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Avian flu is spreading rapidly in the bird population, but it is still extremely difficult for humans to become infected. According to Dr. Sherry Cooper, Chief Economist, BMO Nesbitt Burns, there is a good deal of misinformation triggering unnecessary fear and economic cost. Human infection generally requires direct exposure to sick or dead poultry. This is most likely in areas where backyard birds live in close contact with people—generally in parts of Asia, Africa and the Middle East. A human H5N1 pandemic, if it were to occur, would likely be triggered in the emerging world, rather than in Europe or North America.

In her report titled The Avian Flu Crisis: An Economic Update, Dr. Cooper explains that, unlike other natural disasters or terrorism, pandemics are prolonged and pervasive, so the net economic loss is substantial and extended. She states that an avian flu pandemic would lead to considerable supply and demand effects. Widespread absenteeism and trade disruption would dominate the supply-side effect, and social distancing and fear would initially increase the demand for essentials such as non-perishable food, water, medical supplies and health-care services, but reduce the demand for virtually everything else.

Global health-care systems would be running beyond surge capacity. Shortages of key medical equipment, supplies and trained personnel would be likely. And we could suffer prolonged outages of power and utilities and disruptions in government services. Preparation is the key to managing such debilitation, says Dr. Cooper.

“Government, business, individuals and public health offices must further refine and develop continuity and preparedness plans and test and retest these plans as well as revise them as the situation changes,” she urges.

Dr. Cooper explains that global economic interdependencies and the importance of China in commodity markets and in exports of low-priced goods increase the potential for economic disruption from a human pandemic. So does the prodigious volume of international trade and travel. Supply chains are now global and inventories are managed on a just-in-time basis. Dr. Cooper suggests that the meaningful economic slowdown in Asia that would result from pandemic would markedly reduce the demand for commodities and industrial materials, driving prices downward. This would have a particularly negative impact on commodity-producing countries like Canada.

People cannot contract H5N1 by eating fully cooked chicken and poultry products. Nevertheless, according to Dr. Cooper, the poultry industry is already taking a big hit, especially in Europe. Knock-on effects will manifest for industries including poultry-feed growers, poultry processors, grocers, and restaurants, especially those specializing in chicken. In the U.S., the US$30 bln poultry industry has already suffered, as exports dropped 28% in December and there are concerns that a steeper drop is forthcoming.

In addition to the poultry industry and its ancillary businesses, immediate losers would be tourism, travel and transport sectors, the hospitality industry, public transportation, life and health insurers, theatres, casinos, sports facilities, spectator sports, religious facilities, convention halls, restaurants, retailers of nonessential goods, and providers of nonessential services or those that could directly spread disease such as dentists and hairdressers.

Dr. Cooper's economic model predicts that a mild pandemic would reduce annual global GDP growth by 2 percentage points from what it would otherwise be. A severe pandemic, similar to the 1918 Spanish flu, would reduce global GDP growth by 6 percentage points (again, from prevailing growth rates). She considers the results to be “low-ball” global estimates as the economic model assumes all countries are impacted equally. Most likely, the number of countries suffering more than the U.S. will probably be larger than the number of countries faring better—but even that is uncertain.

If there were a cytokine storm (as in the severe flu virus of 1918), where the immune system attacks not only the virus but damages internal organs and tissue, pregnant women and 15-to-40 year olds would suffer the highest case fatality rate. Dr. Cooper notes many experts suggest that modern health systems cannot handle acute cases of a cytokine storm today much more effectively than they could in 1918, even in fully equipped and fully staffed modern intensive care units.  “The hardest hit group would be the young, most productive and reproductive members of the population,” says Dr. Cooper.

This would have a lasting impact by reducing birth rates and aging an already aged population, exacerbating economic underperformance for years to come, and increasing already excessive demands on pensions and the health-care system. No one can accurately predict the characteristics of the particular mutated virus strain that would cause the pandemic or how these characteristics would evolve over time.

“It's important to know, though, that even with a severe pandemic, roughly 99% of the world's population would survive, and travel and trade would recommence as economic activity rebounds.” concludes Dr. Cooper.

The full report is accessible at:

http://www.bmonesbittburns.com/economics/reports/20060313/report.pdf

BMO Nesbitt Burns is a leading full-service investment firm offering corporate, institutional and government clients access to a broad range of products and services including investment and corporate banking, treasury services, market risk management, institutional investing and research.  BMO Nesbitt Burns is a member of BMO Financial Group (TSX, NYSE: BMO). For more information, please visit www.bmonb.com.

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