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Bird flu and the stock market

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Global economic analysis

The threat of a human flu variant developing from bird flu remains high and could pose a severe risk to human life and the global economy. The impact of a bird flu pandemic on the worlds' stock markets and global gross domestic product (GDP), especially through the effect on discretionary spending and trade, may be substantial compared with the SARS outbreak in 2003.

The general slowdown in economic activity would reduce GDP. Business confidence would be dented, the supply of labor would be restricted owing to illness, mortality, and absenteeism spurred by fear of contracting the disease, supply chains would be strained as transportation systems were disrupted, and arrears and default rates on consumer and business debt would probably rise somewhat.

It seems quite likely that following an outbreak of bird flu the stock market would fall initially and then rebound later, as it did in Hong Kong during the SARS episode.

A report on the threat of bird flu by Oxford Economic Forecasting (OEF) said the following:

Even if bird flu is confined to the bird population, the effects are likely to be significant, given the size of the poultry farming industry and the resulting disruption in agricultural trade.

A virulent human-to-human flu would spread rapidly around the world, even if restrictions were quickly imposed on movements of people and goods. According to OEF, the number of cases--as a percentage of the population--could be anywhere from 10% to 50%, while mortality rates are expected to be higher than those for a "normal" flu outbreak (one fatality in 500 cases).

The impact on consumer spending and trade may be large, even if human cases and death rates are low.

A global flu pandemic may endure for up to two years. According to simple estimates, based on a pro rata extension of the SARS impact over half a year, a serious pandemic could damage economies by a minimum of 1% of GDP in the first year. However, the impact on GDP is likely to be more than a simple multiple of SARS.

Despite significant health care costs and losses to the poultry industry, the dominant impact on GDP of a global flu pandemic will be through the demand response and, to a much lesser extent, the effect on output:

Perceptions of risk may lead to significant and immediate reductions in discretionary spending--particularly in the travel and tourism sector (a global industry worth around 4% of the global GDP)

The report highlights the potentially large "trade multiplier effects" (i.e., income reductions caused by falling exports) of the initial demand losses worldwide. As the outbreak spreads, the trade multiplier effect will increase.

On an annual GDP basis, the direct impact of the "loss of life" (incorporating measures of lifetime earnings) on economies will not be large compared with the impact of perceptions of risk in the short term. However, the OEF suggests that a loss in population of, for example, 1% may cut annual potential output between 0.5% and 1% of GDP per year.

If case numbers became substantial, workforce shortages would occur in the short term, reflecting the percentage of workers absent. If 20% to 25% of the population became infected, this might lead to an average shortfall of 1% of the labor force over one year.

According to OEF estimates, the annual cost could easily rise to more than 5% of the world GDP, representing losses of about $2 trillion per year.

However, the response to a potential pandemic--and the resulting impact on GDP, may not be as large as the estimates suggest. Reductions in travel in areas exposed to risk may be compensated by expenditures on other goods. Moreover, spending may be diverted to servicing debt or increasing saving.

A global pandemic will have a substantial impact on discretionary spending and global trade in services, especially tourism and travel--beyond estimates suggested by a simple extrapolation of the SARS outbreak. While there is little doubt that a human flu outbreak will be global, its effects will largely depend on the response of consumers and investors to the perceived risk, as well as policymakers' attempts to stem the outbreak.

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