Thursday, 30 April 2009

Swine flu deflation

Swine flu deflation
Posted By: Ambrose Evans-Pritchard at Apr 28, 2009 at 19:20:44 [General]

The markets have been remarkably relaxed about the rise in the World health Organization pandemic alert Phase 4 (sustained human to human transmission) - and tonight perhaps to Phase 5.

They seem not to care that confirmed cases of H1N1 avian-swine flu have spread to Israel, Spain, France, New Zealand, and Korea.

This surprises me. The WHO alert is the best objective indicator we have of rising risk, and the potential implications of Phase 4 or Phase 5 are .. well .. awful.

We can all argue about the likely damage from a "severe pandemic" along the lines of 1918 'Spanish Flu' or the Neapolitan pandemic of 1775.

The World Bank has floated a figure of $3 trillion, or 4.8pc of global GDP. The US Congressional Budget Office has come up with something similar. These are arbitrary telephone book numbers.

But even if losses are less, we are still talking about a further deflationary shock to a world economy already tipping into debt deflation (though it might not be a uniform deflation, if shortages push up local food and fuel prices). It would certainly finish off half the global banking system.

It is too frightful to think about. That perhaps is why investors are doing exactly that: refusing to think about.

Over the last couple of days I have been deluged by notes from City analysts and economists suggesting that H1N1 avian-swine flu poses no great threat to the global economy because the authorities showed during the 2003 SARS epidemic in Asia that outbreaks can be contained.

This is a misreading of the threat we face.

SARS is a coronavirus. It is extremely hard to catch. Just 8,000 people were infected worldwide during the entire epidemic (10pc died).

Today's H1N1 outbreak is an influenza virus, which is far more contagious.

Dr. Keiji Fukuda, the WHO's assistant director-general, said it is already too late to stop the spread of the disease. “At this time, containment is not a feasible option.

It is entirely possible that we may see a very mild pandemic. I think we have to be mindful and respectful of the fact that influenza moves in ways we cannot predict.

The worst pandemic of the 20th century occurred in 1918, and it also started out as a relatively mild pandemic that wasn’t very much noticed in most places. Then in time it became a very severe pandemic, one of the most severe infectious disease episodes ever recorded.

Perhaps because so few market players studied science, or have a current link to science, they seem not to realize that the world’s virologists and flu experts are in a state of nail-biting, ashen-faced, fear.

Rob Carnell, chief economist at ING, is one of the exceptions. “We believe fear of infection will lead to drastically altered behaviour. It may be that swine flu does not tip the human fear scale sufficiently, but if it did, with the economy already in tatters, the results could be catastrophic,” he said in a note today.

We may be lucky. The virus may indeed prove mild - like the Hong Kong flu in 1968 - or burn out altogether as it mutates.

The early cases in the US and Canada give hope. So does the apparent fall-off in the fatality rates in Mexico.

But as Dr Fukuda said, nobody can pre-judge the virulence of this pandemic. Least of all the markets.

Full coverage of the swine flu virus.

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