Swine flu panic could have devastating effect on economy: Kohler

The last thing the world economy and sharemarket needs right now is an influenza pandemic, but Mexican swine flu seems to be more dangerous than either SARS or bird flu in its ability to pass between humans.

With the world economy already forecast by the IMF to contract by 1.3% this year, the impact of a serious flu epidemic would be devastating.

It is far too early to predict anything like a serious international flu pandemic, but pictures of airline passengers in face masks having their body temperature scanned are not helpful.

Studies by the World Health Organisation show that by far the biggest economic effect of a flu epidemic is caused by avoidance behaviour, the largest of which is a drop in air travel. That’s why the Dow Jones Transportation Average dropped 5% last night and the oil price fell more than 2%.

Last year the WHO published a paper that modelled three scenarios based on work by Australian economist and RBA board member Warwick McKibbin, with Alexandra Sidorenko, for the Lowy Institute:

1. Mild – based on the Hong Kong flu of 1968-69, in which 1.4 million people died.
2. Moderate – based on the 1957 Asian flu, in which 14.2 million people died.
3. Severe – based on the 1918-19 Spanish flu epidemic, in which 71.1 million died.

The impacts on global GDP, in order, are: 0.1%, 2% and 4.8%.

McKibbin and Sidorenko didn’t model world GDP in their original presentation, just individual countries, but they did do Australia. Their estimates for the three scenarios on Australian GDP were: mild, -0.8%; moderate, -2.4%; and severe, -5.6%.

They also modelled a fourth scenario – “ultra” – which refers to the highest estimations of casualties from the 1918 Spanish flu (not specified). That produced a decline in Australian GDP of 10.6%.

No one is suggesting that Mexican swine flu will be as bad as the worst estimates of the Spanish flu epidemic.

But the key point of the WHO’s work is that most of the economic effect is caused by the panic, not the casualties.

Efforts to avoid infection cause 60% of the contraction in GDP, a lot of it because of a decline in air travel, but also because people stop eating out and stop eating any of the animal that caused the disease in the first place.

Of the remaining 40% of the drop in GDP, the WHO study says that mortality causes 12 percentage points of the decline, and illness and absenteeism the other 28 points.

So far swine flu appears to be responding to drugs like Biota Holdings’ Relenza, and the world’s health authorities appear to be better placed to deal with outbreaks like this after the real test-run of SARS and bird flu.

But the world’s economy, and specifically the airline industry, was in better shape then, and more able to withstand the impact of an infection panic.

This article first appeared on Business Spectator