Tuesday, December 20, 2005

News - Bird flu could devastate NZ economy - Breaking News - World - Breaking News

A New Zealand treasury briefing paper on possible consequences of bird flu warns it could be the worst economic catastrophe since the Great Depression of the 1930s.

A briefing paper to the New Zealand government said lost output could be of the order of 10 to 20 per cent of GDP, costing $NZ15 billion-$NZ30 billion ($A28 billion-$A14 billion), in the year a pandemic occurred.

Under this severe impact scenario, it could cost the country up to $NZ40 billion ($A37.36 billion) over four years.

Treasury assesses the risk of a severe flu pandemic as low but with a potentially very high impact.

"The economy would take several years to recover from a shock of this scale," the report said.

"If this worst case scenario came to fruition it would probably be the most adverse shock since the Depression, but as not as serious as the Depression," Treasury director Bob Buckle told NZPA.

He and the report stressed considerable uncertainty on the likelihood of a pandemic and its severity.

Fellow Treasury director Jeremy Corban noted there were several less severe scenarios. Flu pandemics in 1957 and 1968 caused minimal economic impact.

"This scenario is very much worst case - 'maximum credible event' are words I've heard to describe it."

Normally, the risk of a flu pandemic is 1-2 per cent over any one year, and 20-30 per cent over 20 years. But Treasury quotes Australia's chief medical officer as putting the odds at 10 per cent over the next few years.

Economists said trade, which comprises over a third of the economy, was likely to come to a standstill as borders here and overseas close. The $NZ4-6 billion tourism industry would halt overnight.

Ordinary businesses would find it difficult to operate, even assuming any workers showed up, as supplies from overseas would be severely disrupted.

Institute of Economic Research director Brent Layton said that under the dire scenario the Reserve Bank would slash the official cash rate, now at 7.25 per cent.

"If we really are looking at a 20 per cent dive in GDP, they would have it (the official cash rate) well down - it wouldn't be too much above zero."

Infometrics managing director Andrew Gawith, like other economists, remains sceptical of the dire scenario.

"All the economic catastrophes I've experienced - the Asian financial crisis of '97/98 was going to do all sorts of dastardly things - in the end, were over remarkably quickly."

He said the consequences of the fear factor were high, "and that, I've no doubt will have quite a severe economic impact, but my impression is you get over that relatively quickly".

Mr Gawith said New Zealand's high foreign debt would see the kiwi dollar savaged. Inflation would be the least of the Reserve Bank's worries, he added.

The World Health Organisation (WHO) has warned of increased risk of a pandemic on the scale of the 1918 "Spanish flu" because of the emergence of a highly pathogenic strain of avian flu, H5N1.

H5N1 has killed just over 60 people in Asia since January 2004, but only if it mutates so it can be transmitted from human to human is it likely to become a pandemic. WHO assesses such risk as high.

Under the most severe scenario, the Ministry of Health estimates up to 40 per cent of the population could contract flu, with 2 per cent of those dying, resulting in up to 33,000 deaths.

Treasury warns of possible shortages of raw materials such as oil, and major disruption to global supply chains as borders close.

"Schools, universities, creches, libraries, bars, cinemas, and other places of gathering may close, either as a public health measure to prevent the spread of disease, or through a downturn in customer numbers," the report notes.

"Many people would be absent from work because of sickness, caring responsibilities, fear of infection, or because they had been requested to stay home by their employer.

"A large number of households may come under financial stress."

Treasury and the Reserve Bank have developed plans to keep the financial system and government payments running.

Treasury has requested that the government consider what support might be needed to help financially distressed households and firms.

It asks who should pay if businesses have to furlough workers and what support might be available for heavily affected industries.

Mr Corban said the government was in good shape to help. One reason why it had been trying to get debt down to prudent levels was to give it the ability to cope with such adverse shocks.

Government tax revenue would fall with GDP while demands would rise. Treasury has not quantified the likely effect on the books.

Mr Gawith agreed the government's relatively low debt meant it was in a good position to provide compensation. However, it would quickly chomp through its budget surplus and could be forced into a debt-financed fiscal rescue.

If the situation became dire, there was even "the outlandish possibility of the government printing money", which was done in the 1930s to re-inflate the economy.

Bird flu could devastate NZ economy - Breaking News - World - Breaking News

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