New Economist

What if the City caught flu?

What would the impact of an avian flu epidemic on financial markets? Jill Treanor reports in today's Guardian that the City is to spend six weeks answering bird flu alarm:

A dead swan was enough to raise fears of bird flu ripping through Britain. The prospect of a sick bird contaminating humans is being taken so seriously that for six weeks this year the City will practise how it would cope with such a disaster.

The length of the exercise will be unprecedented for the City, which is more accustomed to preparing for terrorist attacks or an energy crisis.

Every Friday for six weeks starting on October 13, more than 60 organisations in the City will be asked to react to a new scenario about a pretend bird flu pandemic. The exercise will end on November 24, by which time the authorities hope to know how the City would cope with reduced staffing levels and the knock-on effect this might have on essential services such as transport, power and telecoms.

The event is being run by the tripartite authorities - the Bank of England, Financial Services Authority and the Treasury - which simulate a disaster every year. Last year was billed as the world's biggest ever business endurance exercise as it included more than 80 firms. Whereas it lasted a day, this year's event is scheduled to run for six weeks.

"The overall objective for the authorities is to improve their own and the sector's preparedness by providing an opportunity to review, test and update plans for managing a pandemic threat," the three authorities said.

The FSA has already asked insurance companies about their ability to withstand a deluge of claims on life insurance policies in the event of a bird flu pandemic. Last year the City regulator also asked financial firms to prepare plans to continue operating in the event of their staff being struck by the flu after warnings that 10% of personnel could be off work for three months.

The effectiveness of those plans is likely to be tested by this year's exercise in disaster planning. Though the authorities will not give public updates on the exercise while it is under way, it plans to publish a report once it has finished.

Avian flu: what impact on financial markets?

What would the economic impact of an avian flu pandemic be? A short but useful overview of recent studies has been provided by HSBC's chief economist in Australia and New Zealand, John Edwards. His piece, Assessing the economic impact of a flu pandemic (PDF), argues that the financial market responses would be key, but has been largely overlooked by those studies. Here's his assessment:

The surprising and not quite credible conclusion from the current crop of studies is that despite the large number of deaths, despite the estimate that four out of ten people in the developed countries would be infected and despite the recognition that the epicentre of the pandemic would be in countries such as China and India which are now important to global output growth, the economic impact would be only moderately severe.

...All the studies rightly recognize that the economic impacts are difficult to forecast, as is the nature and progress of a pandemic. The economic impact is highly sensitive, for example, to the duration of the pandemic. If most of the infections and deaths take place over a couple of months the economic impact would be much less severe than if it lingered on for a year.

The main economic impacts evaluated in these studies are on supply and demand for goods and services. Because of illness and fear of infection, the numbers of hours worked falls sharply during the pandemic. For the same reason people are reluctant to shop, visit a bank, eat out, go the movies or sporting events, or travel. While the fall in hours worked and production lost can be related to the incidence of the disease, the response of demand is harder to predict and will be more important. As the ADB finds, the fall in demand is much more important than the fall in supply.

Although they don’t model it, the studies usually recognize that the financial market impact could well amplify the impact on the demand and supply of goods and services.

Equity markets would be very badly hit, particularly because many stocks are now priced on the assumption of continuing strong global growth and rising profits. The vast majority of business corporations would see profits plunge, with falling production and sales but fixed short term costs. The pandemic could be expected to be over in a year or less, which should put a floor corporate losses and thus on the fall in equity prices. The sell off would also and immediately include corporate bonds, so credit spreads would blow out and new issues would be impossible. But since central banks are likely to respond to the crisis with sharply lower interest rates there will be a sustained rally in sovereign OECD government bonds. Cash would also be popular, and gold.

The currency market impact would favour safe haven currencies with deep sovereign bond markets, against any emerging market currency or peripheral currency. The New Zealand dollar would plunge, which would help New Zealand. The Australia dollar would also weaken, partly because commodity prices and interest rates would fall. The US dollar would attract safe haven flows into US government bonds, but US interest rates would probably fall faster and further than European or Japanese rates. The much criticised “global imbalances” would be mitigated but in the worst possible way as US imports and East Asian exports both tumbled.

