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Summary

New Zealand and the world currently face the risk of a global influenza pandemic caused by the potential adaptation of avian influenza H5N1 to humans. This paper investigates the possible effects of a pandemic on New Zealand’s macroeconomy. Although the economic effects may be dwarfed by the social and human costs of death and illness, it is still important to evaluate how a pandemic may affect the economy so as to guide policy interventions to lessen the economic impact. Our approach is to model the impact of a pandemic as simultaneous supply and demand shocks. Supply shocks arise primarily from workers stopping work due to sickness, care of others, or fear of infection. New Zealand’s import supply may also be disrupted. The labour force would be permanently reduced due to deaths caused by influenza. Demand shocks arise due to lower export demand, higher uncertainty, “social distancing” caused by fear of infection and public health measures, and consequential effects on income. There is a great deal of uncertainty around the potential size of these shocks. However, the results of this paper do suggest that a severe pandemic has the potential to generate a significant loss of output and income growth.

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