Paris: One of the few certainties about the H1N1 swine flu virus is that it would have to turn much deadlier than it seems right now to cause a major drop in global economic output.
A renewed rash of media headlines suggests the virus, the subject of a World Health Organisation (WHO) pandemic alert since 11 June, could deliver the next big blow to the global economy. But there is no reason to take that for granted and experience shows the impact could just as easily be limited.
The fear factor on its own could reduce travel, tourism and leisure, but that demand-side decline could also be short-lived even if it is sharp, and followed by a sizeable rebound, as the Sars epidemic in Hong Kong in 2006 suggests.
Warwick McKibbin, the Australian designer of one widely cited simulation model, says the potential loss ranges from 0.8 percentage points of global GDP in his ‘mild scenario´ to 12.4% of GDP in the most extreme case of a virus more deadly than the Spanish flu of 1918-19, which killed 40-50 million.
The mild scenario is the most plausible right now, he says, given the WHO tally of 816 deaths for 134,503 confirmed cases.
“It’s a little bit worse but not a lot worse than a regular influenza cycle,” McKibbin, director of the Centre of Applied Macroeconomic Analysis at the Australian National University, said.
Even if a panic-driven drop in consumption did slow the pace of recovery from the current recession, the hit would probably be too small to derail it, as long as it is just a scare, says Marco Annunziata, chief economist at UniCredit bank.
“I can however imagine a worst case scenario where the panic is so intense and widespread that people avoid all crowded places for an extended period,” he says. “But I think in most plausible scenarios this (hit to the economy) would be temporary and contained.”
Estimates of possible economic fallout vary hugely according to who produces them and how, but governments and busineses need nonetheless to plan for what might be the fourth pandemic of the past 100 years, after 1918-19, 1957-58 and 1968-69.
The World Bank says a flu pandemic could trigger global GDP losses of anything from 0.7 to 4.8 percentage points in the year it strikes depending on severity, while investment advisory firm BMO Nesbit Burns says that the GDP loss could be two percentage points in a mild pandemic and 6 percent in if severe.
Estimation methods range from simulations of damage to supply and demand to more complex macroeconomic models that try to factor in shifts in capital flows and country risk premiums, as does the one constructed by McKibbin.
Regionally, official surveys range from losses for US GDP of from 1.5 to 5 percentage points, from 2.6-6.8 percentage points in Asia from 1.6-3.3 percentage points for the European Union.
Most experts agree that the toll on poorer countries would be bigger given less developed healthcare and less sophisticated communications or corporate planning for such situations.
Experts have drawn few consensual conclusions however on the economic toll of past pandemics. The Spanish flu coincided with the end of World War One when national accounting was in its infancy and information restricted for security reasons.
The International Monetary Fund highlights that despite data showing US industrial output and business activity dropped at the height of the outbreak in October 1918, a Canadian finance ministry study suggests annual output loss was limited to an annual GDP loss of just 0.4 percentage points.
Indeed, EU study author Jonung noted that some researchers found GDP growth rates probably increased in a catch-up later.
Junung says a 1.6 percentage point loss of EU GDP in a pandemic year would likely be followed by a 1 percentage point rebound a year later compared to the level of growth that would otherwise have been expected.
Hong Kong’s story is edifying on that point. GDP rebounded strongly in the third quarter of 2003 after a big dip in the second quarter as tourist arrivals slumped. Growth for 2003 as a whole ultimately exceeded preceding years.
Hong Kong’s economy was in a poorly state before Sars even hit but plunges in retail sales and investment during the second quarter of 2003 gave way to big rebounds in the third and fourth quarters after the Sars threat waned, tourists starting flooding back and the property market started to pick up.
“If it’s psychological (only), the worst will happen in September or October, we will all realise a month later that it was not so awful and in January everything will go back to normal,” says Mathias Matallah, head of Jalma, a French health economics consultancy.
The primary damage will be sectoral as travel slows, people go out to eat and socialise less and businesses limit meetings, making airlines, leisure and retail the main losers.
Stock markets so far reflect the belief that the economy as a whole will not be severely damaged.
Broad stock indices such as the Eurofirst 300 have risen near 40% since mid-March on hopes that the economy, plunged into recession by a financial crisis, is starting to stabilise. Airlinesstocks are up just 15% and dropping since news of the new H1N1 virus emerged in April.