Global: Pandemic Fallout
morganstanley.com
Jeffrey Matsu (New York)
The recent spread of avian flu from Asia to the Middle East and Europe has heightened the alarm that the world may be on the brink of its next pandemic. There are three preconditions for this to occur: emergence of a new virus subtype, human infection and human-to-human transmission. While the H5 subtype has circulated among wild migratory birds in a low pathogenic form for some time, the highly pathogenic H5N1 virus is entirely new to humans. As such, it poses a radically different threat than a standard strain of influenza.
The World Health Organization (WHO) currently reports 170 confirmed human cases of avian flu worldwide with 92 deaths — a staggering mortality rate in excess of 50%. Sustained transmission among humans, however, has not yet been documented. Given sufficient opportunities to mutate and adapt, H5N1 may evolve into a fully contagious virus capable of triggering a pandemic. If it does, there will be limited opportunity to react — past influenza pandemics have spread globally within six to nine months.
Considerable uncertainty surrounds the timing and virulence of such an event. Over the past 300 years, the world has experienced ten influenza pandemics. The Black Death (1347-50) and Spanish Flu (1918-19) had, by far, the most profound global impacts, killing an estimated 60-70 million people combined. Europe lost an estimated one-third of its population to the bubonic plague, and more than 1% of the world population perished during the 1918 outbreak. In contrast, the pandemics of 1957-58 and 1968-69 were far less severe, with a death toll of three million people. In 1976, the death of an American soldier due to swine flu, coupled with fears that a devastating pandemic was overdue, led to a national vaccination campaign in the US. Fortunately, the disease did not appear, but in its haste to encourage and expedite vaccine production, the US government exposed itself to over $3 billion in liability costs.
Economies highly dependent on external trade such as the US and East Asia, along with their trading partners and industries accustomed to lean inventories and just-in-time delivery, would be particularly hard hit. Over the past decade, the prevalence of infectious disease-related trade disruptions has escalated. Imports now account for as much as 75% of the produce stocked at many US grocery stores, and in 1996, raspberries from Guatemala were blamed for outbreaks of cyclospora, a protozoan parasite. Recent outbreaks affecting pork, beef and poultry have raised similar health safety concerns. According to the UN Food and Agriculture Organization (FAO), animal diseases currently affect one-third of all meat exports in the form of sanctions, bans or other risk-based regulatory measures. In 1995-96, mad cow disease cost the British beef industry $5.8 billion in lost exports and reduced consumption. Subsequent outbreaks in Japan (2000), Canada (2003) and the US (2004) amounted to an additional $6 billion in lost revenue. In 2001, the UK was besieged with the onset of foot and mouth disease (FMD), which ultimately cost its pork industry $9.2 billion. Several years earlier, FMD brought Taiwan’s pork industry to a halt, exacting nearly $7 billion in direct losses. Outbreaks of classical swine fever in the Netherlands (1997-98), nipah in Malaysia (1999), and recent confirmation of FMD in Brazil have been equally devastating.
Since the first clinically diagnosed case of H5N1 human infection in 1997, avian flu has spread from Hong Kong to seven other countries, causing roughly $10-15 billion in damages to the Asian poultry industry. Economic losses have also affected upstream producers such as feed mills and breeding farms as well as downstream sectors like poultry traders. In the past two years alone, 150 million birds have either died or been slaughtered through mass culling efforts. This number is set to increase as 13 additional countries on three continents have reported new outbreaks in birds during the month of February, with India just last week. While the poultry industry’s value-added to Southeast Asia’s regional economy amounts to just over 1% of GDP, the costs associated with containing avian flu has fallen disproportionately upon “backyard” producers. In some countries, these small farmers and peasants account for a majority of the poultry production (e.g., 60% in China), raising their animals on small plots of land surrounding their homes. In Vietnam, for example, the poorest quintile of households is three times more reliant on poultry income than the highest quintile. Unless the government can provide adequate financial compensation to offset the loss in livestock, farmers have little incentive to report illnesses amongst their flock. Given that a country like China has an estimated 13 billion chickens and over 500 million pigs spread over large rural areas, this informal channel of surveillance is critical to reducing the spread of the disease and its transmission amongst commingled animals. Over time, this cross-contamination can lead to mutation of the H5N1 virus into a form that is more easily transmittable to humans, and then among humans.
