Hamish McRae: It's not just a health issue - the economic impact of bird flu could be disastrous too

Would people be rushing out to buy that sofa? Would businesses be signing off large projects?
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The Independent Online

A month ago I was in a village high up in the Alps, chatting to the head of a Swiss bank. We were talking about the world economy and I asked him about his greatest worry. I had expected the usual banker's concerns: something about the US deficit or maybe the rise in the oil price. His answer was: "bird flu".

It seemed incongruous. Up to then I had thought of bird flu, insofar as I had thought of it at all, as a potentially serious public health matter but one that would be within the normal range of other recent health worries, such as BSE. I was aware that the great flu pandemic after the First World War had killed more people that the war itself. But that was after the most destructive conflict the world had ever known, which had weakened the health of the general population and undermined the ability of governments to tackle peacetime problems. Besides, our understanding of public health, not to mention the development of anti-viral drugs, has advanced enormously since then.

Well, in the past week, the health concerns have been widely discussed and from a medical point of view the range of probabilities at least is pretty clear - they were summed up by The Independent's health correspondent, Jeremy Laurance, in an excellent Q&A in yesterday's paper. The economic implications, by contrast, have been almost completely ignored. If my banker is right, we had better start thinking about these pdq. The human cost must always stand before the economic cost, as with any disaster, but the economic implications are important too.

Where do you begin? Perhaps the first thing to do is to put in perspective the cost of any emergency measures that a government might take. At the moment the British government is spending something like £200m stockpiling the anti-viral treatment Tamiflu. Were we hit by a pandemic, there would be a large additional burden on the NHS, which would increase its costs. But its annual budget is some £75bn, huge by any standards, and has in recent years been increased much faster than inflation. So the burden on taxpayers' funds in Britain, and indeed other developed countries, would be within the normal ebb and flow of public finance.

The prime concern, therefore, is not the immediate cost of tackling a pandemic, but rather the cost of the economic disruption that it would cause. Here, we are flying blind. The 1918-20 flu pandemic is no guide. It hit a world that was less able to cope in medical terms but also one that was much less interdependent in economic terms. In 1918 international trade and investment was around 8 per cent of world output. Now it is about 20 per cent. So it not just a question of goods and people moving about more quickly - by plane instead of by ship - which of course will spread any disease more swiftly. Because we move more stuff about, any hold-ups in trade flows will be more damaging.

But how damaging? The recent experience of health problems in Asian countries is not much use. We know that Hong Kong slaughtered its entire chicken population in 2001 in an effort to curb the spread of bird flu. We know that the Sars epidemic which struck much of east Asia in 2002/3 led to serious regional trade disruption, as well as more than 8,000 deaths. But none of this made more than a dent in economic activity.

The Asian financial crisis of 1997/8 did lead to recession in several countries; but in economic terms they came though the health crises of 2001/3 in pretty good shape. If you went through an airport in China you had to sign a form stating that you had not had any respiratory trouble, and your temperature was taken by a machine before you boarded. But you could still fly.

The main concern seems to me not so much one of direct damage to world trade, unless a pandemic were to reach such proportions that it would become impossible to move anything but essential goods and people around the world. That seems unlikely. Rather it seems to me that a flu pandemic would hit a world economy already weakened by other forces and would therefore tip it into some sort of global recession.

The best parallel I can think of was the first oil shock of 1973/4, when Opec quadrupled the price in two stages. The world was already suffering from rising inflation and the oil shock made matters much worse. The result was the worst global recession since the Second World War.

The current equivalent to the rising inflation of the 1970s is the trading imbalance between Japan, China and the other countries of east Asia, on the one hand, and the US and to a lesser extent the UK and parts of Europe on the other. We hardly realise the extent to which the West is dependent on east Asian exports because, while we are accustomed to Japanese brands, most of China's exports are unbranded. But go into an Ikea store, buy a bed or some crockery, and have a look underneath at where they are made. Chances are it will be China. The bra war this summer between the EU and China gave a taste of what happens when trade is disrupted.

Now of course you don't catch flu from a sofa or indeed a bra. We are not going to see all Chinese imports suddenly halted, just as we are not going to see all Chinese funds in the US suddenly withdrawn. What we might see, however, is a serious slow-down to trade or a sudden jump in inflation, plus maybe some unexpected capital flows out of America. The central point is that while the world economy has done very well in the past five years, delivering solid low-inflation growth, there are underlying financial tensions. Ideally you want things to adjust gradually. The direct disruption resulting from a bird flu pandemic could be the trigger leading to a sudden and more catastrophic adjustment.

At the moment little of this has been absorbed by the professionals in the financial markets, though I did see one rather alarmist commentary by a Canadian bank last month. For the markets as a whole, it has still been pretty much business as usual. In the past month confidence has been patchy but I don't think bird flu is to blame for that. It has been worries about oil and inflation. But economics now is about confidence and coping with surprises.

Just imagine what it would be like were some tens of millions of people around the world catching flu, with the inevitable death toll that implies. Would people be rushing out to buy that sofa? Or planning a holiday on a Greek island that reported its chickens dying? Or travelling unnecessarily at all? Would businesses be signing off large investment projects or would they rather wait six months until things were a little more calm?

It would be absurd to predict that bird flu will cause the next world recession. But if the world were teetering on the edge of recession, a flu pandemic could tip it into one.