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Impacts of a Potential Influenza Pandemic on New Zealand's Macroeconomy - PP 06/03

Motivation and Key Results

Experts at WHO and elsewhere believe that the world is now closer to another influenza pandemic than at any time since 1968.

The World Health Organisation (WHO) has warned that the world currently faces a higher risk of a global influenza pandemic that at any time since the 1968 influenza pandemic. This risk is mainly due to the spread of the H5N1[1] strain of avian influenza among birds and other animals in Asia, the Middle East, Africa and Europe. A combination of other factors also contributes to the WHO’s concerns, including the dynamics of resistance to influenza within populations and the emergence of conditions conducive to the global spread of a severe influenza virus.

In response, governments across the world are, in varying degrees, considering their states of preparedness, promoting research into development of an effective H5N1 vaccine, and promoting international cooperation to contain the spread of the H5N1 virus.[2] In New Zealand, the Ministry of Health (2005) has prepared an influenza pandemic plan, and the Ministry of Economic Development (2005) has provided information for businesses and other organisations to assist with their preparedness.

The purpose of this paper is to provide an assessment of the potential impact of an influenza pandemic on New Zealand’s real Gross Domestic Product (GDP). This assessment work was prepared as a contribution to interdepartmental work on pandemic planning (The Treasury 2005). The approach used in this assessment is to model the impact of a pandemic as a simultaneous supply and demand shock. The supply shock arises primarily from a reduction in labour supply as labour is withdrawn to minimise the risk of infection, to recover from infection, or as a result of death. There may also be disruptions to the supply of imported intermediate inputs to production. The labour supply effect in particular differentiates pandemics from other types of shocks. The highly contagious nature of influenza and the speed with which it can spread mean that, in a modern economy, labour withdrawal is an essential part of the process of “social distancing” that is required to reduce the risk of infection and minimise contagion. Here we use the term “social distancing” to refer to any action by people to avoid infection from other people, including for example not using public transport or staying home from work. This process of “social distancing” directly contributes to reduced availability of services and reduced consumer demand.

The demand shock arises primarily from reduced international demand, and from reduced domestic demand due to rising economic uncertainty, reduced household income and “social distancing”. As the pandemic passes, we assume that GDP gradually recovers to its long-run path, which in turn is likely to have been affected by the impact of the death rate on the size of the labour force.

“Given the unpredictable behaviour of influenza viruses, neither the timing nor the severity of the next pandemic can be predicted with any certainty.” – WHO

This paper does not consider the likelihood of an influenza pandemic around which there is still considerable uncertainty. Uncertainty exists because we cannot be sure whether the H5N1 virus will mutate into a form that can be transmitted from human to human nor whether international cooperation can contain the spread of a mutated virus. However, even if a pandemic involving the current strain of H5N1 does not eventuate, the risk of pandemic from other influenza viruses remains.

There is also inevitably considerable uncertainty involved in assessing the potential economic impact of an influenza pandemic should one eventuate. An influenza pandemic is unlike other shocks that typically impact on New Zealand’s economy and there has been scant international research on the economic impact of previous pandemics. In any event, differences in the epidemiological features of influenza viruses and differences in the environment in which a future influenza outbreak will occur make comparisons with previous pandemics difficult. There have been marked changes for example in the speed and pervasiveness of global travel and trade, the capability of public health systems and availability of antibiotics, and in international monitoring and awareness since the influenza pandemics of 1918, 1957 and 1968.

We base our assessment on judgements about the magnitudes of the supply and demand effects. Due to the uncertainty surrounding potential pandemics there are many different scenarios that could be investigated. We look particularly at the severe scenario presented by the Ministry of Health and Ministry of Economic Development in their planning documents, and at a less severe scenario based on the features of the influenza pandemics of 1957 and 1968. These two scenarios do not represent upper or lower bounds for the potential impact on the economy.

For the severe scenario we first assume that 40% of the population become infected with the virus and 2% of the infected die, giving a population death rate of 0.8%. On top of this we assume another 40% of the workforce takes time off work due to fear of infection or care of others. The wave of infection occurs over an eight-week period, with the greatest infection rates in the third, fourth and fifth weeks. Considering as well a range of demand reductions and business closure rates, we estimate the impact of a severe pandemic in New Zealand to be in the range of a 5 to 10% reduction in annual real GDP in the year of the pandemic. Over four years we estimate the cumulative reduction in real GDP to be a loss of 10 to 15% of one year’s GDP. The range of estimates for the economic impact depends on the extent that consumer demand is reduced by the pandemic and the extent that industries choose to or are forced to close because of public health measures. A large proportion of the estimated reduction in GDP is due to reduced GDP during a recovery period following the pandemic. If the economy recovers faster or slower than we have assumed the impact may be considerably smaller or larger.

We also investigate a pandemic with a lower infection rate and case fatality rate. For this scenario we assume the effect on the labour supply and on consumer demand is less, although we note that a pandemic being epidemiologically less severe does not necessarily mean the length of time people take off work or the psychological effects of the pandemic are lessened. A pandemic with an infection rate of 30% and a 0.25% case fatality rate would have a mortality rate of the same order of magnitude of the 1958 and 1967 pandemics. If the associated labour withdrawal and “social distancing” effects are indeed reduced, a pandemic of this magnitude could have considerably less impact and may reduce GDP by the order of 1 to 2% in the first year, an impact similar to a typical business cycle downturn.

Notes

  • [1]H5N1 refers to the gene coding of the virus. Virologists use the combinations of antigens (haemagglutinin, which comes in sixteen known basic shapes, and neuraminidase, which comes in nine known basic shapes) to identify a particular virus. H1N1, for example, is the name for the influenza virus that caused pandemic in 1918.
  • [2]The World Bank, the World Health Organization, the Food and Agriculture Organization, and the World Organization for Animal Health are taking the lead in preparing a global coordinated response strategy on the possibility of an avian flu crisis, and helping members improve surveillance and control capacity and to develop national action plans that focus primarily on human and animal health (International Monetary Fund 2006).
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