Recent weeks have seen market doomsayers warn of global recession as a result of an avian flu pandemic. For example, a long piece by Ambrose Evans-Pritchard in the 22 October Daily Telegraph, The clock ticks on economic collapse, cited analysts at ING Bank claiming 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.
Likewise The Business weekly newspaper of October 23 ran a piece by Tracey Boles, Facing up to disaster 1918...1968...2005?, which argued that in the UK alone the bird flu virus, H5N1, "could kill 50,000 people, cost nearly a million jobs and our economy would shrink by £95bn". (The £95b claim is from a Nottingham University estimate that I will discuss in a future post).
But in the Cassandra stakes these reports are not the first. That dubious honour likely goes to Sherry Cooper and Donald Coxe of Canadian brokerage BMO Nesbitt Burns, who in August published An Investor's Guide to Avian Flu (PDF). This 40 page booklet provided a bleak and speculative assessment of the likley social and economic consequences of a pandemic. Dr Cooper writes:
The bottom line is that a pandemic, even one meaningfully less virulent than the 1918 Inﬂuenza breakout .., would have hugely disruptive effects. Depending on its length and severity, its economic impact could be comparable, at least for a short time, to the Great Depression of the 1930s.
...It is for epidemiologists to decide the likelihood and severity of the next pandemic; but, Don Coxe and I have concluded that the economic and societal effects of a pandemic, even a moderate one, are so severe that businesses and consumers need to join the medical and scientific community in creating a crisis prevention and management plan. Investors and business leaders must be aware of the risks and factor them into their strategic planning.
Despite their alarming nature, these are warnings that deserve to be taken seriously - though as the authors clearly state, we do not know the probability of a flu pandemic. See also their Business Week interview. For blog reactions: Tyler Cowen, Future Pundit, Ian Welsh and Just a bump in the beltway.
Readers should note that Sherry Cooper issued a subsequent special report in October, Don't Fear Fear or Panic Panic: an economist's view of pandemic flu (PDF). This contains mostly practical information for investors business and is an excellent overview of the issue.