ECFIN in action
Predicting the impact of a bird flu pandemic
We are as yet several steps away from an avian flu pandemic. Whilst humans working or living in close proximity to diseased poultry have contracted the H5N1 strain of bird flu, as yet there has been no transfer of the disease from human to human. Since few people in the EU have close contact with birds, human-to-human transfer will have to occur before there is a pandemic. Once that takes place, however, features of modern society such as air travel and urbanisation make it likely that the spread of the disease would take place rapidly, although it will not happen overnight.
Whilst we do not know if there will be a pandemic, it is only wise to prepare to deal with the possibility. On the medical front, the pharmaceutical industry aims to develop treatments and vaccines to counter the spread of avian flu between humans (and between birds in the poultry industry), and of course there is the logistical challenge of manufacturing and distributing millions of doses for patients around the world.
In economic terms, such a pandemic would have significant consequences. Millions of people dying and many more ill would inevitably have major impacts on most areas of economic activity. In a recent study, Lars Jonung and Werner Röger, senior officials in DG ECFIN’s Research Directorate, have attempted to quantify the macroeconomic impacts of a pandemic. They used a DG ECFIN model to assess the effects on the macroeconomic scale for the EU economy. Furthermore, they deliberately used methods which make their results comparable to parallel studies done in the USA, Canada and elsewhere, on the effects of a pandemic.
Jonung and Röger stress that their study aims purely to quantify the impact of a possible pandemic on GDP in the EU, and makes no attempt to factor in the costs of human suffering – which would undoubtedly be significant. They emphasise that the study is undertaken on the same terms as any other attempting to estimate the effects of an external shock on the EU’s economy.
Three influenza pandemics from the past century have been studied by economists, of which the most serious was the Spanish influenza of 1918-19, killing up to 60 million people. Estimates of the economic impact of past pandemics vary however, with some suggesting a negative effect in the long term while others show a positive contribution to growth in their aftermath.
“Whilst we can always find many factors that could influence the rate and extent of spread of the disease, we believe it is reasonable to take evidence from past pandemics as a basis for our assumptions,” explains Jonung. Therefore, the study uses the same medical assumptions used in a recent study by the US Congressional Budget Office, which were derived from past pandemics. (This also has the advantage of facilitating comparison between the EU and the US.)
Fig. 1 Estimated output losses due to a future pandemic – recent estimates
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The study assumes a morbidity rate (the percentage of the population infected) of 30% and a mortality rate (the percentage of those infected who die) of 2.5%. On average, those infected would take three weeks off work. That translates to some 150 million Europeans becoming ill, and 3.75 million of those dying (or 7.5 deaths per thousand of the European population). In fact, these assumptions are more severe than the outcome of the Spanish influenza of 1918-19, when the mortality rate was around five deaths per thousand population, and those infected had the fever for just three to five days. Again based on past experience, it is assumed that a pandemic would pass in a relatively short time (within two to three months), and so the immediate effects would be concentrated in a short period.
“Although we have used these assumptions in our model,” notes Röger, “the model is scalable and we could easily adapt it to estimate the effects of a different initial impact.”
Supply and demand effects
The study suggests there would be greater effects on the supply side than on the demand side. The study assumes a permanent reduction in the population of 0.75% and an additional temporary reduction in productivity as sections of the labour force take time off while ill, offset to some extent by additional work/overtime by the healthy workforce. Taking supply and demand separately (i.e. ignoring direct influences on each other), the study estimates a reduction of -1.1% in 2006 GDP from the projected level due to supply-side effects and a further reduction of -0.5% from demand-side effects. This total reduction of -1.6% in GDP, were the pandemic to have occurred in the first quarter of 2006, would mean GDP growth would slacken to 0.5%, down from DG ECFIN’s projected 2.1% (from the Autumn 2005 Forecast). This reduction in GDP growth falls in the middle ground of predictions for other countries/regions (see figure 1).
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Demand-side effects would be strongest in industries such as tourism, travel and entertainment, i.e. non-essential activities that bring people together in large numbers. Member States which rely on tourism for a large share of their GDP, notably the Mediterranean countries, could expect to be hit harder particularly if the pandemic was to happen in the summer months. The model estimates a more limited effect on demand since it assumes the European Central Bank (and other central banks) would lower interest rates to stimulate spending, and the increase in saving during the pandemic would lead into increased spending after it had passed.
This drop of -1.6% in GDP in 2006 (for a pandemic occurring in first quarter 2006), followed by much less significant drops in 2007 and 2008, would be the equivalent of a major recession. But in contrast to a recession, the economic shock would be concentrated in a short period and the recovery (at macro level) would be much quicker.
The base assumptions can be varied however, taking account of more severe effects on tourism, or increased disruption to trade due to reduced demand elsewhere in the world. (The impact of the base assumption and a more severe scenario are shown in figure 2.) But one of the biggest assumptions made in the study is that those who are not sick continue to go to work. In the event of widespread absenteeism – whether through employee choice or employer instruction – through a desire to limit exposure to infection, labour productivity would clearly be significantly further reduced temporarily.
“It is difficult to predict rates of absenteeism. We know that in the Hong Kong SARS epidemic in 2003, employers reduced staffing to try and ensure they could maintain key functions running in the event of sickness among their employees,” Röger underlines. “Certainly we could see a lot of scope for white-collar tasks to be done by teleworking, so it is likely that more employees could stay home temporarily without disrupting the work flow too much.”
Fig. 2 Growth effects on EU-25 of a pandemic starting in the first quarter of 2006
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Whilst it predicts the economic effects of an avian flu pandemic would be comparable to those of a recession, the study concludes that there is no major threat to Europe's economic well being, since the effects would be short lived. In contrast to more extreme press reporting on the potential impact of avian flu, this study suggests that the economic effects will be limited. “There is the possibility of being alarmist, particularly since the pandemic may not come, but we have a duty to understand the possible scenarios. Indeed, it’s valuable to think ahead, to look at the possible effects on our economy. In fact, given the limited effects we predict, we could even be accused of encouraging complacency,” Jonung suggests. “But when we have an estimate such as this study, we can more confidently weigh up the benefits of spending €1 billion on World Health Organisation (WHO) campaigns against avian flu in Asia. Once we have quantified the potential effects for Europe, we see efforts such as that of the WHO in a different light.”