Avian flu: companies expect mass absenteeism

An avian flu pandemic has the potential to cause major economic losses due to high rates of illness and workplace absenteeism, loss of critical staff and the quarantining-off of business facilities. In the UK the Department of Health's Influenza pandemic contingency plan assumes quite a low rate of absenteeism:

It is suggested that business continuity plans are based on a cumulative total of 25% of workers taking some time off – possibly 5-8 working days – over a period of 3 to 4 months. Modelling suggests absenteeism due to the pandemic will rise to a peak of 5-7%, the higher number including those who would need to look after those who are ill. This equates to about three times the normal average absenteeism in a private sector company and double that in the public sector.

By contrast, Gartner says employers should "plan for absenteeism rates of 25 to 30 percent." Kim Elliott, deputy director of Washington-based Trust for America's Health, said companies should plan for business interruptions that may see worker absentee rates of 25% to 35% over four months.

Today's FT online report, HSBC warns on possible bird flu tolls, suggests major UK companies are also expecting higher absenteeism levels than government officials.

HSBC, the world's third largest bank, is estimating that up to half of its staff could fall ill or be absent from work at the peak of the next flu pandemic, as Europe began to come to terms with the first human cases of the H5N1 bird flu virus on its doorstep.

The 50 per cent figure is double the rate forecast in draft guidelines for businesses being drawn up by the World Health Organisation. They will advise planning for 25 per cent absence, and the HSBC estimate is the most explicit warning yet that governments may be underestimating possible disruption.

The projections from HSBC - which the bank's head of crisis management expects to be the template for other multinationals - come as the WHO yesterday confirmed at least two human deaths from the current H5N1 bird flu strain in Turkey.

...Bob Piggott, head of group crisis management at HSBC, told the Financial Times he was devising ways to cope with as little as 50 per cent of normal staff during a pandemic wave that could last for up to three months. "None of us knows the virulence of the virus, but I would rather be prepared for the worst," Mr Piggott said.

He said severalother banks were "moving towards" similar estimates for absences, as they began to step up their preparations for a flu pandemic.

The figures are important as a rare public insight into estimates made by a top company - one that has considerable experience, given its activities across 77 countries including those in Asia and Canada affected by the Sars crisis in 2003.

They stand in sharp contrast to official calculations, with the UK government recently downgrading its estimate to an average of 8 per cent of the workforce absent at any one time and25 per cent cumulatively throughout the pandemic.

Mr Piggott said HSBC has devised plans to boost working from home, teleconferencing and office cleaning once an hour in an effort to limit infection. He added that, alongside employees who stayed at home for at least a week with the flu, many would be off recovering from secondary infections. Others would be absent caring for family members and children taken out of school, or avoiding transport and work to avoid infection.

While recent surveys have indicated that employers are beginning to perceive a flu pandemic as a risk to their operations, few have yet made formal contingency plans on how to respond.

If HSBC and other organisations are correct, the short-term disruption to companies could be much greater than the government expects. The contingency plan appears to assume, for example, that schools wil not close and that absenteeism will be illness-related. Yet surely, especially in large cities like London, many workers will stay home either to look after their children when schools close, or to avoid the risk of infection?

Avian flu: the kimchi option

With reports of growing Tamiflu resistance**, readily available alternatives become more attractive. One possibility is kimchi; Mark Thoma cites a Washington Post story that more people are buying it after reports it may help cure avian flu.

Blame it on the Internet ... publication of a minor study by a South Korean academic last spring has apparently triggered a minor run on kimchi, a daily staple of the Korean diet that the bland-of-palate are likely to avoid ... Which presents a potentially difficult choice given the work of Kang Sa-Ouk of Seoul National University, who took 13 chickens infected with avian flu virus and a couple of other diseases, fed them kimchi juice and found that 11 of the birds recovered.

