Lessons from history

Sunday’s number was similar, and when markets opened on Monday the Dow Jones industrial index finally lost its nerve. It slid nearly 1,000 points that day and another thousand the next, losing 6 per cent of its value in two days.

The timing was instructive. It had been clear for weeks that although the Covid-19 virus is much less lethal than the Sars virus in 2003, it spreads much faster. With China’s airports quiet and factories in lockdown, it had also been clear that the economic impact of this outbreak would spread even faster than the infection.

So why did it take so long for US markets to catch on? The answer may be that past outbreaks conditioned investors to think of  epidemics as blips, as long as they were geographically contained.

Covid-19 is no longer geographically contained, and this week, for the first time, US epidemiologists warned in earnest that a pandemic is likely. Analysts agree this could mean a serious risk of global recession. If so, the lesson of history may be that far from preparing the global economy for this sort of shock, past viruses lulled it into a false sense of security.

2003: Sars spreads

In 2003, the first major virus of the new century spread out from southern China. Severe Acute Respiratory Syndrome (Sars) was an epidemic that led to around 800 deaths worldwide.

Sars spread fast, and may have infected more than 8,000 people, mainly in China and south-east Asia. Over two dozen countries in north and south America, Europe, and Asia were affected before the outbreak was contained.

Warwick McKibbin, professor of economics at the Australian National University, estimates that Sars cost the world economy $40 billion.

Given that China’s economy is now so much bigger than it was in 2003 – just 4 per cent of global GDP then compared with 17 per cent now – the financial impact of Covid-19 may be that much larger. “Most of the GDP loss that we saw in the Sars model, and in reality, was China slowing down,” McKibbin told Bloomberg. “And so, with China much bigger, you’d expect the billions would be much bigger.”

So it has proved.

The International Air Transport Authority (IATA) estimates that Sars cost airlines in the Asia-Pacific region $6 billion, while US airlines lost $1 billion. By the end of last week, the Covid-19 outbreak had already cost airlines an estimated $29 billion, and that must be considered a downpayment.

After Sars, international passenger traffic took nine months to return to normal, IATA says. Global passenger traffic fell by 18.5 per cent in April 2003 compared with a year earlier, with a fall of almost 45 per cent in the Asia-Pacific region, according to the Fitch ratings agency.

In March 2003, the World Health Organisation issued its first emergency travel advisory about Sars. The agency lifted travel advisories against Hong Kong and Beijing three months later. When Sars was at its height Cathay Pacific, the Hong Kong-based airline, canceled 42 per cent of its flights. Daily passenger numbers fell to 10,000 from 33,000. (Although there were also some “Sars special” bargains to be had, as this writer – the lucky beneficiary of a heavily discounted 2003 trip to Hong Kong – can confirm.)

There were other knock-on impacts on consumers. Antiseptic gels (as well as face masks) became more popular. And car sales were boosted when more people rejected public transport.

Fast forward to 2020 and luxury goods manufacturers will be nervous about the (temporary) loss of so many brand-loving shoppers from their stores. A striking result of the breakneck growth of the Chinese middle class since the time of Sars is that, according to consultants at Bain, Chinese consumers made up 35 per cent of spending in the global luxury market last year, and 90 per cent of the growth in global luxury goods sales.

2003-2006: H5N1

The H5N1 virus (“bird flu”) emerged around the same time as Sars and spread round the world, from poultry to humans, over the course of the next few years. It killed over 60 people in south-east Asia from late 2003 onwards.

Poultry is a global industry. Transmission risk was, and is, high. Germany’s poultry industry, for example, experienced a 20 per cent fall in demand in 2006, with losses of €140 million.

In France, in February of that year, there were as many as 6,000 calls to a government bird flu hotline after confirmation that a wild duck found dead near Lyon had H5N1. Around this time poultry sales were 15-20 per cent down on normal levels. In Italy, poultry sales were down by 70 per cent after 16 cases of avian flu in wild birds. And in Nigeria the outbreak cost the economy hundreds of millions of dollars. Emmanuel Ijewere, one of the country’s biggest poultry farmers, said 5,000 to 6,000 birds were slaughtered on his farm each day of the outbreak.

In May 2006, Japan banned imports of British poultry. Over 15,000 chickens were slaughtered in Norfolk after the virus was discovered on two farms in one weekend.

Tourism was also hit by H5N1. In June 2006, the travel firm Thomas Cook said business had fallen by almost 25,000 (3 per cent of bookings) as fears over bird flu in Turkey undermined the group’s sales. Several deaths in Turkey were linked to the H5N1 virus.

The virus wasn’t bad news for everyone in business, however. In February 2006 the Swiss pharma company Roche reported a surge in profits, up by 33 per cent to SFr 9bn, thanks in no small part to sales of its Tamiflu bird flu treatment. Governments bought up large stocks of the antiviral drug. Tamiflu sales were up 370 per cent.

And in November 2006 drug maker GlaxoSmithKline won a contract worth at least $40m to supply the US with bird flu vaccines. The company also won a £70m contract from the Swiss government to provide bird flu vaccines for the whole country.

In November 2005 The Observer newspaper noted: “Bird flu: if symptoms persist, consult your stockbroker…” Analysis from Citigroup suggested that H5N1 would be bad for travel firms such as British Airways and energy giant BP, and good for home entertainment businesses such as Blockbuster and Nintendo. Consumers would be too scared to travel and would prefer to stay in if the spread of the virus got worse.

Meanwhile the World Bank estimated the costs of preparing to deal with H5N1 at between $750m to $1bn over three years.

2012: Mers

The first death from Middle East Respiratory Syndrome (Mers) was recorded in June 2012 in Saudi Arabia. According to the World Health Organisation, at least 850 people have now died from the virus. Mers is transmitted from animals to humans. The WHO says that camels are likely to be a source of Mers infection but the exact route of transmission is not yet known.

In July 2015 South Korea reported that its economic growth had been hit by both the Mers outbreak and continued weak exports. The economy grew by only 0.3 per cent in the second quarter, compared to 0.8 per cent in the first three months of the year, which represented the worst performance for six years. Mers undermined both consumer spending and tourism. Domestic consumption fell and tourism was 40% lower in June, after Mers was first detected in May that year.

Mers was also known as “camel flu”. A Saudi health ministry conceded that almost all camels in the Gulf are infected with Mers. Poor air quality in the Gulf states remains an ongoing health problem.

These past outbreaks were easier to contain than coronavirus, even though in the case of Sars many of the medical staff who first saw the need to isolate patients died along with them.

Sars and H5N1 detonated in a world economy that seemed interconnected at the time, but was much less so than it is now. Their economic impact was limited and recovery was quick. This may be why one US investment manager, asked recently by the Financial Times what he would do to immunise his portfolio against coronavirus, said he wouldn’t bother. “The virus is temporary.”

Perhaps. But its slow-down effect on the way the world goes round may not be. So buckle up – or just stay indoors and buy stock in video games.