Hamish McRae: The worst time to suffer a pandemic

We know a lot about the impact on economies of health emergencies
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The threat of a global pandemic quite properly instils fear. We know sadly that people in Mexico have died from the present outbreak of swine flu. We know inevitably that the flu will spread, indeed is already spreading, around the world. And we have that folk memory of past pandemics, from the Spanish flu after the First World War back through time to the plagues, the Black Death and beyond. Why do we still say "bless you" when someone sneezes? Because a sneeze was a first sign that someone had caught the plague.

That fear continues despite the fact that with modern health systems it should be possible to tackle swine flu effectively. That is perhaps because the boundaries of the possible outcomes cited by health experts are so wide. We are told that as far as Britain is concerned there could be a few isolated cases or one-third of the population could go down with flu.

That is quite a wide range. Indeed that sort of information is almost as helpful as the comment yesterday from Joaquin Almunia, the EU Commissioner for economic and monetary affairs, who told reporters that: "These things at such a delicate moment for the world economy are not helpful, but the economic consequences shouldn't be exaggerated".

Actually that is a bit unfair because what the commissioner is saying is right as far as it goes. From an economic perspective this does indeed come at a bad time, for it is a blow that strikes just at the moment when the world economy is at its weakest point of an already serious cycle. But we do know quite a lot about the impact on the economy of health emergencies because we have the recent experience of the Severe Acute Respiratory Syndrome that struck East Asia in 2003. It is of course possible that swine flu will prove to be more serious than Sars but if it does indeed turn out to be comparable then there are some things that can sensibly be said about it.

The first is that the blow is unevenly felt. It is uneven geographically of course. Mexico is cruelly hit because it has already been suffering from the collapse of demand from the US. It is an inherently robust economy, ever more closely integrated with that of the States following the launch of Nafta. But it was under particular stress and that will worsen in the weeks ahead.

Naturally it loses its tourist business and for some parts of the country, such as the Yucatan peninsular, this is dreadful. Cancun, the place to which most British holidaymakers go, is an artificial city, created on a sandbar as a tourist resort. But the impact goes much further than tourism, right into the heart of the economy.

If the impact spreads to other regions they will be similarly affected. We don't yet have figures for the impact on visits to the US but we do know that tourism is a particularly sensitive industry to health or personal safety blows. People go elsewhere – or maybe don't travel at all.

The second point is that the blow is felt unevenly felt by different industrial sectors. The airlines are in the front line, the hotels just behind them. Travel and tourism, defined widely, accounts for around 11 per of the world economy, which makes itthe largest industry in the world. It has a further characteristic in that it cannot store its output. Car factories can build cars and stick them in car parks for a month or two until they are sold. But if an airline seat or a hotel bed is empty that is revenue lost for ever. So the biggest industry gets the biggest hit, with inevitable knock-on effects on the rest.

If that all sounds dispiriting, the third point is more encouraging. It is that output lost by industries than can store their production recovers quickly. In the case of Sars the outbreak led to a disclosed 774 deaths, mostly in China and Hong Kong, but the cost has been estimated by the Asian development Bank as between 0.6 per cent and 2 per cent lost regional output. But much of this was made up swiftly afterwards. If you look at graph of consumer confidence the SARS outbreak looks like a slit. It dips down suddenly and then equally suddenly recovers. So for industries that can store output – i.e. not the travel-related ones – Sars was damaging but not a catastrophe.

There is however one important difference between the two cases. In 2003 the world economy was growing swiftly; now it is contracting. The first half of this year is probably the worst moment in the cycle, for even if things go on down through the second half, they are likely to do so at a slower rate. So the potential for a swift bounce back is more limited than it was in 2003.

Here I am afraid we do head into the unknown. We can see that Mexico is hard hit. We can see travel and tourism is hard hit. But what we don't know is how widespread the damage will be, nor at what speed the broad raft of global industries will recover. That depends on what happens in the next few days and weeks.

If the main outbreaks are contained to the Americas and if the flu proves relatively easily treatable it is possible to be fairly confident about the impact on the world economy. On that basis the balance of probability is that this will account for the loss at the very worst of 0.25 per cent of North American output this year, with most of the damage in Mexico rather than the US. That is not what you would want at all but in the context of an economy that will decline by at least 3 per cent it is not so massive.

To be precise: it is massive for the sectors and localities that bear the brunt of the outbreak and it is of course dreadful for the people who suffer directly. But seen in the context of a whole economy it is quite manageable. To give another parallel, in economic terms it would be broadly similar to the impact of the BSE outbreak in the UK.

There is however a possibility that the outbreak will spread much further and maybe even develop into something more serious as it does so. If that were to happen, we go beyond the realm of economics. We simply cannot start to calculate the economic consequences until we know the medical and human costs.

All we can say is that in the past the world economy has eventually proved quite resilient when faced with medical emergencies – and ironically more so than faced with man-made financial ones.