Gauging the cost of the swine flu pandemic

A revenue shortfall looms for the kingdom's economy as sickness worries and bans on some groups threaten to slow Haj-related spending this year. David George-Cosh reports As the world prepares for another round of swine flu, Saudi Arabia is bracing for a sharp fall in travel and tourism spending since health officials in many countries have warned vulnerable groups against undertaking the Haj and Umrah due to fears of contracting the virus while others have banned certain age groups this year. The kingdom's travel and tourism sector could lose as much as 25 per cent of the expected revenue from Muslim pilgrims. The Mecca Chamber of Commerce and Industry told the Asharq Al Awsat newspaper that hotel losses could total US53 million (Dh194.6m) and occupancy could be as low as 60 per cent. Any losses due to travel cutbacks mark the first real example of swine flu's impact on the economy. Since the virus, officially known as the H1N1 strain of influenza, began infecting humans in Mexico last April, its immediate impact has been clear. More than 162,000 people have been affected and the epidemic is responsible for 1,154 deaths worldwide, according to the latest statistics from the World Health Organisation. Now with the flu season on the horizon, economists are looking to determine the illness's impact on our global yet very interconnected economy. Marie Diron, a senior economist with Oxford Economics, a forecasting consultancy, wrote a study published in June using data from the 1957 "Asian flu", the 1968 "Hong Kong flu" and the Asian SARS outbreak in 2003. Assuming worldwide infection rates of 30 per cent and a 0.4 per cent mortality rate, she concluded that a severe swine flu pandemic would result in serious cuts to consumer spending, particularly in travel and tourism, which would spur deflation. Furthermore, oil prices, the lifeblood of many Middle-Eastern economies, would subsequently decline from estimates of $60 per barrel this year and $75 by next year, to an average of $55 this year and below $40 next year. That would prolong the downturn for the region for "quite a long time", Ms Diron said. "In the most benign scenario, it would take about a year to recover," she said. "In the nastiest scenario, with the inflation rate in a downward spiral, the time for recovery would be about three to four years. This is because authorities around the world have very few weapons left to prop up the economy from the current crisis. Interest rates are already very low, if not at zero, and budgets have already been stretched out." Transport, retail and hospitality will continue to be the sectors most vulnerable to a swine flu outbreak. Afraid of becoming infected, people will simply keep away from public spaces such as airports, train stations and shopping centres. "A lot of people are not travelling because of swine flu," Adel Ali, the chief executive of Air Arabia, told Bloomberg last Sunday. "Swine flu is a bigger threat than the economy." Commodities have also been affected as pork futures have fallen 14 per cent since the outbreak began. As well, a pandemic could deter companies from investing and financial markets would experience another round of volatility, Ms Diron said. In Vietnam, fears have risen so dramatically that its stock regulator recently asked brokerages to make trades either by telephone or online in the event of an outbreak of swine flu in securities firms. Depending on what research you read, swine flu coming on top of the recession could drive global GDP to shrink 2.5 per cent this year, compared with a current growth forecast of 1 per cent, and cost the world economy anywhere between $166 billion and $800bn, with long-term costs projected to be much greater. But others say the high level of alarm is not necessarily justified. Thomas Garrett, an economist with the St Louis Federal Reserve and the author of the article Pandemic Economics: the 1918 Influenza and Its Modern-Day Implications, said it was far too early to tell whether swine flu would have a cataclysmic impact on the economy. SARS killed 774 people over two years. The "Spanish flu" influenza epidemic of 1918 took the lives of more than 675,000 people in the US and 40 million people worldwide. "For a very short period of time, there were local economies, cities, towns, where commerce essentially stopped for a couple of weeks," Mr Garrett says. While advances in health care have essentially contained influenza strains to a seasonal annoyance, the Spanish flu of 1918 provides a telling example of what could happen if a disease stopped day-to-day business on a scale large enough that parties who do not have the flu are affected. Some of that is happening today with the swine flu. "In terms of the economic effects, I don't think the swine flu is as nearly as widespread or severe as 1918, but it'll be hard to fully say what any economic effects are," he says. "Certainly, within some families there's going to be some effects, but in terms of being able to see some aggregate effects in state or country-level data, I think it is difficult to say whether there's anything there at all." Robert O'Hanlon, a partner at Deloitte and Touche Middle East, says it will be difficult to say whether any Haj-related travel bans will have an effect beyond GCC economies. And he points out that "key transit airports, such as Dubai and Abu Dhabi, are continuing to register increases in passenger volumes despite both the global slowdown and swine flu". Simon Williams, the chief economist for the HSBC in Dubai, said that short of the worst public health forecasts being realised, the global economy had more pressing difficulties to deal with. The H1N1 virus is only one part of the challenges to economic growth. "I tend to think that if oil prices would be resilient to stay above $50 in the worst global economic conditions in 70 years, oil would be able to withstand the worst outbreak of H1N1," Mr Williams said. In the meantime, some pharmaceutical companies are making record profits as their flu vaccines are stockpiled by authorities worldwide. "The sense of urgency is obviously driven by governments who put themselves in a position where they have a need for preparedness," Andrew Witty, the chief executive of GlaxoSmithKline, said last month. The company has received orders for 291 million doses of its swine flue vaccine, dgeorgecosh@thenational.ae