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Estimated Impacts of a Severe Pandemic

Our estimation for a severe pandemic is based on the population infection and case fatality rates of the standard planning model pandemic developed by the Ministry of Health and adopted by the New Zealand Government for pandemic planning purposes.[11] The standard planning model assumptions are based on the infection and case fatality rates of the 1918 influenza pandemic in New Zealand, that is a 40 percent infection rate, with a 2 percent case fatality rate, giving a population mortality rate of 0.8%.

As well as the sick, we assume that there is a 40% additional absenteeism rate. We assume workers take an average of three weeks time off work, resulting from the Ministry of Health’s assumption that each sick or absent worker takes 1.5 weeks off and that an additional 15% of the working population takes 8 weeks off to care for children who cannot go to school. Because we do not know which parts of the working population will be affected, we assume the infection and absenteeism rates are uniform across all workers.

Using these planning assumptions and considering a range of demand reductions and industry closure rates and applying the quarterly recovery process generated by NZTM, we estimate the impact of a severe pandemic in New Zealand to be broadly in the range of 5 to 10% reduction in real GDP in the year the pandemic occurs. Over 4 years the cumulative reduction in real GDP is broadly in the range of 10 to 15% of one year’s GDP.

This range of GDP reductions comes from a series of increasing reductions in the output of industries. To begin with we assume there is no reduced demand or closure for any industries, there is simply a fall in supply of labour as a result of sickness, absenteeism and death. As a second step we assume that output from the Accommodation Restaurants and Bars, Cultural and Recreational Services, Personal and Other Community Services industries is reduced by 75% in the pandemic quarter. These industries make up approximately 5% of the economy. Further, we assume that Retail Trade output is reduced by 25%. These reductions in output will be the result of health restrictions on public gatherings, the decline of the tourism industry, and drops in demand as people confine themselves to their homes. We also assume a 25% reduction in output of the Transport and Storage industry due to heavily reduced tourist travel. Retail Trade and Transport and Storage make up approximately 11% of the economy. As a third step we reduce the output of the rest of the economy (except the government sector) by 5% during the pandemic quarter and then by 10%. The impacts of these effects are shown over three time periods (3 months, one year and four years) in Table 1. All impacts are the percentage deviation of GDP from the baseline path of GDP without the pandemic shock. The impacts are shown as a percentage of annual GDP.

Table 1: Reduction in GDP from the baseline for different demand and industry closure scenarios
All cases have 40% infection rate, 2% case fatality rate, 40% absenteeism and average time off work of 3 weeks Annualised reduction in first quarter real GDP First year reduction in real GDP Cumulative annualised 4 year impact
A: Sickness absenteeism and death only; no reduced demand or industry closure. 2.5% 5.9% 9.8% (3.2% due to death)
B: Output reduced by 75% for: Accommodation Restaurants and Bars, Cultural and Recreational Services, Personal and Other Community Services + 25% reduction for Retail Trade and Transport and Storage 3.6% 8.4% 12.9% (3.2% due to death)
C:B + 5% reduction in output for all other industries 4.0% 9.1% 13.9% (3.2% due to death)
D: B + 10% reduction in output for all other industries 4.5% 10.3% 15.3% (3.2% due to death)

The recovery path generated by NZTM for Case B is shown in Figure 2. This path is used to estimate the impacts beyond the quarter in which the pandemic hits New Zealand. The economy recovers much of the way back to full potential within the two years after the impact, where the level of full potential output is permanently reduced due to death. In terms of growth rates, economic growth is only negative during the pandemic quarter, growth is then above trend as the economy grows back to full potential.

Figure 2: Pandemic impact and recovery path (relative to baseline)
Figure 2:    Pandemic impact and recovery path (relative to baseline).

Clearly there is uncertainty surrounding the assumptions about the epidemiological features of a pandemic and therefore how it could impact on infection rates and workplace absenteeism. We therefore provide calculations showing how variations in these assumptions may affect the economic impact.

In the short term the reduction in output depends crucially on the rate of absenteeism and the average time people take off work. Increasing (reducing) the average number of weeks workers take off by one, while holding everything else constant, increases (reduces) the first year impact by around 1.5 percentage points (ppts). Increasing (decreasing) the infection rate by 10 percentage points to 50% (30%), increases (reduces) the first year impact by around 0.8ppts.

The death rate during the pandemic has its impact in the medium and long terms. Increasing (decreasing) the case fatality by 1ppt to 3% (1%) increases (decreases) the cumulative four year impact by approximately 1.7ppts. Table 2 shows the sensitivity analysis for our calculations as deviations from baseline in addition to those in Table 1. Using the values in Table 2, approximate impacts can be calculated for various cases around the ones we have presented in Table 1. For example the assumption that 15% percent of the workforce takes eight weeks off to look after children approximately doubles the reduction in labour supply during the pandemic. Table 2 can be used to evaluate the effect of removing this assumption; by reducing the level of absenteeism from 40% to 0% we reduce the first year impact by approximately 2.0 to 2.5 ppts.

Table 2: Sensitivity analysis
  Annualised reduction in first quarter GDP Annualised first year impact Cumulative annualised 4 year impact
±1 week average time off ± 0.6 – 0.8ppt ± 1.2 – 1.7ppts ± 1.5 – 2.1ppts
±10ppt rate of absenteeism ± 0.2 – 0.3ppt ± 0.5 – 0.6ppt ± 0.7 – 0.8ppt
±10ppt rate of infection ± 0.3ppt ± 0.7 – 0.8ppt ± 1.5 – 1.6ppts
±1ppt case fatality rate ± 0.0ppt ± 0.3 – 0.4ppt ± 1.6 – 1.7ppts
±0.1ppt output reduction for each 1% labour supply reduction ± 0.3 – 0.4ppt ± 0.7 – 0.9ppt ± 0.9 – 1.1ppt

Notes

  • [11]See appendix 3 of Ministry of Economic Development (2005).
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