When the U.S. catches a cold, the whole world sneezes.
It’s an old adage.
[img]487|left|||no_popup[/img] But as we’ve seen over the past several months, our nausea from the over-consumption of toxic assets has caused economic indigestion throughout the world economy.
As the U.S. and its neighbors confront the possibility of a regional swine flu pandemic, this notion about our influence over the health of the global economy is about to be tested at a new level.
This past weekend, the airwaves have been filed with news of the growing severity of the outbreak in Mexico. Every national and local television station has been broadcasting images of Mexicans in surgical masks along with alarming reports of nearly 100 deaths relating to this virulent strain of influenza.
The last time the world withstood anything similar was 2002’s bout of severe acute respiratory syndrome (SARS), which emanated in China’s Guangdong province and spread to three dozen countries.
At nearly 800 deaths worldwide, the human toll from SARS was a pinprick compared to the estimated 20,000 to 100,000 deaths associated with the Spanish flu pandemic at the end of World War I.
Scant Economic Effect
But the resulting panic had a severe impact on many travel-related businesses. The World Health Organization estimated that travel to affected destinations such as Hong Kong, Beijing and even Toronto fell by more than half.
In retrospect, the epidemic did little to derail the upward trajectory of the region’s economies. The difference is that this incident occurred in the midst of a period of unprecedented economic growth.
Threats of a broader flu epidemic in Mexico could scuttle the rebound in investor confidence that has been fueled by the government’s recent decision to seek a $47 billion credit and tap a $30 billion swap line offered by the U.S. Federal Reserve Bank. After slipping to a record low of 15.5892 per dollar on March 9, the Mexican peso has regained nearly 14 percent of its lost value. Today, with reports of additional flu-related deaths filtering out of the Mexican capital, the peso fell approximately 3.5 percent, the steepest dip since last November.
[img]488|left|||no_popup[/img] In 2008, tourism attracted $13.3 billion into the Mexican economy, making it Mexico’s third-largest source of foreign currency behind oil exports and remittances from Mexicans living abroad.
Although the Mexican government appears to be taking all the right steps to contain the outbreak and to quell the growing public concern, the lingering health threat may put a real damper on the foreign tourism that is so essential to the economy of our southern neighbor.
Many offices, factories and shops across Mexico have remained open. But it is going to be far from business as usual. The federal government now is even considering the extraordinary step of temporarily shutting down the Mexico City subway system as another means to arrest the spread of the illness.
With cases being reported in ports of entry like L.A. and New York, the President has been quick to respond. While the threat of a real pandemic is remote, Mr. Obama and his team know that it will take very little to spook the economy and negate any perceived progress in the recovery process.
Look at the Shares Taking Flight
Just as the waters of the economy are starting to calm, the President can ill afford to give consumers yet another reason to eschew the malls or void their summer vacation plans. Consequently, along with his Homeland Security Chief, former Arizona Gov. Janet Napolitano, and the Centers for Disease Control in Atlanta, the President has ordered the preemptive national distribution and stockpiling of the known anti-viral drugs.
As fears about a more widespread epidemic have taken hold, shares in airlines and hotel firms have taken a hit. Meanwhile, U.S. soy and corn futures suffered their biggest one-day decline in more than two months on fears that a swine flu outbreak in North America will slash global meat consumption and impact the demand for grain to feed animals.
On the expectation that the demand for anti-viral drugs will rise, the shares of TamiFlu-maker Roche, along with those of other drug manufacturers have enjoyed a mild rally.
Now we watch and wait.
In the meantime, get lots of rest, drink plenty of fluids and take your finger off the panic button.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
