NCPA - National Center for Policy Analysis


May 4, 2009

The scares over bird flu since 1997 and severe acute respiratory syndrome (SARS) in 2003 have spurred research into the economic costs of pandemics.  Studies paint a grim picture of what swine flu could mean for the world economy.  For example, World Bank economists estimated last year that a pandemic with death rates similar to those in the Spanish flu that swept the world in 1918-19 could shrink global gross domestic product (GDP) by 4.8 percent.

Although such research can help to identify the economic effects of swine flu, global recession means that some of the mechanisms it describes are already at work.  The recession means, perhaps counterintuitively, that the incremental economic effect of a pandemic may be less dramatic than it would be in normal times, says the Economist.

Asia's experience with SARS is a guide:

  • The outbreak caused a sharp drop in private consumption in the economies it affected; people avoided going out -- as they are doing in Mexico.
  • On April 29th the country's president, Felipe Calderón, announced a national suspension of non-essential activities from May 1st to May 5th.
  • The cancelling of sporting events and concerts, the closing of bars and nightclubs, and people's propensity to stay inside had already cost Mexico City's service and retail industries $55 million a day from April 24th, when authorities first closed schools.
  • That sum was expected to double after a ban on restaurants seating customers.

Financial markets have reacted sharply:

  • The peso has fallen by 5.5 percent against the dollar since the emergency began.
  • Mexico's finance minister, Agustín Carstens, has said that he expects the economic cost to be .3-.5 percent of GDP, based on Asian precedents.
  • Luis Flores, an economist at IXE, a bank, reckons that the government's budget deficit could increase by .7 percent of GDP.

This outbreak has happened when, worldwide, consumer confidence is low.  So any further drops in demand because of a swine-flu pandemic may be smaller than those caused by SARS, when airline-passenger arrivals in Hong Kong fell by nearly two-thirds in a month.  But a pandemic would dent hopes of a rapid recovery from recession, by providing yet another reason for gloom to continue, says the Economist.

Source: "The Butcher's Bill," The Economist, April 30, 2009.

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