Risk that flu outbreak could tip ‘stretched’ UK into deflation

Author: By Laura May, Press Association

As workers fall ill and take time off work businesses will struggle to
maintain productivity, and those who escape infection will find it difficult
to get to the office as staff shortages hit the transport network, the
report by economic forecaster Oxford Economics said.

The firm has based its forecast on the effect of the Sars outbreak in 2003 on
the Asian economy, which hit leisure spending and caused a collapse in
travel to affected countries.

But it warned that the current recession will mean that the UK economy will
not bounce back as the Asian markets did and it could take up to four years
to recover.

The report states: “This time around, such a sharp rebound is unlikely. GDP
would likely remain below baseline for some time. However, by 2011 GDP
growth could be above our baseline forecast and the economic loss would be
gradually recouped within around 3-4 years.

“But there is a risk that swine flu tips the UK and the world economy into
deflation. This is because the pandemic would hit at a time when businesses
and banks are still reeling from the economic crisis.

“The fact that UK households’ balance sheets are more stretched than in many
other countries makes the risk of deflationary dynamics larger than
elsewhere. In addition, companies that are already fragile after the
recession may succumb to this new shock.”

The report also found predictions that a possible pandemic could happen around
Christmas could further dent the economy and the UK is most at risk from the
economic impact of a pandemic because if its already stretched balance
sheet.

It found: “A flu outbreak in the autumn would hit just as the economy starts
to recover from the credit crunch.

“It would threaten already fragile businesses and put further strains on
financial markets and fiscal balances. This could generate a vicious cycle
that postpones the recovery for another couple of years.

“The fact that UK households’ balance sheets are more stretched than in many
other countries makes the risk of deflationary dynamics larger than
elsewhere.”

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