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Pigs can fly – What are the economic implications of swine flu?

11 May, 2009

Every year there’s an ‘X factor’ -something unexpected that economists cannot put into our well crafted forecasts. Source: Tim Harcourt.

Sure we can pick a tax change here, a war there, a likely profit downgrade somewhere else, but there are certain things that are always well, uncertain. Remember SARS – or its full title - the severe acute respiratory syndrome?

SARS was the factor X of 2003, and in 2009, this year’s factor X candidate may well be Swine flu. After all, the Global Financial Crisis (GFC), also known by its original name the sub-prime crisis, has been on everyone’s lips for at least eighteen months and the only pork discussed was how much pork-barrelling they’d be in government stimulus packages. But the swine flu out-break, emanating originally in Mexico has changed all that and it seems now that pigs really can fly.

What are the economic implications? At the big picture level, eminent Australian economist and Reserve Bank Board member, Warwick McKibbin believes the swine flu is will have “mild impact scenario” for a pandemic (that is much less than the Spanish flu pandemic of 1918). In terms of the Australian economy, McKibbin estimates that a mild scenario would be a GDP reduction of about eight tenths of a per cent.

Furthermore, Macquarie Bank economist Rory Robertson has reported that the original incidents of swine flu impact may have been overestimated and it may be “no more dangerous than the various strains that kill hundreds of thousands of people across the world each year.” He cites US data that shows that 36,000 Americans die each year from “flu-related causes.”

How about the trade picture? Whilst Mexico, the country most affected so far by swine flu, is Australia’s second largest trading partner in Latin America (after Brazil), with a merchandise trade being worth around $1.7 billion in 2007-08, most of the fear has been on how quickly the swine flu may spread to the rest of the global economy.

There have been no disruptions to trade so far although some sectors in Australia – particularly in travel and tourism – are concerned. Olivia Wirth of the Tourism and Transport Forum says that swine flu is yet another burden for the travel industry to carry on top of the GFC, and memories of SARS are still fresh in the minds of tourism operators who saw an 8 per cent decline in travel to Australia over that period. However she adds that “once SARS was under control things picked up pretty quickly.”

But how does swine flu compare to SARS? As SARS was concentrated on Asia, and swine on the Americas, trade-wise there was probably more at stake with SARS. Incidents of SARS occurred in most of Australia’s key trading partners in East Asia and the trade ‘entrepot’ cities of Singapore, Hong Kong, and the Chinese hubs of Beijing and Shanghai were affected (before Toronto was impacted as the first city outside Asia).

However, in some ways, the fear of SARS was bigger than SARS itself. Most economists were worried that people would withdraw from trade, travel and investment for fear of SARS, whether it was a threat or not and downgraded their forecasts accordingly. In any case, in the end SARS came under control quickly and most trade and investment was simply postponed not lost altogether. This may give us some comfort for swine flu, especially as Rory Robertson suggests, the actual incidence of swine flu may be less than was at first thought which might reduce some of the squealing we’ve heard in the markets.

But there are still real risks and we still need to be aware of the information available on swine flu. What can exporters do? As in SARS, many exporters who chose to postpone travel can still use the Austrade network, particularly the video conference facilities to maintain their business relationships. These strategies have been employed not only during SARS but also during terrorist incidents that delayed business travel.

Austrade can maintain relationships, pass on samples, visit clients and keep Australian exporters in the game when they temporarily can’t visit their customers. Exporters should also use the information provided by the Department of Foreign Affairs and Trade (DFAT) through the smart traveller website:
www.smarttraveller.gov.au and keep abreast of Australian government health announcements on the swine flu hotline – 180 2007.

In conclusion, whilst swine flu may not be like past crises, exporters and other travellers do need to be careful and need to heed all warnings and use the Austrade and Australian Embassy network where they can to get information and help.  Whilst there are few reports of trade missions being cancelled, a recent parliamentary delegation to Mexico did return earlier than expected to Australia. However, what the swine flu incident does show is that business travel does have its risks and can be arduous and anyone who goes on a trade mission cannot simply be accused having their snout in the trough.

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