Severe Flu Pandemic Could Cause US GDP To Contract as Much as 4.25%, According to CBO

Swine flu.

People have been abuzz about a possible swine flu pandemic this weekend.

News broadcasts have been leading with the story. Online message boards are ablaze with activity as netizens discuss the possible implications of a widespread outbreak. The topic will surely be talked about in depth at the office water coolers this week.

Some of the most frequently asked questions this weekend have been:

a) What will a swine flu pandemic do to an already fragile US economy?

b) What is the worst case scenario when it comes to the US economy?

The CBO (Congressional Budget Office) actually attempted to answer this question a few years ago when they were assessing the potential economic damage that an avian flu outbreak could cause.

At the time, the Senate Majority Leader requested "an assessment of the possible macroeconomic effects of an avian flu pandemic".

The results were pretty interesting, and can more or less be applied to a potential swine flu outbreak.

First off - what is a pandemic?

According to the dictionary, a "pandemic" is an "epidemic over a wide geographic area and affecting a large proportion of the population".

The current swine flu outbreak certainly has the potential to become a serious international problem. The outbreak, which seemed to originate in Mexico, has now spread to Canada, the United States and parts of Europe.

Now, back to the CBO report that was released in 2006.

At the time, the CBO figured that a "severe influenza pandemic", similar to the one that began in 1918, could cause a 4.25% decline in the GDP of the United States.

A milder pandemic, similar to the ones seen in 1957 and 1968, could cause a decline in the GDP of about 1%, according to the CBO.

Other independent reports have varied wildly when it comes to determining the economic impact of a severe flu pandemic. Some have the US economy contracting by as much as 6% in one single year, while other reports conclude that the economic impact would be much milder than what the CBO currently predicts.

At the time the original CBO report was released in 2006, the US economy was on a much more stable footing. Would a severe swine flu outbreak cause the US economy to contract even more severely, given that the economy is already in tatters? Or would the effects be minimized, given that we have been hit by an economic tsunami already?

Source: CBO - A Potential Influenza Pandemic: An Update on Possible Macroeconomic Effects and Policy Issues

Filed under: The Economic Meltdown