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Conclusions

In May 2005 the World Health Organisation declared that the current outbreak of avian influenza is “the most serious known health threat the world is facing today.”[12] William Aldis, the World Health Organisation’s representative in Thailand, is reported to have commented in October 2005 that this outbreak of avian flu “is a threat to the poultry industry, but it’s not a big public health problem yet.”[13] Clearly there is considerable uncertainty surrounding the potential for the current outbreak of avian flu to cause a pandemic. If a pandemic did occur, it could potentially impact severely on the New Zealand economy. This paper attempts to evaluate how a pandemic would affect New Zealand’s GDP and the potential size of that impact.

Using as a benchmark the Ministry of Health standard planning model, which in turn is based on the infection and mortality rates of the 1918 influenza pandemic, we estimate that the reduction in New Zealand’s annual real GDP in the year of the pandemic could be in the range of 5 to 10%. Over four years we estimate the loss will accumulate to around 10 to 15% of one year’s GDP. The range of estimates varies according to assumptions regarding the expected rate of absenteeism due to sickness and care-giving and to assumptions about the rate of reduction in consumer demand and temporary industry closure.

We also estimate that a pandemic with infection and case fatality rates similar to the 1958 and 1967 pandemics and with milder effects on the workforce and demand would reduce GDP by approximately 0.7 to 2.1% in the first year, an impact similar to a typical business cycle downturn. Taking into account a typical rate of recovery this would accumulate over four years to a loss ranging from 1.1 to 2.8% of one year’s GDP.

The necessity for “social distancing” is an important factor that is a significant source of the short-term loss of GDP growth. It is possible that as the rate of “social distancing” increases, and therefore the short-run adverse impact on GDP increases, the impact of a pandemic on infection and death rates would decrease thereby mitigating the adverse long-run effects. This possibility is not built into our analysis. Furthermore, we have not made any assessment of other potential policy responses to a pandemic shock such as, for example, the benefits of public investment in contracts to develop a vaccine that might reduce the potential extent of labour withdrawal and long-term impact on population and labour supply. Apart from the impact of a pandemic on population growth, we have also not incorporated any long-run effects that might arise for example from changes in labour productivity or from changes in international trading conditions. Just how these could change is uncertain.

Our scenario results are based on several other important assumptions that are highlighted in the paper. In addition to the estimation of the initial supply and demand shocks, for which we provide a range of estimates, the estimated impact of a pandemic will depend on the appropriateness of the recovery path (which is based on past shocks and generated by NZTM), the duration of the pandemic, the coincidence between timing of the international and domestic pandemics, and the impact of a pandemic on asset prices and business finance.

What the results of this paper do suggest is that a severe pandemic has the potential to generate a significant loss of output and income growth. This suggests that policies that can encourage households, firms and financial institutions to undertake actions that will mitigate the risk of contagion and that can facilitate the economic recovery process warrant consideration.

Notes

  • [12]Statement by Dr Lee Jong-Wook, Director-General of the World Health Organisation to the 58th World Health Assembly, May 18, 2005.
  • [13]Dominion Post, 1st November, 2005.
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