Thursday, April 30, 2009

Macroeconomic Effects Of Swine Flu Onto Global Economy

The swine flu pandemic could have unleashed itself at the time when it is mostly unwelcome. With no tentative & convincing evidence that the global economy will rebound in nearest time, the fear spread by swine flu is expected to put statistical data to a grimmer look
Mexico is the epicentre of the outbreak. However scores of confirmed cases have been reported in US & as such it has become the largest single country outside Mexico to suffer from the pandemic

Public in Mexico wearing preventive-mask to avoid infection

What’s the macroeconomic effects towards global economy?

(1) Fall in private spending. Take Mexico for instance. The government has announced a temporary curfew. Schools will be closed until May 6th & many other businesses shut down too as a precautionary measure. Within this period economic activities will slow down markedly. People choose to stay at home to avoid being infected. The impact onto Mexican GDP for the second quarter of 2009 will be detrimental. As many as one-fourth of Mexican resides in metro area

Consumers from US, Israel, New Zealand & many other large European economies will probably give the same reaction since there are suspected or confirmed cases there. The combo effect of global recession & swine flu will further reduce consumers’ optimism. Private spending will further decline & it may offset all efforts undertaken previously

(2) Falling share prices. Major stock markets around the world suffered from the beatings with Dow Jones Industrial leading the pack. From economics points of view, this represents negative wealth effect which could change consumption pattern. Stocks that overreact are mostly travel-related. For instance British Airways share prices fell 8%, Air France 7%, Cathay Pacific 8%, Continental Airlines 16% etc. Meanwhile others like Interncontinental hotel down 4.2% & cruise firm like Carnival lost 6.8%.

(3) Falling income for hog farmers. The nearest future is unpredictable for these poor farmers. Demand for sausage, beacon, pork chop & all other pork related meal dwindle in these few days, pushing its price lower. Some major hog farming industries in Kansas, Texas, California & Mexico will be severely affected as China, South Korea & Russia have placed an embargo towards the import of pork from these areas

(4) Drop in exports. Fall in demand for pork from major export destinations mentioned above will not bode well for the already-ailing Mexican & American economy. Fall in real GDP for 2nd quarter of the year due to derailing consumption will be magnified by the fall in exports. Through the negative multiplier effect, an initial fall in these two will lead to a larger secondary fall in aggregate demand (AD). Although export of hogs may not be significant as a percentage of GDP, still it will bring about measurable effect onto local economy

(5) Derailing price of grain futures. Investors are anxious about the rampant outbreaks of the fatal virus which would reduce pork demand, which means decrease in grain consumption. As such soybean, grain & corn futures for July delivery fell

(6) Waste of scarce financial resources. President Obama already asked the Congress for $1.5 billion to fight against the disease. Such huge amount of money perhaps could be better of spent onto helping homeowners to cope with mortgage repayments or spent onto other public services like schools & hospitals construction

(7) Currency sell off. Mexican peso was under some mild selling pressure over the past few days. This is because investors are fearful that the government might not be able to cope with the outbreak since WHO officials declared that they may need to raise the pandemic alert to Level 5 (now possibly 6). Also they could have predicted that recession in Mexico would last longer than thought.

(8) Affect American businesses. Some Mexican-based firms are important in US supply chain. If Mexican government mandated a closure onto the operations of these factories & workers confined, probably lots of businesses in US will be forced to a halt too. This is a good example for negative effect of globalisation


(1) Not all share prices fall. While it is true that many people suffer from negative wealth effect, there are quite a number of people who gain out of it. For instance, share price of Swiss firm Roche the manufacturer of anti-flu drug, Tamiflu rose 3.5% while GlaxoSmithKline which manufactures Relenza gained 5.7%

(2) Name of pandemic changed. The current swine flu virus name has been changed to H1N1 to avoid further damage to the pork industry in North America. Also it is to convey the message to countries that banned the import of pork that this is not a food-borne disease. Nevertheless, I’m doubtful that this will work. The swine-flu stigma is too thick in their head, that consumers almost immediately refer it to pigs

(3) May not be detrimental to global economy. In the worsening of times, people already began to change their lifestyle. Increasing number of people have cut their spending as can be seen from falling retail sales. Also more choose to eat at home. As such, the swine-flu pandemic may not spread the so called fear among global consumers. In other word, whether there is swine flu or not, people already choose to remain at home. Therefore there could be no severe fall in spending as exaggerated by many

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