(Reuters) - A high body count is not the only meaningful number attached to a pandemic. The potential cost of a global outbreak of the flu or some other highly contagious disease, however ghoulish to calculate, is essential for government officials and business leaders to know. Only by putting a price tag on such an occurrence can they hope to establish what containing it is worth.
The financial damage by itself can be devastating. The expense of major epidemics is evident every time a health agency totes up the cost of treating infected people ? the outlays for drugs, doctors' visits, and hospitalizations. But that spending is only the most obvious economic impact of an outbreak.
Consider the effect on international airlines. During the 2003 SARS (severe acute respiratory syndrome), which began in southern China and lasted about seven months, business and leisure travelers drastically cut back on flying. Asia-Pacific carriers saw revenue plunge $6 billion and North American airlines lost another $1 billion.
The tourism industry also took a beating. The net revenue of Park Place Entertainment, owner of Caesar's Palace in Las Vegas and other gambling and hotel complexes, plunged more than 50 percent in the second quarter of 2003 compared with the year before, mainly because Asian high rollers hunkered down rather than risk infection while traveling.
Fear even hurt businesses dependent on sales calls. AIG, which pulled almost 30 percent of its revenue from Asia back then, was hobbled when the epidemic kept its agents from visiting potential customers.
That's just the easily measured stuff; the indirect costs pushed the total SARS bill much higher. "The biggest driver of the economics of pandemics is not mortality or morbidity but risk aversion, as people change their behavior to reduce their chance of exposure," says Dr. Dennis Carroll, director of the U.S. Agency for International Development's programs on new and emerging disease threats. "People don't go to their jobs, and they don't go to shopping malls. There can be a huge decrease in consumer demand, and if (a pandemic) continues long enough, it can affect manufacturing" as producers cut output to align supply with lower demand. If schools are closed, healthy workers may have to stay home with their children. People afraid of becoming infected are less likely to go out to stores, restaurants or movies.
Most of China was essentially on lockdown in the first half of 2003 as the government did everything in its considerable power to minimize human-to-human contact and, hence, the spread of SARS. Beijing was shut down tighter than at any time since martial law was declared during the 1989 Tiananmen Square protests. Discos, bars, shopping malls, indoor sports facilities, and movie theaters were closed, and 80 percent of the capital's five-star hotel rooms were vacant.
By May 2003, Singapore Airlines had cut capacity 71 percent and put its 6,600-member flight staff on unpaid leave. Tourism to Singapore fell 70 percent, and the country's gross domestic product took a $400 million hit that year.
From Asia, where the disease was largely confined, the ripples spread in all directions. Toronto recorded 361 SARS cases and 33 deaths, and the World Health Organization issued an advisory against traveling there ? surely a factor in the $5 billion loss Canada's GDP suffered in 2003.
It's not surprising that a pandemic hurts businesses dependent on employees or customers moving from point a to point b (as AIG and the airlines learned), but SARS also set back transport companies such as FedEx (closed airports; fewer people doing business), telecom equipment-makers such as Nortel (vendors and customers staying home) and cable-TV-box maker Scientific-Atlanta (multiple parts made in Asia). It even cut deeply into profits for Estee Lauder, which under normal circumstances sells a lot of cosmetics in Hong Kong, Singapore and China, and in duty-free airport shops.
In our interconnected world, a farmer running a fever in Southern China can reduce the income of a baggage handler in Frankfurt, and hence all the businesses that worker patronizes. "Within hours or days, an event that starts on one side of the world can establish itself on the other," says Carroll. Lufthansa saw demand for flights to and from the Far East tumble 85 percent that year, and grounded a dozen planes. With planes grounded, oil demand fell by 300,000 barrels a day in Asia, dinging the revenues of oil companies from Kuwait to Venezuela.
A COST BEYOND MEASURE? The World Bank estimated China's SARS-related losses at $14.8 billion, and although the United States and Europe were largely spared its ravages, the pandemic reduced the global GDP by $33 billion. And here's a scary thought: As health crises go, SARS wasn't that bad: It killed just 916 people and lasted well under a year. The Department of Health & Human Services estimates that the ho-hum seasonal flu is responsible for 111 million lost workdays each year in the United States. That's $7 billion in sick days and lost productivity.
A global pandemic that lasted a year could trigger a "major global recession," warned a 2008 report from the World Bank. If a pandemic were on the scale of the Hong Kong flu of 1968-69 in its transmissibility and severity, a yearlong outbreak could cause world GDP to fall 0.7 percent. If we get hit with something like the 1957 Asian flu, say goodbye to 2 percent of GDP. Something as bad as the 1918-19 Spanish flu would cut the world's economic output by 4.8 percent and cost more than $3 trillion. "Generally speaking," the report added, "developing countries would be hardest hit, because higher population densities and poverty accentuate the economic impacts."
The majority of the economic losses would come not from sickness or death but from what the World Bank calls "efforts to avoid infection: reducing air travel ? avoiding travel to infected destinations, and reducing consumption of services such as restaurant dining, tourism, mass transport, and nonessential retail shopping."
The really bad news is that we may not be hearing all the bad news. Economists who study pandemics worry they may be underestimating the financial toll because they haven't been considering all the ramifications. "Research to understand the indirect costs of an epidemic has been growing, focusing on how to accurately incorporate productivity losses and effects on economic activity," says Bruce Lee of the University of Pittsburgh Medical Center, where he is an associate professor, director of the Public Health Computational and Operations Research Group, and an expert in the economics of infectious diseases.
