Swine flu rattles global economy

Phil Noble/Reuters
Max Summerskill talks on his mobile phone after his holiday flight to the Mexican resort of Cancun was cancelled at Manchester Airport in Manchester, England, Tuesday. Britain's Foreign Office advised against all but essential travel to Mexico as a result of the swine flu epidemic there.

Nothing spreads faster than the fear of an epidemic.

Consumers, investors, the tourism business, and other industries around the world have already felt the impact of the swine flu epidemic. Its ultimate economic cost will depend not only on how serious it becomes but how long it lasts.

Tourism hit first

As with previous epidemics, the tourist industry was hit immediately. US officials warned against nonessential travel to Mexico; European officials urged no travel to the US as well as Mexico. Several US and foreign airlines allowed their Mexico-bound passengers to switch their tickets to other destinations even as their share prices tumbled on world stock markets Monday.

Other service industries were also hit in Mexico, which appeared to be the epicenter of the crisis. Authorities banned the public from a Mexico City stadium Sunday, so soccer teams played without their fans. Many local restaurants were empty or closed. (Click here for one potential bright spot for Mexican tourism.)

Food import bans

Fears even curtailed exports of pork, even though health officials have repeatedly assured consumers that there's no connection between pork consumption and the virus. China and Russia banned pork products from Mexico and US states where flu cases had cropped up. Indonesia banned all pork imports.

Overall, investor fears weighed on stock indexes from Tokyo (down 2.7 percent Tuesday) to London (down 2.1 percent in morning trading) to New York (where futures contracts pointed to a lower open). Mexico's stock market took a beating on Monday (down 3 percent), despite big run-ups for pharmaceutical companies whose products might be used in the fight against the strain.

Comparison with SARS

Now, the question for the fragile global economy is how big the epidemic will become. Even the relatively brief SARS outbreak in Asia in 2003 caused a 0.6 percent drop in East Asia's gross domestic product (GDP), the Asian Development Bank estimated. Most of the $18 billion impact was in services as consumers and workers stayed home rather travel to their offices, restaurants, and other public places.

On Monday, the World Health Organization (WHO) raised its alert level although that is still two steps short of a full pandemic. As of Tuesday, the virus was suspected in 152 fatalities and 1,600 illnesses – all in Mexico. Elsewhere, 90 cases of the flu had been confirmed in at least 11 countries – 50 cases alone in the United States. SARS, by comparison, was believed responsible for 800 fatalities and 8,000 illnesses.

One stark scenario

Should the current crisis take a more serious turn – the last major pandemic in 1968-69 was linked to roughly 1 million fatalities, according to the WHO – then the economic impact could be far more severe, according to a 2005 study by economists at the Asian Development Bank. Studying the potential impact of a year-long avian flu outbreak epidemic in East Asia, the economists came up with a mild scenario and a stark one. The stark scenario suggested economic losses of nearly $300 billion, enough to throw the booming economy of 2005 into recession. [Editor's note: The estimate for fatalities from the Hong Kong flu pandemic was changed and sourced to a more authoritative source.]

With the world already in recession in 2009, a swine flu pandemic would prolong the current contraction.

But if the crisis follows the SARS trajectory, then fears of a large economic impact are probably overblown. "One clear lesson from the SARS outbreak was the psychological impact on economic activity," the 2005 study concluded. "Recent experience with SARS and other disease outbreaks have shown that the public and markets often panic in the face of uncertainty."

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