BackEpidemics and their effect on markets
Epidemics and their effect on markets
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Pigs have been making headlines with the global media on fire about the swine flu. Without making light of the people who have lost their lives or are suffering from the swine flu outbreak, let’s look at the economic and market impact that epidemics generally tend to have.
Also Read Rajeshree Varangaonkar and Bharat Indurkar’s earlier columns
In 2008, the World Bank and the International Monetary Fund (IMF) put out a report saying a flu “pandemic" could cost the world economy $3 trillion (around Rs150 trillion), or 5% of global gross domestic product (GDP). Webster’s dictionary defines a pandemic as “a disease occurring over a wide geographic area and affecting an exceptionally high proportion of the population". Here itself, we get a clue that World Bank’s estimate is overly alarmist. Neither does the World Bank have a great track record estimating the economic impact of individual epidemics. The main fear of an economic impact comes from a hit to travel, tourism, trade and in the extreme case, from a rise in unemployment.
The SARS outbreak was quite debilitating to global travel and to the countries in the centre of the crisis—Hong Kong, Singapore, China and Malaysia. However, only 800 people lost their lives, a reasonably small number given the seriousness of the epidemic and compared with previous epidemics. According to the Asian Development Bank, the outbreak cost the global economy $18 billion—a far cry from the World Bank estimate of $3 trillion—of which $15 billion was tourism-related. The market reaction to the epidemic truly showed how difficult it is to outsmart the market. The currencies of the countries in doubt hardly reacted. Stocks in these countries sold by about 15% between January and March 2003, ironically it wasn’t until March 2003 that the World Health Organization (WHO) had declared the SARS outbreak a pandemic! By the year-end, the stock markets had made back their losses and much more.
In response to the avian flu of 2006, the World Bank had estimated that the cost to the global economy would certainly be $1 trillion and perhaps as high as $2 trillion, or upwards of 3% of global GDP. Avian flu claimed about 250 lives, progressively less than the 800 lives claimed by the SARS epidemic and had almost no economic impact. Those of us who deal with the financial markets know estimates are useful only when they are believable. Of course, the financial markets virtually saw through the whole episode.
Following the World Bank and WHO alarmist model, Egypt has now declared that it’s going to slaughter all of its 300,000-plus pigs. While no health hazard is pleasant and this outbreak most certainly will mean a temporary slack in international travel, let’s not blow this out of proportion. It almost seems like as medical science progresses and epidemics remain better controlled, the global organizations responsible for public awareness get worse at estimating the intensity of the crisis, or are they just justifying their existence?
Rajeshree Varangaonkar and Bharat Indurkar have day jobs with US-based hedge funds. They write every other Thursday. Send your comments to globalbeat@livemint.com
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