An avian flu pandemic could halt Asia's growth rate to virtually zero and reduce the global trade of goods and services by 14%, according to new research by ADB.

The report - on The Potential Economic Impact of an Avian Flu Pandemic on Asia - stresses that there are many unknowns in predicting the consequences of a new flu pandemic. "This analysis has shown the consequences of a realistic and relatively mild set of assumptions," it says. "The consequences could be significantly worse if the outbreak lasts longer or is more virulent."

The report underscores that there are three major unknowns in projecting the possible economic impact of a pandemic - the magnitude and duration of the pandemic; the psychological impact resulting in loss of consumer and investor confidence; and the supply side effects, resulting from shrinkage in the work force.

"One clear lesson from the SARS outbreak [in 2003] was the psychological impact on economic activity," the report says. Compared to the SARS outbreak however, "a flu pandemic could be substantially more damaging in both human and economic terms."

The study examines two possible scenarios. The first is a mild outbreak with an infection rate of 20% and a population mortality rate of 0.1% (equivalent to 3 million people dead in Asia), with the most serious economic effects lasting two quarters. The second models the same health outcome but with the serious economic effects lasting four quarters and a psychological impact stretching beyond Asia.

The outcomes of a potential pandemic will basically depend on public policy responses, the report says. Governments and international organizations can do much to moderate the downside risk through appropriate and timely public policies, especially coordinating activities and sharing information, it argues. "Governments and international agencies should act transparently and disseminate accurate and timely information," the report says. "Recent experiences with SARS and other disease outbreaks have shown that the public and markets often panic in the face of uncertainty."

In the case of the first scenario, Asia could face a demand shock of around $99 billion in its 2006 GDP, the equivalent of 2.3 percentage points lost.

Some Asian economies could be harder hit than others, depending on their vulnerability to external shocks and whether they depend on a significant quantity of services, including tourism.

Both Singapore and Hong Kong, China are significant exporters of services and have open economies. Singapore could therefore suffer a demand shock of more than 10 percentage points of GDP equivalent to $11 billion, Hong Kong, China could lose 9 percentage points of GDP, and Malaysia and Thailand could also be seriously affected.

In the second scenario, Asian consumers and investors would reduce their activity and the rest of the world would cut back on consumption. The estimated loss to the region could be $283 billion, or around 6.5 percentage points of GDP, resulting in cutback in Asia's GDP growth to 0.1%. Global GDP could also shrink to -0.6%.

"The psychological impact of the disease may be long lasting," the report says. "Much of the Asian boom is built on confidence in the region's growth potential. A pandemic could shake that confidence and lower future investment."

The report was put together by ADB Economist Erik Bloom, Senior Health Specialist Vincent de Wit, and Economics Officer Jane Carangal-San Jose.