Take workplace vaccination. Public health officials recommend it, but does it help the bottom line? Would targeted shots bring a higher return on investment? Should employers vaccinate only their older employees? Or just those, say, in the shipping department? Lee and colleagues found that for the 22 main occupations defined by the U.S. Bureau of Labor Statistics (legal, management, food preparation, education, and 18 more), when the employer footed the bill, "employee vaccination was cost-saving for the median wage" if contagion was on the low side (one case producing 0.2 to 0.6 additional cases). It was almost cost-neutral for low-paid occupations, and a clear benefit for high-paid ones. The biggest payoff is for older workers, since they are more likely to become ill and miss work if infected. As a result, "employers could gain money" by underwriting flu shots, Lee says, adding that "a flu virus does not have to hospitalize or kill a lot of people to have a large effect on society."
Analyses of epidemic-related school closings can also inform policy. In 2009, as the H1N1 influenza (swine flu) epidemic gathered force, the U.S. Centers for Disease Control and Prevention (CDC) as well as state and local public health officials considered closing schools in order to reduce transmission of the virus. Taiwan did so, closing schools for one week.
Lee and colleagues analyzed what closing schools in Pennsylvania would cost. Reducing transmission of a virus saves healthcare expenditures, not surprisingly, and averts deaths. "But closing a school has a lot of ripple effects," Lee says. "You not only have teachers and staff not working, and having to make up the lost time in July, but parents have to stay home with their kids." Bottom line: It would cost as much as $51,000 to avert a single case of a very transmissible flu. As a result of the Taiwan school closings for SARS, one study found, 27 percent of households reported workplace absenteeism and 18 percent suffered an average wage loss of five days' pay.
A 2009 study by economists at the Brookings Institution analyzed the direct economic impact of closing schools during a flu pandemic. Since about one-quarter of civilian workers in the United States have a child under 16 and no stay-at-home adult, closing all the nation's K-12 schools for two weeks would result in between $5.2 billion and $23.6 billion in lost economic activity; a four-week closing would cost up to $47.1 billion dollars ? 0.3 percent of GDP.
"Those are only the first-order effects," says Ross Hammond, who led the Brookings study. "There are also multiplier effects from a multibillion-dollar decline in economic output." He looked only at lost wages, but people whose income falls because they don't work for several weeks don't spend as much, and the people who don't receive that spending cut their own in turn. In addition, he said, "The decrease in supply of some goods as factories run at less than full capacity might lead to inflation."
Also tricky is deciding how to account for outbreak-related spending. For instance, Hong Kong spent $1.5 billion on a "We love HK" campaign to get residents out of their homes, facemasks in place. Note that such economic activity counts toward GDP. Similarly, hospital charges, doctors' fees, medication, and other epidemic-related costs add to GDP.
HOW MUCH THAT IS LOST IS MADE UP? It may seem heartless to count such spending as an economic plus, on a par with welcoming an earthquake for the construction boom it triggers, but a dollar spent on medicine still contributes to a company's bottom line and to the GDP. In fact, analysts do a robust business figuring out how investors can profit from an epidemic. Sales of vaccines and drugs to combat H1N1 (swine flu) in 2009 boosted some pharmaceutical companies. By early 2010, when the mild epidemic had petered out, Sanofi-Aventis had registered net profits of $10.1 billion, up 11 percent year-to-year.
Wall Street never encountered a disaster it couldn't profit from, and pandemics are no exception. Several companies have produced investor guides to avian flu. In the event of an outbreak, Citigroup concluded in a 2005 report, investors should short companies whose revenues come from malls, casinos, air travel, and tourism. Analysts were also bearish on labor-intensive industries and countries with "inflexible" labor laws (most of Europe) because companies cannot easily fire workers if demand for their products falls off a cliff.
In contrast, Citi says avian flu will not only benefit healthcare companies but also those that provide products and services people turn to when they're afraid to leave home: telecoms, Internet commerce companies, home entertainment and even utilities. Finally, because any worldwide calamity sends currency traders scurrying for safe havens, Citi expects the dollar to rise in the event of a pandemic. Overall, it concluded, "We would expect global economic activity to decline, raw material prices to collapse, risk aversion to rise, monetary policy to ease, and interest rates to fall."
Economists acknowledge that there are still plenty of unknowns here. For one thing, they're not sure how much of the economic activity lost is eventually made up. Another unknown is the effect on factory production. Illness and fear keep most people home during a pandemic, but not in China. During SARS, employees were quarantined to inhibit contagion, yet because many of them lived in company-owned dormitories, they continued to work, and their employers built up enormous inventories.
The greatest unknowns are such macroeconomic effects as interest rates and inflation. Some analyses suggest that when production is scaled back, the shortage of goods creates inflationary pressures. That might not occur if the supply cutback were met by a fall in demand as people shopped less.
Researchers are making progress on these fronts, but it hasn't been easy. "When we economists first came to CDC in 1995, many people told us it was immoral to include economic analyses in questions of public health," says health economist Martin Meltzer. "But taxpayers have a right to know, if they're putting x dollars on the table (for vaccinations, quarantines or other flu-fighting measures): What are they getting?"
Until all those questions are answered, savvy investors won't be putting money on the table to cash in on the next global pandemic. But as surely as a devastating swine flu epidemic is coming, some shrewd, and perhaps soulless, quants wizard will figure out how to profit from it.
(Editing by Jonathan Oatis and Prudence Crowther)
Source: http://news.yahoo.com/flu-conomics-next-pandemic-could-trigger-global-recession-194720041.html
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