That is not a surprise. But this quote was:

[T]he National Institute of Allergy and Infectious Diseases, where callers have turned seeking validation of the idea that kimchi may ward off avian flu... said. "Although it certainly sounds interesting, NIAID, unfortunately, can't comment on the dish's effectiveness as we have not studied it," ...

Why on earth not? Considering a major avian pandemic could easily kill millions, shouldn't someone be investigating this lead? Likewise other products based on fermented cabbage, such as  sauerkraut? I would have thought Korean and German health authorities would see it as a wonderful opportunity to promote their national cuisine.

** For a contrary view, see this post by Eclectic Economist.

Avian flu: Crying wolf?

As flu fears mount, a number of scientists are questioning just how likely it is that the Avian strain H5N1 will trigger a deadly human outbreak. Dennis Normile writes about Avian Influenza: Pandemic Skeptics Warn Against Crying Wolf in Science magazine.

Avian flu economics 5: What should investors do?

You know an issue has hit the mainstream when newspapers and magazine start offering investment advice about it. Yesterday's Observer  had an anonymous article, Bird flu: if symptoms persist, consult your stockbroker... , which contained these pearls of wisdom:

Research from the global portfolio strategists at giant American finance house Citigroup sums it up in a nutshell - sell British Airways and BP, buy Blockbuster and Nintendo. The lesson is that in the case of a serious outbreak, we will be too frightened to leave our homes.

The research paints a bleak economic analysis of the possible situations the world faces if the virus makes the leap from birds to humans. The worst case scenario - if the H5N1 virus becomes transmissable between humans - leads to slower global growth, rising risk aversion, declining interest rates and 'significant wealth effects'.

If the world suffers a virulent pandemic similar to the Spanish flu of 1918 which killed up to 50 million people, you should sell airlines, hotels and luxury goods companies, as well as oil, travel and hospitality companies.

On the other hand, the best case scenario leads to a temporary blip - the markets hate uncertainty - but this is, in fact, a buying opportunity, just as happened during the Asian Sars crisis three years ago. Buy telecoms, internet and, of course, drugs companies. 'While it is difficult to quantify the likelihood of a human pandemic, our analysis suggests avian flu is a rising risk to the global economic outlook,' says the report.

Crass? Certainly. Insensitive. Of course. (Now you know why the article was anonymous).

Despite its headline, Prevent A Pandemic, Make A Profit, Business Week's article is a little less exuberant, noting that "even a disaster such as a global flu pandemic will make someone richer":

Where there's disaster, there's opportunity for business. Consultants such as Booz Allen Hamilton Inc. and Kroll Inc. are already selling advice to business and governments on flu preparedness. Companies are stocking up on items thought to slow the spread of disease such as masks and hand sanitizers -- potential sales for companies like Beijing-based Kimberly-Clark (China) Investment Co. President Stephen Shao says his company is already developing new lines of medical masks, wipes, and hand-washing liquids.

Public health officials say that with the right early warning systems, they could spot a dangerous flu strain soon enough to snuff it out. The pot of gold: $1 billion-plus that countries have proposed to spend on enhancing global biohazard surveillance. Enter Applied Biosystems, the company that made the advanced sequencers that deciphered the human genome...

First, close all the schools

One of the first things a government should do if a global flu pandemic begins - even before it hits your country - is to close all the schools. So writes Tyler Cowen in a new George Mason University working paper, Avian Flu: What Should Be Done (PDF).

Once a pandemic breaks out abroad, we should shut the schools immediately. This will limit the ability of children to pass the flu to each other in close, regular settings. We should assume that the flu is coming to the United States or has arrived, rather than remaining in denial, or believing that a quarantine will keep it out. We should not wait for the first wave of U.S. human cases to close the schools and day care centers. So far it appears that children are a group especially vulnerable to current H5N1 strains. If need be, some of the schoolwork could be posted on-line and taught in a virtual manner.

