2003 April 04 Friday
Stephen Roach Factors SARS Into New Economic Forecast

Morgan Stanley chief economist Stephen Roach sees no growth in the world economy in the second quarter of 2003. He says the economies of the developing world appear to have contracted in February and March. Overall for the year his group sees 2.4% growth for the entire world. But since the world average is boosted by some faster growing East Asian economies the industrialized Western economies will see a more anemic growth rate. Roach says that the potential for the further spread of SARS and other risk factors make further forecast revisions most likely to be toward the downside.

Nor should this dip be viewed as just a two-month statistical fluke that will end the moment that Baghdad falls. Our baseline forecast currently points to a world economy that is likely to record “zero” to slightly negative real GDP growth in the second quarter of 2003. For the current period, we are projecting outright contractions in Europe and Japan that could more than offset fractional growth in the US and elsewhere in the world. Moreover, with SARS-related disruptions hitting Asia exceedingly hard at the moment, the risks to our second-quarter estimate are decidedly on the downside

If the SARS outbreak is not controlled the economic impact of SARS could quickly become much larger as business and tourist travellers start avoiding an even longer list of destinations and people who live in affected areas avoid going out, spending money, and working in crowded offices. If SARS is spreading in the poorest parts of China or makes it into Bangladesh or India or some other country will primitive health care infrastructure then the containment of SARS becomes much less likely. Then the economic impact of the disease will increase enormously.

The impact of SARS is being keenly felt by the airlines.

0525 GMT [Dow Jones] Another sign of how SARS taking toll on travel in Asia with Sydney Airport chief saying traffic yesterday was down 23% on-year; but adds it's too soon to say what impact SARS will have on Australia's largest airport, and analysts say fall was expected after Qantas' recent profit warning.

The Business Travel Coalition survey of large employers found 27 percent banned travel to some Asian destinations.

The group contacted about 1,800 corporations and other large employers Tuesday. Of the 180 who responded, 27 percent said they had banned trips to some Asian countries because of SARS. An additional 8 percent were considering similar prohibitions. Those banning travel had restricted visits to Hong Kong, and most also had limited trips to China, Singapore and Vietnam.

The Toronto Canada SARS outbreak has raised enough concern that some governments are advising against travel to Toronto

The situation in Canada is judged so serious that authorities in Ireland, Australia and Spain have issued a travel warning recommending that their citizens avoid travel to Toronto, the epicenter of the Canadian outbreak.

Remember, a reduction in business travel doesn't just reduce revenue to the travel industry. It also reduces the rate at which sales deals and investment deals are made. It slows the rate at which engineers get together to hash out problems between large customers and their suppliers. Travel bans prevent service and support people from coming to fix a problem on a factory floor at a remote location.The world economy is very dependent on labor mobility. The reduction in business travel will reduce economic activity in ways that are less visible than revenue drops for the airline industry.

In another sign of worsening economic conditions the OECD has recorded a drop in its early warning indicator.

The Organisation for Economic Cooperation and Development said its early warning indicator for the OECD area fell by 0.5 points in February to 120.4 from a revised 120.9 in January. It was the first fall in the index for four months.

The problem for the world's economy is that SARS comes on top of so many other economic problems.

It's unclear how much of the blame for this can be attributed to Iraq. The continued after effects of 11 September, the end of the investment bubble, and the subsequent 50 per cent collapse in equity values are equally potent factors. To these must now be added a fifth, Sars, which has already prompted a collapse in international air travel and the cancellation of conferences and events across the world.

Imagine the SARS spending reduction effect as reported in Hong Kong if the fear of catching SARS was spread over a larger area than Hong Kong.

Holders of Hang Seng Bank credit cards spent 10-20 percent less in the last two weeks of March compared to earlier in the month, Hong Kong's third largest bank told Reuters.

Share |      By Randall Parker at 2003 April 04 11:12 AM  Economics Political


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