UK: Swine Flu – The Market’s Response

Last Updated: 6 May 2009
Article by Daisy Barnett

The current outbreak of swine flu was first detected in February 2009 in La Gloria, Mexico. The origins of swine flu are still unknown; however the majority of the Western world is now acutely aware of the virus. Not only could the spread of the virus result in human tragedy, the effect on the financial markets could also be catastrophic.

As soon as the first cases of swine flu were reported, the markets began reacting. On 28th April the FTSE fell 1.6 percent in response to world media reports on the suspected159 fatalities from the virus in Mexico alone. The figures have since been revised to ten fatalities worldwide by the World Health Organisation (WHO), proving that the media alone have caused a significant psychological impact by over-dramatising the situation.

In previous instances of global outbreak of viruses, such as SARS (between 2002 and 2003), foot and mouth (2001) and bird flu (1995-1997), the markets reacted instantaneously, with the impact of SARS alone costing the global economy $40bn in 2003. To predict how the markets will be affected by the swine flu outbreak it is useful to look at past outbreaks. However, neither SARS, bird flu nor foot and mouth had such a global effect as swine flu is set to have.

Since the WHO have raised its official global alert level to five out of a maximum of six economists have forecast a 7 percent drop in the stock markets. The areas most affected by global outbreaks are typically travel and tourism. In particular it is likely that swine flu will affect businesses in the airline, hotel and leisure sectors, and so far British Airways has seen has seen its worst drop on the FTSE by 7.8 percent.

The affect on the travel industry has had an incidental effect on the oil market, with crude oil prices falling as the WHO declared a global pandemic alert. The pork market has also taken a downturn of 10 percent, with several countries banning Mexican pork exports, even though the WHO has stated that the virus can not be passed on through meat1.

There is speculation that if swine flu was to become an epidemic in the UK, although we would have the available resources and healthcare to treat it, it would still have a significant effect on the economy. Even though the mortality rate is likely to be low, it may lead to high numbers of individuals taking time off work due to being quarantined or from fear of catching the virus. The lack of available workforce could cause businesses to suffer. With unemployment currently around 1.46 million this can only have an even greater negative impact on the economy.

There are now worries that an economic recovery could be derailed by the predicted global pandemic of swine flu. The Mexican economy has been shut down, with people being told to remain in their homes, and the Mexican peso falling 1.6 percent against the US dollar. It is unlikely that swine flu would have the same effect on the economy worldwide, with Britain in particular being declared the country best equipped to deal with the outbreak. However, with the current fragile state of the global economy, the threat may be enough to prolong the recession that we were told only last week would be improving at the end of the year.

However, the FTSE has recovered since its initial drop earlier this week with some companies limiting the damage and profiting from the outbreak. Both GlaxoSmithKline and Roche have seen rises in their share prices on the FTSE this week as sales in anti-viral medication have soared. Companies producing cleaning-products and medical masks have seen their sales rise significantly in the last few days and are likely to continue to rise given the current state of panic, in particular as it has been reported that the British government has ordered 32 million face masks this week.

Despite negative forecasts the global stock market has rebounded in the last couple of days with Wall Street reaching a three-month peak on Wednesday. It may be that after previous outbreaks the traders are not panicking. Market experts say that after the significant drop on Tuesday, and subsequent recovery, they do not expect Swine flu to have any further significant impact on the stock markets.

Footnote

1. http://www.who.int/csr/don/2009_04_29/en/index.html 30.04.2009.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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