Selling Swine Flu
November 5, 2009
The predictions about the economic impact of swine flu are enough to make you sick. A group of consultants working with Ernst and Young estimated that if swine flu reached pandemic proportions – 50% infection rate in the UK – it could reduce economic growth by 3.0% of GDP. That’s A LOT. Given that they were already predicting a negative growth rate for this year of 4.5%, that means that the UK would finish the 12 month period 7.5% down.
If you are a loyal reader of this blog (and have put up with the fact that the frequency of my posting has recently hit an all time low – sorry), you might recall that I was quite sceptical about the depth and severity of the ongoing financial crisis. I’m also sceptical about the potential adverse economic impact of swine flu, in part because I think that pessimism in both cases are partially attributed to obsessive media reporting that influence people’s expectation of crisis. Let’s think through it for a second: what are the mechanisms through which swine flu could cause a downturn in economic growth?
The first, and most important, would be lost working hours due to people being sick, or having to take care of sick family members (especially children). It could also suppress demand for some types of products, like travel, or in general because people stay home instead of venturing out to Oxford Street to shop in fear of catching swine flu. Third could be the behavioural link I hinted at above: a swine flu pandemic on top of all the bad news about the economy convinces you that this is the end of the world as you know it, so you stop spending money, investing, etc. Fourth and finally, all of these things could have an impact on the government finances (thanks to this blog for the list of mechanisms).
I believe the first. But I don’t think that it would lead to a 3.0% decline in GDP. While lots of studies got these numbers by assuming swine flu would keep people out of work for two weeks, amongst the people I know that think they might have had it already (and how do you know if you have or are suffering from some other flu or cold?), they’ve missed a week or less of work. And of course infection rates are not as high as the doomsday scenarios in some studies’ model.
The second, in turn, one seems to me to have a critical flaw: the amazing capacity of capitalist economies to turn anything into a market for new products. The first and most obvious source of economic growth from swine flu is the market for H1N1 vaccines and drugs like Tamiflu -revenues for Roche, the maker of Tamiflu, were up almost 10% in the third quarter of this year. Pretty impressive given the overall economic conditions.
Additionally, I noticed today on my commute into work on the London Underground (a breeding ground for swine flu if ever there was one, I note between two sneezes), that there was, all of the sudden, a huge proliferation of advertisement for products claiming to “capture and kill 99.9%” of germs. Including those pesky swine flu ones. Kleenex has a tissue that kills germs. Liquid hand soap companies are claiming to kill germs. And there are some kind of wipes now that do the same.
That means that a) there are more companies seeking ad space than would otherwise be the case in a recession (especially because lots of ad space on the tube is being taken up by the above pictured series of government adverts showing you how germs spread), b) there are new “anti-flu” consumer goods out there (think increased R&D and marketing budgets) and c) that there may actually be some growth in all of these anti-germ products. To add anecdotal evidence to anecdotal evidence, I’ve now been given 2 bottles of anti-germ hand gel by the Department at LSE I work for. Someone paid for those bottles.
Perhaps, you might think, this potential marginal uptick in income is just putting lipstick on the pig of any otherwise gloomy economic picture. But as the third transmission mechanism above suggests, a dose of optimism (and Tamiflu) might be just the antidote to feverish predictions about declining GDP (I just can’t resist the plethora of easily available puns for this topic).