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My Two Cents

The economic impact of the flu

Chris Farrell Apr 27, 2009

The experts are trying to figure out how severe is the risk of a global swine flu epidemic. So far, there isn’t a lot of information and it is far from clear how much of a worry is it. But the cocerns are already hitting an economy that is still on a downward tragectory. It’s bad news from an economic point of view.

In 2006, the Congressional Budget Office briefly looked into the economic impact on the U.S. economy of a pandemic.

The economic effect of a mild pandemic was fairly small. For instance, the CBO ran some numbers assuming the attack rate would be 25% (except in the farm sector, where it was assumed to be 5%), the fatality rate would be just over 0.1%, and the time out of work would average about 4 days.

Under those assumptions, GDP would decline by about 1/2 percent (about $70 billion in 2004) as a result of supply-side factors. For the demand-side effects, CBO assumed that the declines in each industry would be one-quarter of the declines under the severe scenario, which amounted to 1/2 percent of GDP (about $60 billion in 2004). In total, the decline in output amounts to about 1 percent of GDP, relative to what would have happened in the absence of a pandemic. Compared to the long-run growth trend, a mild influenza pandemic would cause growth to slow, but would probably not cause real GDP to fall (or cause a recession).

The worry is that this relatively optimistic economic scenario from a mild pandemic now looks very optmistic since the global economy is in recession. The U.S. economy has probably lost another 630,000-650,000 job in April.

What would be the impact of a severe pandemic?

That scenario suggests that a severe influenza pandemic would have an impact on the U.S. economy that was slightly larger than the typical recession experienced during the period since World War II. On average, real (inflation-adjusted) GDP declined by 0.6 percent during the four quarters following each of the 10 business cycle peaks between 1947 and 2005. Those declines indicate that the average postwar recession lowered real GDP by about 4.1 percent, relative to a baseline in which output continued to grow according to its long-run trend of 3.5 percent. In addition, the estimated effect on real GDP in the severe scenario exceeds the impact of every postwar recession except the one following the 1981 peak, which pushed real GDP more than 7 percent below trend in 1982.

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