Flu pandemic could lead to the next great depression, economists say

(August 17, 2005) Avian flu is frequently relegated to the back pages of newspapers and rarely considered an investment risk by money managers, but a new research report from BMO Nesbitt Burns, entitled An Investor’s Guide to Avian Flu, which catalogues the possible economic and societal fallout of a global pandemic, could change all that.

A pandemic is an infectious disease that spreads across many countries in a relatively short period of time. Epidemics, by comparison, are local or regional occurrences.

Written by chief economist Dr. Sherry Cooper and chief strategist, Don Coxe, the report outlines the challenges and uncertainties associated with developing egg based vaccines, the typical way of manufacturing flu vaccines, for a virus that is lethal to chickens. It chronicles past outbreaks like the 1918 “Spanish flu” influenza that killed more people than the war going on at the time. It also discusses the nature and process of virus mutation, and conditions, both physical and economic, which help the virus spread.

In East Asian countries, for example, governments give little to no compensation to peasants who have their flocks destroyed in large-scale culling. “However successful this process may be at slowing the progress of the disease, it hardly operates as an incentive to report outbreaks,” writes Coxe.

Against this backdrop, both Cooper and Coxe ponder worst case scenarios and the economic fallout that could occur if the virus were to mutate to the point of sustained human-to-human transmission. Until recently the virus was present in birds and mammals, but it rarely killed them. Today, it has a 100% mortality rate with chickens and some migratory birds.

At a first glance, the report smacks of something that isn’t going to happen — think Y2K — but it makes two very good points: First, many people are overleveraged, investors are comfortable right now, and in the current environment it can be easy to let the risk level of your investment strategy creep higher.

In his introduction to the paper, BMO director of research, Mike Miller says “it is worthwhile to stop and consider an outside risk that might really impact your portfolio. The odds are that an Avian Flu pandemic (or a flu pandemic based on some other flu strain) won’t happen anytime soon, but it might,” he says. “I recommend reading Don and Sherry’s thoughts on this topic with an open mind and then taking the time to complete a risk review of your portfolio strategy.”

Secondly, the report points out that resources are needed to help make sure the catastrophe won’t come to pass.

Cooper writes: “Y2K triggered a worldwide response, and expenditure of more than $100 billion. The business community, believing its own survival was at stake, did everything the experts asked, based on those experts’ appraisal of the risks. Maybe a significant proportion of that effort and expense was wasted, but the desired result was achieved, not even a glitch. Shouldn’t the business community get engaged once again?” she says.

“If nothing else, we hope to raise the consciousness of citizens around the world in an effort to support the urgent endeavors of the public health and medical professionals … In today’s world, the economy is borderless and so are public health and terrorism risks.”

If the Cooper-Coxe worst case scenario, many Canadians would be out of work, either taking care of themselves or dying family members, or would have to abide by quarantine restrictions. Commodity prices, along with the value of most assets, would plummet as demand forces ground to a halt, and travel restrictions would heavily impact global trade.

Cooper admits she could sound alarmist, but considering both the social and economic impact of SARS, a relatively short outbreak with fewer than 1,000 deaths, it quickly becomes easy to see where she’s coming from.

“It is for others to decide the likelihood and severity of the next pandemic. What Don and I have concluded is that the economic and societal effects of a pandemic, even a moderate one, are so severe that businesses and consumers need to join the medical and scientific community in creating a crisis prevention and management plan,” she writes. “Investors and business leaders must be aware of the risks and factor them into their strategic planning.”

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com