Truly Dismal Science: Estimating a Pandemic's Economic Impact

While most people are worried about the potential personal impact of an avian-flu pandemic, the WSJ reminds us that economists are mulling over the potential impact a global pandemic would have on business. A subscription-required article make some interesting points:

A relatively mild -- and containable -- outbreak of bird flu would likely slow economic activity, cause stocks to fall, bonds to rally and trigger sharp jumps in so-called haven currencies, such as the Swiss franc and possibly the U.S. dollar and sterling. But these effects should prove temporary, contend Citigroup analysts. In fact, they regard the equity selloff as an opportunity to buy stocks that would be expected to rebound with economic growth.

A full-blown pandemic is another story. Even people who regard predictions of a repeat of 1918-1919 as alarmist acknowledge the ruinous impact of such an event. "A virulent, global outbreak of avian flu, which is still considered to be a low-probability event, would cause global economic activity to decline, raw-material prices to collapse, risk aversion to rise, monetary policy to ease and interest rates to fall," says Ben Walker, a fund manager at Gartmore Investment Management.

Economies would be buffeted by curtailed individual travel, increased absenteeism from the workplace, reduced shopping, a steep drop in consumer and business confidence and government-imposed quarantines.

Meanwhile, the combination of increased investor aversion to risk and slowing global growth would damp cross-border investment. That, in turn, should be bad news for the currencies of countries with large current-account deficits that rely on financing from abroad, such as the U.S., Australian and New Zealand dollars, the U.K. pound, South African rand and Mexican peso, says Marvin Barth, a Citigroup currency economist.

Slowing growth, especially in Asia, would also put a big dent in the demand for raw materials, particularly jet fuel.