Cold comfort
Jul 23rd 2009
From The Economist print edition
The economic impact of swine flu may not be that bad
Illustration by S. Kambayashi
ATISHOO, atishoo, we all fall down. On July 20th the Ernst & Young ITEM Club, a forecasting group, warned that swine flu could knock 3% off Britain’s economic output this year. The FTSE 100 stockmarket index reacted with equanimity, finishing the day 1.3% higher.
Perhaps investors had already factored the impact of a pandemic into their calculations.
Perhaps the media’s habit of treating every potential crisis as an omen of the apocalypse made them cynical. Or perhaps they were simply sceptical of any attempt to predict the economic impact of the disease.
Swine flu is just the latest in a series of “exogenous events” (risks originating outside the financial system) to test the markets.
Whether these events are natural disasters, acts of terrorism or even wars, they have generally had less economic impact than pessimists feared—at least over the past ten years. Even the terrorist attacks of September 11th 2001, the quintessential example of a shock, had only a temporary impact on consumer demand. Some much-feared events, such as the Y2K computer bug and bird flu, have been complete washouts.
Changes of government can be regarded as exogenous events too. An enormous amount of analysis is devoted to assessing the impact of elections. But it is hard to think of a recent ballot in a developed country that has led to a stockmarket taking a decisive new course.
Could swine flu be the exception that proves the rule? If the medical authorities are correct, one-third of the British population may be affected this winter (other nations would presumably be similarly hit). If all these people have to take a week off work (because of their own, or a child’s, illness), production will be affected. If the “worried well” avoid public places like shopping malls or aircraft, demand will also fall. That is the rationale behind the Ernst & Young prediction and a World Bank study of pandemic flu in 2008 that suggested a 5% blow to global GDP.
At the very least, the pandemic will make this autumn’s data hard to interpret. Any impact on consumer sentiment would come at an awkward time, with the economy still struggling to bounce back from recession. But as Ian Stewart, an economist at Deloitte Touche Tohmatsu, an accounting firm, points out: “History suggests that economies are remarkably resilient in the face of disasters.” Activity merely shifts from one period to the next.
That was the conclusion of a 2006 report* by the Canadian finance ministry, when bird, rather than swine, flu was the concern. The report examined the global flu outbreak of 1918 and the less severe pandemics of 1957 and 1968. In the first episode, about 20-25% of North Americans fell ill, with a maximum of around 4% of the population taken sick at the same time. Excess mortality, defined as a greater death rate than normal, was around 4 in 1,000, or 0.4% of the population.
What economic impact did this have? Figures for American industrial production show a 1.7% decline (in annual terms) during the autumn of 1918, which translates into a 0.5% fall in overall economic output. As for sensitive consumer sectors such as retailing and transport, the authors conclude that the impact ranged “between indiscernible and modest”. There was no visible effect on world trade or on the Dow Jones Industrial Average.
The 1918 pandemic coincided with the end of the first world war: the data may have been distorted by the conflict. But the 1957 and 1968 pandemics occurred in more normal times and on those occasions too, the authors found the economic impact was very small.
All told, and even if one allows for greater absenteeism in the modern era, a repeat of the 1918 outbreak would only hit output in affected countries by 1%, the study concluded. And the reason for the limited impact? “People adapt and work around the shock; those unaffected work harder and longer to pick up the slack.”
Apart from the difficulty of forecasting the impact of exogenous events, investors may have another reason for ignoring them. The “endogenous” factors (those originating within the system) seem so much more important. It was not a disease or a war or an election that plunged the economy into crisis, but a combination of bad lending decisions and the excessive leverage of banks at the heart of the financial system. H1N1 will have to be a very powerful virus indeed to match the destructive force of subprime lending.
* “The Economic Impact of an Influenza Pandemic” by Steven James and Tim Sargent. Working Paper 2007-04, Canadian Department of Finance
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