and careers. You can sign up for upcoming sessions, hosted by Kellogg Executive Education, here.

To start, and as we might expect, we’ve seen that stay-at-home orders are devastating to economic activity. Early on, governments imposed simple containment measures such as lockdowns, Rebelo says, “because there was no time to prepare other policies.” At the same time, we’ve seen that lifting a lockdown while the virus is still raging does not prompt much of an economic recovery, because people are still worried about their health.

In contrast with the simple containment measures implemented in much of the western world, countries like South Korea deployed a “smart containment,” strategy. This strategy combines robust random testing, which allows public-health officials to find infected people who are asymptomatic, with quarantines for those who test positive. Together with Martin Eichenbaum of Northwestern University and Mathias Trabandt of Freie Universität Berlin, Rebelo simulated the impact of smart containment on health and economic outcomes. They found that this policy reduces both the death toll of the epidemic and the severity of the recession.

“This strategy is a win–win,” he says. Why? “There’s fewer infected people circulating, so the risk of infection is smaller. The result is fewer infections and fewer deaths. At the same time, it’s less dangerous to go to work, take public transportation, or dine at a restaurant, so we have a smaller recession.”

We are also learning how spending has shifted in response to the pandemic. For example, in the U.S., high-income households cut spending much more than low-income households. This is likely because higher earners cut more activities and services that require lots of interpersonal contact. Think sporting events, theater performances, or dining out.

“Wealthy households cut their spending on consumption that requires social interaction by quite a bit to self-protect,” Rebelo says. This type of spending likely made up a smaller portion of low-income households’ budgets pre-pandemic.

Rebelo also discussed his ongoing research with Eichenbaum, Trabandt, and two other coauthors, Miguel Godinho de Matos of the Portuguese Catholic University and Francisco Lima of Statistics Portugal. Using administrative data for Portuguese public servants, they are studying the spending behavior of different age groups. Crucially, because civil servants have relatively stable jobs, they likely were not altering their spending as a reaction to a dramatic change in income.

The researchers found that people in their 70s cut consumption by 41 percent compared with those age 20–49, who cut back by 26 percent. The split is even more dramatic when the researchers focused only on “high-contact” spending, like restaurant meals or sports events.

“We see people behaving rationally,” he says. Older people are most at risk of dying from COVID-19, so it makes sense that they would reduce spending by more than young people, particularly on types of consumption that involve social contact.

Next, Rebelo turned to some economic indicators. Overall, he says, most organizations and economists expect the world economy to bounce back in 2021.

This expectation is borne out by the evolution of the price of copper. After an initial, precipitous drop this spring, the price has recovered and is even a bit higher than it was pre-COVID-19. This pattern is telling because copper is widely used in manufacturing.

“That means commodity markets are looking ahead and seeing that the global economy will recover,” Rebelo says.

He also looked at the strength of the dollar. During the Great Recession, which was centered in the U.S., the dollar was on average quite weak. That is not the case today. The recession is global and the dollar is strong.

“It’s a moment of great uncertainty, and people see the dollar as a safe haven,” he says.

Looking toward the future, Rebelo worries about growing inequality both within the U.S. and between developed and developing countries. It’s become clear that those who were most physically and economically vulnerable—due to a lack of access to quality healthcare or the need to work in high-contact industries, for example—have been hardest hit by COVID-19 and the resulting economic fallout. Those communities will have a harder time recovering.

“We’re going to exit this crisis with much more inequality than we started [with],” Rebelo says, “and we started with a lot of inequality.” This inequity can potentially fuel a rise in nationalism, with people being quick to blame foreigners, as well as a rise in populism, with politicians winning elections by promising quick fixes that don’t really work.

But, on a more optimistic note, Rebelo believes that a more resilient global economy could emerge from the pandemic. Companies can build this resilience through more flexible sourcing, more robust inventory management, access to differentiated sources of financing, lower fixed costs, and more diversification in revenue sources.

And, hopefully, we will learn the importance of working together across the globe to solve the problems that afflict us all, Rebelo says.

“That lesson might potentially open the door to a new era of cooperation in the world economy,” he concludes.

You can read previous articles from this series here.

Featured Faculty

Tokai Bank Chair in International Finance; Professor of Finance

About the Writer

Emily Stone is the senior editor at Kellogg Insight.

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