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

Other Large Shocks to New Zealand’s Economy

To place the potential shock to New Zealand’s economy from a pandemic in perspective we look at other shocks New Zealand has experienced.

Over the past 100 years, New Zealand has had 6 incidents (1909, 1922, 1931, 1932, 1949, 1952) where real annual GDP has dropped by 5% or more. The average annual growth rate over this period is about 3%. Hence, the probability of having an adverse shock that reduces annual GDP from baseline growth by 8% or more is about one in 20 years. It should be noted that these events all occurred near the first half of last century when institutional arrangements were significantly different than today. Since this time developed countries, New Zealand included, have tended to experience less fluctuation in aggregate output, suggesting that they have become more resilient to adverse shocks.

The most severe period of negative growth last century occurred during the depression in 1931, 1932 and 1933 when growth rates were -5%, -7%, and -0.25% respectively. If the potential real GDP growth rate over this period was 3%, this represents a drop from the baseline level of around 8% in the 1931, then 18% in 1932 and 22% in 1933. The level of annual GDP did not return to the 1930 level until 1936. Compared to the depression, our severe pandemic shock based on the Ministry of Health standard planning scenario has a similar first year impact, but a much smaller cumulative impact if we consider a four year period.

The Reserve Bank of New Zealand and the Treasury estimated the impact of a hypothetical outbreak of foot and mouth disease in the North Island (Gereben, Woolford and Black 2003). The initial shock to the economy generated by an outbreak was estimated to be 4% of quarterly GDP (1% annualised). This potential event was estimated to cause an annualised cumulative reduction in real GDP of around 3% over a two year period. This estimate of the impact of an outbreak of foot and mouth disease in the North Island is similar to our estimated impact of a milder pandemic.

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