Bird Flu: Financial Impact

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http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2005/10/22/ccflu22.xml

 

 

 

 

The clock ticks on economic collapse

(Filed: 22/10/2005)

 

A pandemic is a case of 'when, not if', says the WHO, and global

recession could follow. Ambrose Evans-Pritchard reports.

 

 

If we are to believe the World Health Organisation and a formidable

cast of top scientists, a lethal flu pandemic is now inevitable - this

year, or soon - as Asia's H5N1 bird flu virus mutates into a human strain.

 

The tipping point may even have occurred this week when a father in

Thailand infected his seven-year-old child, though test results are so

far unclear. A suspected family cluster in Indonesia proved to be a

false alarm.

 

A full pandemic - the 11th in 300 years - will not bring the global

economy to a juddering halt. Not even the Black Death could do that,

although it did smash feudalism and usher in the modern wage economy.

But a pandemic will be a major market " event " .

 

Holland's ING bank warned in a report yesterday that " large swathes of

economic activity could simply cease. A realistic scenario might

involve GDP declines of tens of percent. We believe that fear of

infection leading to drastically altered behaviour would result in the

greatest economic damage.

 

" Investors would likely shun equities and corporate bonds in

preference for government bonds and cash. Although economic activity

would slump, inflation might well soar due to the interruption of

supplies and loss of production. "

 

We had a trial run of sorts in 2003 with Sars, albeit on a tiny scale

by comparison. At the height of the epidemic, Hong Kong's Mandarin

Oriental Hotel was down to one solitary paying guest.

 

Cathay Pacific Airways cancelled 42pc of its regional flights,

knocking a third off its share price. British Airways stock was hit

even harder for a few weeks.

 

Mobile telephone sales tumbled 40pc in Canton. But the Chinese car

market flourished as travellers shunned public transport. Hong Kong

tipped into recession, but bounced back quickly.

 

The final bill for Sars was about $30billion (£17billion), caused

almost entirely by human emotion rather than the disease itself, which

killed just 813 worldwide - less than the number killed every day from

ordinary flu.

 

The WHO's chief, Lee Jong-wook, has been sounding the alarm for two

years, warning that the H5N1 avian virus has now broken out in so many

countries and infected so many migratory birds that mutation is almost

a mathematical certainty.

 

" Will there be a human flu pandemic? The short answer is yes, there

will be, " he said this week, wearily.

 

The only question is whether it strikes fast, or can be contained long

enough in a few places to give scientists the extra crucial weeks to

find, produce and deploy a vaccine on a mass scale. In the mild

pandemics of 1957 and 1968, the vaccines arrived too late to have an

impact.

 

Hungary announced yesterday that its scientists had produced a human

vaccine for H5N1, and would need up to eight weeks to produce a

vaccine for the mutant strain, once identified.

 

The contingency plans already in place in some 30 countries call for

border closures and sweeping flight bans. President George Bush even

let slip this month that he would dispatch the US military to enforce

quarantines.

 

" This is going to be very bad for the airline industry, " said Mike

Powell, an airline analyst at Dresdner Kleinwort Wasserstein.

 

" It'll hit short-haul as well as long-haul because people won't be

allowed to travel. It's why we've already started to see pressure on

these stocks over the last week, " he said.

 

The Amex airline index dropped 5.76pc on Thursday as flu rumours

swirled in Asia.

 

Michael Lewis, head of commodities research at Deutsche Bank, said a

pandemic would slash demand for jet fuel, with rapid knock-on effects

through the whole energy sector. The prices of copper, aluminium and

other industrial metals tied to the business cycle would slide, at

least for a while.

 

" This would be an extreme negative shock to the world economy. You'd

see equity markets unravelling everywhere as people began to think

through the implications. The dollar might collapse if Asians decided

to keep their money at home. Gold could do well, " he said.

 

Canada's Conference Board said in a report this week that a major

pandemic would " throw the world into a sudden and possibly dramatic

global recession. "

 

In Washington, the US government is hurriedly upgrading its estimate

of the likely damage, concluding that a full outbreak could kill 1.9m

Americans and cost the US economy $450billion.

 

The equivalent " worst case " scenario from Britain's Department of

Health puts the upper limit at 600,000 deaths, with 50,000 being a

more likely number.

 

A leaked 381-page report from the US health authorities, the Pandemic

Influenza Strategic Plan, said the virus could spread to America

within " a few months or even weeks " once it had mutated, leading to

food and fuel shortages and power blackouts.

 

Schools would be shut, grounding many working parents. A quarter of

the workforce would refuse to go to work, and there might be riots at

vaccination centres, it concluded.

 

The report described what would happen in a hypothetical April

outbreak far away - in an Asian village perhaps. The first infected

passengers would start arriving at US airports by June, and foci would

emerge across America by July. The pandemic would then rage into the

autumn before burning itself out by January.

 

So far, the H5N1 avian virus has infected 118 people in Asia, killing

60. It poses almost no risk as such to Western societies, where few

people live cheek by jowl with birds.

 

Although infected fowl has already reached western Russia and the

Balkans, the migratory paths make it unlikely that any will fly into

Britain this winter. This is small comfort.

 

The threat will come when one or more person - or pig - anywhere in

the world who is infected with a normal human flu virus comes into

contact with a bird carrying H5N1, setting off a lethal and highly

contagious mutant virus.

 

This is what seems to have occurred with the " Spanish Flu " of 1918,

which was closely related to H5N1 in genetic structure.

 

Not Spanish at all, it began on a farm in Kansas, going on to infect a

fifth of the world's population and killing an estimated 50m people.

Unlike normal flu, it struck hard at those aged 20 to 40.

 

Dr Olusoji Adeyi, the World Bank's Public Health Co-ordinator, said

most people still did not seem to understand the threat. " It's not a

question of if, it's a question of when this is going to happen, how

rapidly it will happen and how devastating it might be, " he said.

 

" Health care workers might be dying in large numbers, therefore the

health services as we know them might cease to function. Supply and

distribution chains might break down.

 

" Even if one country were able to hunker down and immunise all its

residents effectively, what about the knock-on effect of the potential

global economic meltdown?

 

" We don't know exactly how long it might take. It could be anywhere

from 12 to 24 months. "

 

The world's big central banks have been able to keep the global

economy humming along despite the doubling of oil prices over the last

two years, but they have done so by holding interest rates at or below

the rate of inflation for an extended period - stretching the world's

imbalances ever further.

 

Paul Volcker, the former chairman of the US Federal Reserve, warns

that this is a hazardous game. In congressional testimony this year,

he said the global economy was skating on " thin ice " as the US current

account deficit tops 6pc of GDP and overall US debt levels reach

historic highs above 280pc of GDP.

 

The hammer blow of a flu pandemic may well break that ice. Once it

happens, there will be bargains galore for cool investors willing to

bet - at the moment of deepest despair - that human ingenuity will

quickly put the world economy back on its feet.