Monday, July 20, 2009

Economics of Swine Flu

I have to admit to a certain 'pandemic fatigue.' Previously, many threatened pandemics reached front page news only to dissipate and never materialise. Yet, a report by Sir Liam Donaldson, the Government's chief medical officer, suggested that this current Swine Flu really could reach pandemic proportions, with up to 100,000 cases a day. The report assumes that infections will ultimately reach 50pc, with a mortality rate of 0.4pc. If the virus did become this widespread it would have serious economic consequences for a fragile economy.

Economic Effects of Swine Flu.

Lost Output. Workers will take time off because of the flu. Schools and other large public bodies could start to shut down to try and prevent a rapid escalation of the disease. This would lead to lost output and lost GDP.

Lower Demand. A widespread flu pandemic would curtail spending on certain items, especially luxury goods such as tourism and flights. This would not just be from those with the disease, but, friends and family.

Impact on Confidence. Swine flu is already front page news, despite a low infection rate. If the swine flu really takes off it could dominate news and adversely affect people's confidence to spend and invest. We are likely to see an extended paradox of thrift as people.

Deterioration in Public Finances. Lower growth and output would further hit the beleaguered public finances leading to an even larger deficit.

This year, according to the governments budget, GDP is expected to fall 3.5% - one of the largest drops on record. With this level of economic decline any further loss of output is to be deeply regretted. A report by Ernest and Young into the impact of a relatively modest case of swine flue could cause this output to fall by a catastrophic -7.5% [link Telegraph]

It is hard to quantify the economic effects of swine flu, because it is a relative unknown. Some point out that the number of fatalities from flu, is unlikely to be much worse than a typical year. But, if places of work close down and people change their spending habits, it would be a real kick in the teeth for the end of a difficult year in economics.

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