April 30 , 2003
When I am asked what the severe acute repiratory syndrome
epidemic will do to the world economy, my first response is to ask how it
alters productive resources. People
are dying (about 6 percent of the
afflicted). Work days are lost
(more than 4000 cases and tens of thousands of quarantines for 10 days to see
if symptoms develop). Resources
must be redirected to attack the
The fatalities are frightening and my CDC contacts will
need to inform me whether 6 percent mortality is dramatic (I think it is but I
do not know). However, this is
not in the class with the influenza that swept the world after World War I
(about 18 million fatalities there). That
epidemic did not spawn a world recession (although postwar rebuilding might
have offset some of its economic impact).
What is different about this epidemic is how the world is
reacting to it. The fear is a
greater economic concern than the disease, and that fear is a difficult issue
to monitor. In the past month,
trans-pacific travel has declined by 40 percent. Trade shows are experiencing less attendance than conferences
in the U.S. the week after 9/11. As
a result, business orders for the next six months of Asian work are off almost
Hotels in Hong Kong are sometimes less than 10 percent
occupied. Restaurants are vacant.
Movie houses are being closed. Even
shopping malls are emptying, with sales off 50 percent in the past few weeks.
Tourism is 3 percent of the Hong Kong economy, and it is off by more
than half (a 1.5 percent drop in GDP is noticeable, even when it is mostly
While the impact is most dramatic in Hong Kong, where the
fatalities have been the highest, similar conditions are developing in
Singapore, Shanghai, and Beijing. Thailand
has not yet lowered its GDP estimates, but the IMF is expecting more than a
percentage point drop in growth there. And the story continues throughout Asia.
The 5.3 percent growth forecast for the region may fall by as much as a
percentage point if the crest of the disease is not reached soon.
My second concern is how long activity can be so
dramatically different from normal before financial repercussions begin to
develop. Ten percent full hotels
cannot pay their mortgage notes. Restaurants
will fail if customers do not arrive soon.
How will this mounting financial impact be handled by the financial
Of course, the answer is not known until the magnitude of
the fear is measured. Hotels
shuttered for a month will not create serious financial distortions.
Hotels shuttered for a year could seriously impair the lending capacity
of the banks that are holding the hotel notes.
So far, the supply side of the Asian economy has not been
significantly impacted. People
will not go to movies and shopping malls (unless they work there).
They are going to their workplaces.
Furthermore, the vast majority of the fatalities are people who had
other medical conditions or were aged. At
this point, the capacity to produce in Asia (and Canada and wherever else the
disease hits) has not been significantly altered.
However, the weakness in demand for services could begin to cause job loss. That could begin to undermine domestic activity in Asia (although much of the stimulus to growth remains export activity, which remains largely unimpaired). The more substantial concern is the loss of financial capacity that could have serious growth restraints further down the road.
Now that I have outlined the economic issues from this
epidemic, let me try to put some numbers to them. First, I do not believe a recession will develop, although
the reduced demand will lower Asian economic growth by a full percentage point
and world growth by almost 0.3 percentage points.
Second, Asian financial institutions will be strained.
In areas such as China, Korea, Thailand, and Japan, the further
weakness of domestic capital markets could impact domestic growth.
However, much of the Chinese growth is financed externally, and most of
the manufacturing production will continue to perform.
So far, the financial markets have not seriously
discounted the economic impact of this epidemic, although the Hong Kong stock
exchange is beginning to sag significantly.
A little backing away from Asian securities at this point might be
justified (although Chinese equities have been among the strongest performers
in the world in the first quarter of this year).
This probably would include debt instruments.
However, the reduction of demand relative to supply
usually lowers prices. The
current rush to gold because of Asian concerns is probably the wrong thing to
do. If anything, downward
pressures on prices will intensify. As
far as my U.S. forecast is concerned, SARS will probably lower inflation
(which already is well under 2% when energy prices are excluded) but will have
minimal impact upon economic activity.
Now if there only was another cure for the fear than actually containing the disease, we could eliminate SARS from our forecasts altogether.