Globalization and cross-border connectivity significantly alters the transmission mechanism of the next pandemic relative to those of the past. The recent SARS outbreak provides only a hint of the potential fallout. In early 2003, the disease spread from rural China to five countries within a matter of days, and by summer, SARS was documented in 30 countries across six continents. Although contagion was limited, infecting about 8,000 people with 10% mortality, the fear and uncertainty it generated led to swift quarantines and the lockdown of national borders. The financial implications were considerable as entire industries came to a virtual standstill. For a region that derives 11% of its GDP from tourism, the cancellation of nearly half of all international flights to Southeast Asia and 70% of flights between Hong Kong and the US was devastating. Industries such as semiconductors, which rely heavily on the freight service provided by these planes, were similarly affected. Repercussions extended to Australia as well, which saw tourist arrivals fall by 20% even though it had only one confirmed case (which happened to be a German tourist in transit). All told, the economic impact of the six-month SARS epidemic amounted to some $40 billion for the Asia-Pacific region.
Quantifying the economic impact of the next pandemic, be it avian flu or otherwise, is next to impossible. Data based on past outbreaks and assumptions on both virulence and mortality rates are helpful in framing the debate, but can yield markedly different results. The Asian Development Bank (ADB) models two Asia-specific scenarios based on a mild pandemic: (1) “short-lived shock” leads to losses equal to 2.6% of regional GDP, and (2) “prolonged shock” leads to losses of 6.8%. In a report issued this past November, the US Department of Health and Human Services predicts that a moderate outbreak in the US would lead to $180 billion in medical costs alone. Total economic damages, however, would be far greater than these conservative estimates due to the second-round effects that disrupt manufacturing and supply chains, halt travel and transportation, and lead to shortages in both critical (e.g., medical equipment, vaccines, potable water) and non-critical (e.g., autos, electronics, clothing) goods. If we assume that the economic loss from the SARS epidemic amounted to 2% of East Asian GDP, and use ADB’s “prolonged shock” scenario as an upper bound, a ballpark estimate for the global economy would put the impact from a pandemic in a range of $880 billion to $3 trillion.
As noted above, the world population is highly susceptible to an H5N1 pandemic, mainly because the human immune system has no pre-existing or residual immunity to the underlying virus. Although prevention is the most cost-effective measure, limited production capacity and high costs make universal vaccination difficult. The global supply of flu vaccines has never exceeded 300 million doses a year, which is barely enough to vaccinate the US population, let alone the world’s 6.5 billion people. Two antiviral drugs are currently on the market (Roche’s Tamiflu and GlaxoSmithKline’s Relenza), but it would take roughly a decade to manufacture enough to treat even a fifth of the world’s population. All told, the laborious manufacturing process and limited shelf life, coupled with liability concerns, has led to massive consolidation within the industry. From two dozen companies in 1980 to just a fraction of that today, vaccines now account for about 1.6% of the $400 billion global pharmaceuticals market.
No one knows whether H5N1 will lead to the next pandemic, but just the slightest chance of an outbreak implies that we need to take these risks seriously in assessing prospects for the global economy and world financial markets. While doomsday scenarios and calls for massive mobilization are likely to be counterproductive, media coverage has stirred governments and their people out of complacency. It is crucial to seize this moment by strengthening research on infectious diseases, and better integrating national strategies on biosecurity standards and surveillance. Reducing opportunities for a pandemic virus to emerge is far more cost-efficient than containing its spread. This will require the active and coordinated participation of households, businesses and governments, with an explicit recognition that any successful solution must be framed within a global context. |
