Economic Impact Of Bird
Flu Hinges On Panic

By Gilbert Le Gras

WASHINGTON (Reuters) - The severity of a global economic slowdown caused by a bird flu pandemic, estimated to slash 1 to 12 percent off world output, largely depends on how people and governments react, economists said on Wednesday.
Initial confirmation of a bird flu strain that easily transmits between people would have an immediate shock effect on the world economy both in supply -- absenteeism and reduced productivity -- and demand -- a drop in activity -- but the depth and duration of the shock depends on people's reaction.
"Behavior, behavior, behavior is everything," International Monetary Fund capital markets expert Charles Blitzer said.
"We see a sharp down, followed by a recovery. Governments need to ensure the collateral damage from the sharp down be minimized so we bounce back," he told a think-tank discussion.
The H5N1 avian influenza virus has picked up speed as it has spread out of Asia and into flocks in Europe and Africa, and experts agree a human pandemic is a question of time. The virus does not yet easily infect humans, having killed 130 people in nine countries since 2003, but scientists fear it could mutate into a pandemic that could kill millions.
"The (economic) effects tend to be lower than you'd expect because people are good at adjusting," said Donald Marron, acting director of the U.S. Congressional Budget Office, citing the U.S. economy's resiliency after the Sept. 11, 2001, attacks and last year's Hurricane Katrina. "A lot depends on the public reaction, which is difficult to predict," Marron added.
Public reaction is already being felt by poultry producers, World Bank economist Andrew Burns said.
The Food and Agriculture Organization expects an 8 percent fall in world demand in 2006, despite no risk of contracting the virus from cooked meat, and he said demand in France -- with two isolated cases of infected flocks -- fell 40 percent.
Air travel could drop as much as 20 percent once a human pandemic occurs with passenger numbers dwindling by 40 to 50 percent on flights to the hardest-hit countries, Burns said.
Pharmaceutical companies could see their stock prices jump while some commodity prices may fall, the IMF's Blitzer said.
Economies should weather the pandemic better than the last severe pandemic of 1918 thanks to better social safety nets and technology that allows people to work from home, he added. "The IT backbone is really going to get stretched and it seems little attention has been paid to this," Blitzer said. "Countries with weak fiscal positions, dependent on commodity exports are most exposed to a reversal in capital flows."
Insurance companies and investment funds could come under pressure during the initial economic shock but market price effects should be temporary. Another concern due to absenteeism is disrupted bank payments, accounting and market settlements.
Central banks should expect a jump in demand for cash and they will have to meet that demand before worrying about mopping up extra liquidity or inflation, Blitzer said.
Citigroup's global head of emerging markets economic and market analysis, Don Hanna, added that investors are likely to put their money in safe-haven U.S. dollars and securities. "Long-term interest rates would adjust less in the U.S. probably because of a better health response (than most of the world) and more money would come into the U.S. economy so there would be no unwinding of global imbalances," Hanna added.
Massive U.S. fiscal and trade deficits and corresponding hoarding of foreign reserves by Asian central banks are growing concerns for policy-makers who fear a disruptive correction.



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