Swine Flu: An Investor's Overview

How the outbreak could affect travel, agriculture, sports, entertainment, and more

By David Bogoslaw

The sudden outbreak of swine flu in Mexico and a handful of other countries, including the U.S., is a scary reminder of unanticipated risks outside the financial system that have the potential to derail any attempt at economic recovery over the next couple of years.

On Apr. 27 the S&P 500-stock index closed 1% lower on news that more than 100 people in Mexico had died of the swine flu and reports of at least 40 cases of the flu in the U.S. The Mexican peso fell 4.4%, and the Bolsa stock index dropped 3.3% that day as a result of the scare.

By the afternoon of Apr. 27, the World Health Organization (WHO) had raised the alert level from phase 3 to phase 4 on a scale of 1 to 6, warning that the virus had made the leap from animal-to-human to human-to-human transmission, which boosts the likelihood that it will cause community-level outbreaks.

Dr. Margaret Chan, WHO's director-general, said she believes it isn't feasible to contain the outbreak and that the focus should be on mitigation measures. But she advised countries not to close their borders or restrict international travel.

How Well Are Nations Prepared?

In view of how quickly the swine flu threat has escalated, it may be prudent for governments around the world to at least consider how well prepared they are for other kinds of events that could emerge as if from out of nowhere to pose a further threat to the already fragile global economy and efforts at recovery. For example, a political or terrorist crisis in Saudi Arabia that could cause the Persian Gulf to be closed, sending the price of oil dramatically higher, or an unexpected major natural disaster such as a big earthquake along the West Coast of the U.S. or another pair of back-to-back hurricanes hitting the Southeast U.S.

"These are real serious things that would do real damage to the economy," says Lawrence J. White, an economics professor at New York University's Stern School of Business.

The Mexican government has ordered a quarantine of infected people and a ban on foreign travel, while the United Kingdom is reportedly already cautioning people not to travel to North America until further notice.

The travel implications aren't confined to tourism—business travelers would be affected as well. An elevated threat level would slow the processing of people through airports and other border locations and drive up costs, says White.

If the flu grows to pandemic proportions—a 1918-19 influenza outbreak killed 50 million people worldwide—the possible economic impacts would be wide-ranging.

Fear of Crowds

Most immediately, travel, tourism, and any retail activity in Mexico aside from essentials like food will suffer, and it's likely that any sort of sports or entertainment event—"anything that involves a crowd"—will, too, according to Andrew Busch, a global foreign exchange strategist at BMO Capital Markets (BMO) in Chicago and author of the book World Event Trading: How to Analyze and Profit from Today's Headlines, a third of which focuses on the effects of infectious diseases.

The Congressional Budget Office published a revised study in July 2006 that estimated the economic impact of an avian flu epidemic. The CBO found that most of the costs would stem from decreased demand for goods and services and higher labor costs due to absenteeism, since lots of people would be staying home, either sick themselves or to care for family members, says Ross Hammond, a fellow in the Brookings Institution's economic studies program and a member of the program's Center on Social & Economic Dynamics.

The CBO estimated that 1% of U.S. gross domestic product could be lost under a mild pandemic and as much as 4.25% if it were as severe as the Spanish flu in 1918, says Hammond.

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