Difficult questions arise when both parents must work for reasons of income or because they supply essential medical or economic services.  ...Nonetheless these significant inconveniences are not worth the potential loss of thousands of children’s lives through the school system. Children, of course, also pick up flu strains at school and bring the diseases back home. They are potential spreaders nonpareil, and we should limit this transmission mechanism before it gets well underway.

I'm not sure I'd move that soon. one of the lessons fom the SARS crisis, surely, is the need to avoid  public panic. Likewise his opposition to quarantine is contentious. Nonetheless, most of the policy recommendations appear economically sensible, with a certain libertarian streak: "pro-intellectual property, pro-decentralization, and skeptical of quarantine and centralized stockpiles", as he puts it. Tyler particularly emphasises the need for local preparedness:

The single most important thing we can do for a pandemic - whether avian flu or not - is to have well-prepared local health care systems. ...Realize that the federal government will be largely powerless in the worst stages of a pandemic and make appropriate local plans.

You may also wish to read his Marginal Revolution post, where he invites comments.

Avian flu: Is China lying?

Yesterday China's Ministry of Health confirmed the country's first three human avian flu cases. One of the three, a woman in eastern Anhui province, has died from the H5N1 avian flu strain. (See Xinhua, Reuters, CNN reports).

Just one avian flu death in a country of 1.3 billion people is remarkable, and in stark contrast with its neighbour Vietnam, which has so far had 42 confirmed deaths. So has China been very lucky so far - or are the Chinese authorities lying? Certainly their track record during much of the SARS crisis was of slowness, lack of openness and under-reporting, downplaying its severity and hence helping it spread.

Local media sources suggest that China might not be reporting every avian flu outbreak. The most serious of these claims - and the most detailed - was reported Monday by unofficial Chinese news site Boxun.com, who were the first to break news about SARS in China. According to the iFlu.org website, which carries an English translation of their report, at least 310 people have died in China so far from avian flu:

It published a detailed breakdown of human bird flu infections in the country, including claims that there has been human to human spread, widespread quarantine, and at least 310 deaths so far this year. If true, the report would be the first indication that the situation in the country is far more serious than the Chinese government is willing to admit. China officially claims to have had no human infections.

The accompanying table indicates total infections of 854 as of November 12, which implies a very high mortality rate. Over 5,500 people have been quarantined. Human-to-human infections have occurred in seven provinces. Boxun says that since the statistics were collated by the Central State Council, "they would have reduced it somewhat, and hence, the actual figures may be higher."

A Chinese version of the Boxun report is here: 卫生部一官员透露的中国2005年禽流感死亡及失踪名单统计.
(Hat tip: Silviu Dochia at the Avian Flu weblog).

Avian flu economics 3: "Not necessarily a big deal - so far"

Roger Bootle of Capital Economics, writing in today's Sunday Telegraph, thinks Bird flu will be a short, sharp shock. He notes that his usual response to such 'crises' is relaxed:

Those readers who have followed my pronouncements over the years on the economic effects of other non-economic events will doubtless feel that they can guess my conclusions. Whether it has been foot and mouth, the Iraq War, the SARS outbreak, Hurricane Katrina or London's victory in the battle to secure the 2012 Olympic Games, my response has been the same - business as usual. But scale alone potentially makes this different.

Bootle notes that the current strains of bird flu are "not necessarily a big deal - so far".

Bird flu has been common in South Asian countries for many years and there has been little economic impact beyond the local poultry industries. ...The immediate concern is that the current strains of bird flu might mutate into a version that can be transmitted easily between humans. This risk does need to be taken seriously.

The World Health Organisation estimates that an avian flu pandemic could kill between 2m and 7m people across the world. ...The Department of Health estimates that if an avian flu pandemic were to hit the UK about 50,000 people would be likely to die. This is a very large number but our chart puts it into perspective. It is less than a tenth of the total annual deaths from all causes and less than half of the deaths from cancer.

His comments on the economic effects of a flu pandemic are over the fold:

Avian flu economics 2: Global recession?

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.