The spread of the Ebola virus has been dominating headlines in recent weeks.
While the ultimate death toll may be limited, the economic impact could potentially be significant.
The “‘fear factor’ associated with Ebola appears more significant than in past instances of pandemic concern, in our view,” Goldman Sachs’ Kris Dawsey writes.
Dawsey studied how other recent pandemic events ultimately played out in the US and Hong Kong.
“Recent episodes of pandemic concern in the US — including SARS in 2003, bird flu (H5N1) in 2005, and swine flu (H1N1) in 2009 — resulted in little if any discernible effect on retail sales or tourist arrivals,” Dawsey found.
Still Dawsey offers downside and worst-case scenarios: 9/11 in the US and SARS in Hong Kong. From his note (emphasis ours):
… For the downside scenario, we think the example of the September 11 terrorist attacks could be informative. In the aftermath of the attacks, demand for air travel temporarily dried up, while some people reportedly preferred to avoid crowded public places such as subway stations, shopping malls, etc. At the time, concerns were further exacerbated by limited-scale anthrax attacks unrelated to the September 11th attacks themselves. If the Ebola situation was to worsen much more than expected, it is possible to imagine that a similar atmosphere of fear could arise. In terms of broader macroeconomic effects, Roberts (2009) estimates the drag on GDP growth from the September 11 attacks at roughly 0.5 percentage point for the year 2001. Some of this drag was certainly due to direct destruction of factors of production, and as such we would view this as an upper-bound on the drag from fear/risk-aversion effects.
In terms of worst-case tail risk scenarios, the example of the SARS outbreak in Hong Kong during 2003 is worth considering. During this time, Hong Kong retail sales dropped roughly 10% from their peak, while air traffic plummeted even more than that seen after the September 11 attacks. Lee and McKibbin (2004) estimate that the SARS outbreak reduced Hong Kong GDP growth in 2003 by 2.6 percentage points. Incidentally, the World Bank cites shopping centres in Lagos, Nigeria — which has largely contained the Ebola outbreak at 19 confirmed cases — reporting sales down 20 to 40%, an even larger decline than that seen in Hong Kong during the SARS outbreak. Again, we believe a fairly limited economic outcome for US growth is most likely, and we present the examples of September 11 and the Hong Kong SARS outbreak only as examples of downside or worst-case tail risk scenarios.
Here’s Dawsey’s charts, indexing the effects of those risk events:
So far, the impact on consumer sentiment appears to be negligible.
“The daily Rasmussen confidence index has been relatively range-bound since early September,” Dawsey noted. “The daily economic confidence index from Gallup has actually risen over this period. Consensus expects the preliminary October read on consumer sentiment from the University of Michigan (to be released Friday, October 17) to remain roughly stable, although we see downside risk to the consensus view.”
Dawsey adds that the West Africa, where the Ebola outbreak is most serious, is an important exporter of iron ore. However, in the context of global supply, it’s relatively small, and Goldman analysts believe iron ore is currently “fundamentally oversupplied.”