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Outbreak Threatens Global Recovery
Airline Shares, Oil Prices Plunge on Fears That Flu Could Bring New Woes

By Anthony Faiola
Washington Post Staff Writer
Tuesday, April 28, 2009

The swine flu outbreak is compounding the ailments of the global economy just as it is starting to stabilize, darkening the outlook for everything from tourism to world trade, particularly in the United States and Mexico.

In recent weeks, economic data suggested a bottoming-out of the global financial crisis. But economists yesterday were forced to digest worst-case scenarios in which a recession that is already the deepest since World War II could become two or three times as painful.

That would be the consequence of a full-blown flu pandemic. But even if the outbreak were to remain relatively contained, economists warned of a new round of woes.

Underscoring those concerns, airline stocks plunged yesterday amid fears of a replay of what happened earlier this decade in Asia, when outbreaks of bird flu and severe acute respiratory syndrome, known as SARS, emptied hotels and led to flight cancellations. The value of the Mexican peso took its steepest drop since November. And investors drove down the price of oil by 2.7 percent on fears that swine flu would slow global economic recovery.

But the real focus of concern centered on a new dose of the last thing the world economy needs right now -- more uncertainty.

"The impact is to threaten the stabilization of the global downturn we've been seeing over the last few weeks," said Brian Dolan, chief currency strategist for Forex.com. "The timing could not be worse."

The damage could hit the already ailing tourism and airline industries the hardest. The European Union and a number of nations began warning their citizens yesterday to avoid unnecessary travel to parts of North America.

During the SARS outbreak in 2003 -- the last major epidemic of a respiratory disease with human-to-human transmission -- airline traffic to Asian destinations such as Hong Kong fell by as much as 60 percent. Overall, Asia-Pacific airlines lost 50 percent of traffic in the first five months of 2003, causing them $6 billion in losses. North American carriers saw passenger traffic fall by 3.7 percent that year.

This time, however, the global airline industry is already in deep crisis, raising the specter that deep losses could lead to forced consolidations or even requests for government bailouts. Though carriers have reported only limited cancellations so far, Continental Airlines saw its shares dive 16 percent yesterday, while United Airlines, Delta Air Lines and American Airlines saw declines of around 14 percent. With a number of nations from Spain to New Zealand reporting confirmed cases of swine flu, and countries including Russia and Taiwan moving to quarantine travelers showing flu-like symptoms, even Asian and European airline shares saw sharp sell-offs.

The outbreak is also affecting trade. Russia, China and the Philippines, citing swine flu, suspended pork imports from Mexico and some U.S. states where the virus has been detected, despite the fact that health officials say there is no link between pork consumption and the virus. With trade barriers already on the rise because of the global downturn, other nations could pile on.

Though Mexico's pork industry could suffer from any new bans, the impact of such restrictions in the United States is less clear. Russia, for instance, is the fifth largest importer of U.S. pork, but since most U.S. production comes from states that have so far not confirmed cases of swine flu, industry leaders said there would be little immediate disruption. That said, they warned that Russia could extend the ban, and that other nations might follow suit.

"The concern is that regardless of the scientific evidence, other countries could use this as an excuse to restrict our exports," said David Warner, a spokesman for the U.S. National Pork Producers Council. "Everyone is looking to protect their own right now."

The economic impact of the outbreak could be amplified by the financial crisis, especially in Mexico, where restaurants and shopping malls were already closing in the capital, eating further into plunging retail sales. When SARS struck, by comparison, the global economy was in a period of broad expansion. The outbreak, according to the Asian Development Bank, cost East and Southeast Asian nations overall about 0.6 percent in economic growth in 2003.

This time, however, the global economy is anything but robust, magnifying potential new strains.

The impact in the United States would be far greater in the case of a larger-scale pandemic, with the worst-case scenario akin to what happened during the Spanish flu of 1918, which killed tens of millions of people worldwide. A 2006 report from the Congressional Budget Office estimated a pandemic, depending on its severity, could cost the United States between 1 percent to 4.1 percent of annual economic output. Given that the U.S. economy is expected to shrink by 2.8 percent this year, a pandemic could lead to a contraction of 3.9 percent to 6.9 percent as consumer demand and worker productivity suffer further.

Staff writer Sholnn Freeman contributed to this report.

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