Swine flu fear already affecting global economy

NEW YORK - The swine flu outbreak is unleashing a side effect the global economy is in no condition to handle: fear.

Travelers are canceling or delaying trips to Mexico, and on Tuesday Cuba became the first nation to ban all flights to its neighbor. China, Russia and South Korea have banned imports of some North American pork, despite assurances that the flu is not spread through meat. Investors just starting to regain their nerve have again caught the jitters.

The threat of a pandemic comes just as the world economy is showing the barest glimmerings of what analysts say might be the light at the end of what remains a long, dark tunnel. And now this.

"This is just another negative shock when the economy can least afford another negative shock," said Jay Bryson, global economist at Wachovia Corp.

So far, fear of the flu is at least as responsible for the economic disruption as the disease itself.

The number of confirmed cases in the United States climbed to 68, and federal officials warned that deaths were likely. In New York, the city's health commissioner said "many hundreds" of schoolchildren were ill at a school where some students had confirmed cases.

President Barack Obama asked Congress for $1.5 billion in emergency funds to fight the disease.

Economists remember well the financial damage the SARS outbreak inflicted in 2003. An epidemic of that scale or greater could inflict severe damage on a global economy already badly listing.

"On top of a synchronized global financial and economic crisis, an outbreak of swine fever is the last thing we need just now," Neil MacKinnon, chief economist at The ECU Group PLC, based in London, wrote this week.

There are already early signs that swine flu fear is taking an economic toll.

In Mexico City, canceled events and closed movie theaters, night clubs, museums and other establishments are costing at least $57 million a day, according to city's Chamber of Trade, Services and Tourism.

That's a 36 percent drop in revenue generated by tourism and services in the Mexican capital, chamber president Arturo Mendicuti said.

Royal Caribbean Cruises suspended stops at Mexican ports indefinitely, and Carnival Cruise Lines canceled Mexico port calls through May 4.

In Chicago, traders bid down the price of pork futures Tuesday for a second straight day, reflecting what analysts say are consumer worries about catching the virus from meat. The drop in prices came even as China — the third-biggest market for exports of U.S. pork — banned shipments of the meat from California, Texas and Kansas, along with those from Mexico. Russia and South Korea have announced similar measures.

The bans caused consternation for U.S. pork farmers, despite assurances from public health agencies that the flu isn't spread by eating meat.

"We have everybody ... all saying pork is safe to eat and that this isn't in the swine herd, definitely not in the U.S. swine herd," said Dave Warner, of the National Pork Producers Council. "I think the economics right now is being driven by fear of what could happen, rather that what really is happening."

Agriculture Secretary Tom Vilsack even pushed to change the name of swine flu to protect the hog market.

The danger of economic fallout helps explain the cautious stance of the World Health Organization, which has not recommended travel restrictions as it has in previous outbreaks.

WHO, accountable to its member countries, is a health agency, but its policies are driven at least partly by financial considerations. In recent years, the agency has shied away from actions that might upset member nations. Dr. Margaret Chan, the agency's head, has repeatedly said that her priority is to serve her countries.

That is in direct contrast to the strong action WHO took to contain the SARS epidemic in 2003, when it issued travel advisories that recommended postponing nonessential travel to cities including Hong Kong, Beijing and Toronto.

The economic impact was devastating as air traffic slowed to a crawl. Canada was so incensed it sent a delegation to WHO's Geneva headquarters to protest. But WHO's leader at the time, Gro Harlem-Brundtland of Norway, insisted the advisories were necessary to contain SARS.

Ultimately, world health experts say the travel advisories sharply cut the spread of SARS.

"There really is a careful balance between scaring people and downplaying it too much. And the reason why that's so important is that the various interventions that are available to public health authorities all have a cost associated with them," said Ross Hammond, part of a group at the Brookings Institution that builds computer models to study how pandemics and public fears interact.

On Monday, WHO increased its alert level from 3 to 4 — out of 6. Its influenza chief, Keiji Fukuda, warned that "at this time containment is not a feasible option," rejecting calls for a travel ban or other restrictions on Mexico or the United States.

"Border controls do not work. Travel restrictions do not work," WHO spokesman Gregory Hartl said. "There was much more economic disruption caused by these measures than there was public health benefit."

The SARS virus — which killed nearly 800 people — wreaked most of its damage in Asia. In Hong Kong, businesses shut and the number of tourists plunged by 70 percent. The local economy contracted by about 9 percent in the second quarter of 2003, when the epidemic was at its peak.

But the damage also sent wide ripples. In Canada, particularly greater Toronto, the outbreak sharply reduced tourism, and kept even residents home rather than out shopping. The city's economy lost about $950 million, a contraction of about 0.5 percent, according to The Conference Board of Canada.

The SARS outbreak was short-lived and came at a time of relative economic stability. Today's economy can ill afford such a setback. But the worry reflected in stock markets is about the possibility, still remote, that a new outbreak could erupt into something far more serious.

A report by the World Bank, updated last year, estimated that a severe pandemic — like the Spanish flu outbreak in 1918 that killed between 40 million and 100 million people — would cause a nearly 5 percent drop in global economic activity, costing the world about $3.1 trillion.

"Even a mild pandemic has significant consequences for global economic output," a pair of Australian researchers wrote in a 2006 report cited by the World Bank.

In a global recession, a pandemic could present a greater threat. On Friday, the World Bank warned developing nations that slashing public health budgets could put their citizens' health at risk.

Meanwhile, economic markets are waiting to see the fallout.

Fear of a pandemic has to make people wonder. In the U.S., where unemployment is expected to top 10 percent before the end of the year, could the shock of a flu outbreak make it 12 percent instead? Think what that would mean to retailers, to people's ability to pay their mortgages, to companies' ability to get work done.

"When you're steaming full speed ahead and are hit by a torpedo, you can just keep going," Wachovia's Bryson said. "But you take a torpedo after four or five torpedoes which you've already taken, and this could be the thing that sinks the ship."

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