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Business News/ Money / Economic impact of swine flu

Economic impact of swine flu

Economic impact of swine flu


After wilting because of drought fears, the green shoots of recovery now also face the risk of being blighted by disease. The economic impact of swine flu has so far been very mild and mortality has been very low, but if the panic spreads, it could have a small impact on growth.

Consider, first, the rapid spread of the disease, which has been an unpleasant surprise, with the flu having already spread to 160 countries at last count. Also worrying has been the rate of infection, with new cases of suspected swine flu in the UK now being reported at a 100,000 per week. In India, it could get much worse than that.

A study carried out by the New Zealand central bank on the impact of swine flu assumes that 30% of the population will contract the disease. Taking the same percentage for India would mean that at least 300 million would be infected.

There have been several studies on the impact that global pandemics could have on the economy. One of the most widely cited has been the W.J. McKibbin and A.A. Sidorenko 2006 research paper on The Global Macroeconomic Consequences of Pandemic Influenza. The paper finds that “even a mild pandemic has significant consequences for global economic output", costing close to 0.8% of world gross domestic product (GDP).

World Bank calculations, based on the McKibbin and Sidorenko paper, estimate that the negative impact on GDP in South Asia as a result of the epidemic will be 0.6%, provided, of course, the epidemic is mild.

World Bank calculations, based on the McKibbin and Sidorenko paper, estimate that the negative impact on GDP in South Asia as a result of the epidemic will be 0.6%, provided, of course, the epidemic is mild. Ahmed Raza Khan / Mint

It’s best not to go into doomsday scenarios of higher mortality, but a look at the accompanying chart should satisfy the curious. There is a lot of hype about swine flu at the moment—a pandemic such as AIDS has killed far more people. Nor is swine flu anything like the Spanish flu, which in 1918 killed around 50 million people worldwide, with an estimated 10-17 million dying in India alone and contributing to a steep drop in economic activity. It’s no coincidence that, according to economic historian Angus Maddison’s figures, India’s GDP declined by 12.8% in 1918.

The economy will be affected not only on account of higher costs of healthcare and absenteeism, but also due to the effect on demand, as people reduce their visits to crowded places such as shopping malls.

In India, this is especially important as the festive season is just around the corner. That said, it’s worth pointing out that studies have shown that recovery from the impact of epidemics and other such events that economists call “exogenous shocks" is fairly rapid, as seen from the SARS epidemic in East Asia. The New Zealand study, for example, assumes that the third quarter of 2009 will be the worst period for the current epidemic and will result in a 1.2% fall in consumption in that country. But it also estimates a 0.8% positive bounce back in consumption in the next quarter.

So far the impact on the economies of even those countries most affected by the swine flu has been very small. For instance, the cost to Mexico, the place of origin of the disease, has been estimated at around 0.3% of GDP and that’s after schools and businesses had to be shut down there. It also has a large tourism industry, which was badly affected.

What about the effect on the markets? Since end-April, when the flu first started to spread in Mexico, the country’s IPC stock market index is up 29%. Clearly, the economic recovery in the US, increasing liquidity and rising risk appetite have outweighed concerns about the flu.

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Updated: 10 Aug 2009, 09:49 PM IST
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