Economic Implications of Swine Flu

It is too early to say whether a full-blown swine flu pandemic is in prospect, but for decades health experts have been warning it is a question of when, not whether, this will occur. The worst-case scenarios would take a weighty toll on the world economy, falling heaviest on developing countries that lack adequate medical and emergency infrastructure, but also affecting advanced economies on both the supply and demand sides of the equation. In the milder scenarios, we are looking at something more akin to the 2003 severe acute respiratory syndrome (SARS) epidemic, which had only a minor impact on the trajectory of the affected Asian economies. Leading economies are all too aware of the dangers after the experience of avian flu and SARS, so their stronger levels of preparedness offer reassurance that in milder infection scenarios the global economic recovery will not be derailed.

Bigger Impact on Emerging Markets

The swine flu outbreak could not have happened at a worse time in terms of its impact on economic growth. More encouraging is the fact that, having learned from the severe acute respiratory syndrome (SARS) epidemic in 2003, and subsequent fears over an avian flu epidemic, the healthcare systems of many countries—especially in the developed world—are better prepared than even a few years ago. Many countries now have stockpiles of antiviral drugs that could cover between 25% and 50% of the population. Unfortunately, many emerging markets have neither the drug stockpiles nor the healthcare systems to cope with such an epidemic. This means that the economic impact of a potential swine flu epidemic is likely to be much larger for emerging markets than developed markets.

Supply-Side Impacts

There are two ways in which a swine flu epidemic would have an impact on economic activity and growth. The first is the direct effects on the supply side of the economy. This includes the physical and psychological effects of the flu-related deaths and illnesses on the labor force, working hours, and productivity.

These supply-side impacts would include:

• Deaths—measured by a reduction in the labor force.
• Worker absenteeism—measured by a reduction in overall hours worked.
• Overwhelmed healthcare systems—measured by a reduction in both work hours and productivity.
• Closed schools and public transit systems—measured by a reduction in hours worked and productivity.
• Restrictions on in-bound travel, tourism, and trade (including a severe crackdown on immigration)—this would not only have supply-side effects, but would also curtail demand for tourism and trade (these are demand-side impacts discussed in the next section).

For a mild epidemic, the supply-side impacts would be small—no more than a few tenths of a percentage point of GDP—and probably last less than a year. In a more serious epidemic, the supply-side impacts could be five to ten times larger and last much longer (at least two years).

Demand-Side Effects

The demand-side effects include the change in the behavior of consumers and businesses in reaction to the pandemic. These effects are often two to five times greater than the supply-side impacts. The economic consequences of Asia's SARS outbreak in 2003 provide an instructive example. That outbreak caused only 800 deaths: in other words, its supply-side effects were relatively insignificant, given the region's huge populations. Yet, psychological effects of the outbreak were considerable and led to a significant demand-side effect: Asia's GDP growth was reduced by 2.0 percentage points in the third quarter of 2003 and by 0.5 percentage point in all of 2003.

The demand-side effects encompass most categories of discretionary spending:

• Travel and mass transit services.
• Hospitality services, such as hotels, restaurants, and tourism.
• Retail and wholesale shopping (except perhaps online shopping, which might even benefit from such an epidemic).
• Other entertainment activities, including cinemas, theatres, concerts, sports, and gaming industries.
• Export-oriented economies (including Mexico, where the recent epidemic started) would be especially vulnerable to demand-side shocks, because of the negative effects on both domestic and foreign demand. Moreover, the reaction (or over-reaction) of financial markets to an epidemic could exacerbate the demand-side impact by reducing household wealth and hurting the balance sheets of companies. In this regard, the response of national and local governments—in dealing quickly with the health issues and in reducing public panic—could be crucial in mitigating and limiting the negative effects of a pandemic on consumer and business confidence.

The Bottom Line

In a mild epidemic, the impact on growth would be limited. But in a more severe epidemic, the consequences could be quite dire. In a mild epidemic (for example, roughly 75 million infected in the United States and 100,000 fatalities), the supply and demand effects cut less than 0.5 percentage point off the growth rate of real GDP and last less than a year. The impact in emerging markets would be likely to be two to three times as big. In a more serious epidemic—or pandemic—with fatalities four to five times higher, the impact on real GDP growth in developed economies would be more like minus 2–3 percentage points. In the case of the United States, this could mean a growth rate of minus 4–5% in 2009 and an even bigger rise in the unemployment rate. For poorer countries, which are less able to cope with such an outbreak, the impact would be devastating, and produce downturns of depression-like proportions.