The World Health Organisation (WHO) has stated that "the world is now closer to another influenza pandemic than at any time since 1968, when the last of the previous century's three pandemics occurred." If a global flu pandemic does occur, and if the virus turns out to be both easily transmitted and accompanied by a high mortality rate, the result would be a profound human tragedy. Even a milder pandemic could have a substantial impact on global economic activity, as labour supply falls and trade, travel and tourism decline sharply.

In some respects the impact on financial stability of a serious global pandemic would be similar to that of any prolonged recession. Markets and institutions would need to deal with a broad slowdown in activity, as well as uncertainty about the severity of the recession and the timing of a recovery. There is likely to be a generalised retreat from most categories of risk.

At the same time, many aspects of the situation would be unique. Intermediaries and infrastructure providers may have to deal with concerns about business continuity, for themselves and their counterparties, if absenteeism and lower productivity become widespread. "Systemic continuity" issues could also come to the fore, if users of the financial system struggle to cope with disruptions to important intermediaries, uncertainty about the resiliency of financial infrastructure and reduced liquidity for many assets.

Preparations for a possible flu pandemic by financial market participants and authorities vary widely. While uncertainty over the timing and severity of a pandemic makes it impossible to formulate detailed plans, many national authorities are preparing for possible scenarios and reviewing the continuity plans of the key institutions in their national markets. Others have taken a "wait and see" attitude.

This note reviews some of the ways in which a global influenza pandemic may affect macroeconomic and financial stability. It then identifies areas which call for planning and coordination by financial system participants and authorities. Continue reading