Sars comes at bad time for weak global economy

12.00pm

WASHINGTON - The mysterious respiratory illness that has spread fear throughout countries from Asia around the world has come at a bad time for the already fragile global economy, economists have said.

Economists agree that Severe Acute Respiratory Syndrome, which has devastated tourism, stunted business and left many restaurants from Hong Kong to Singapore deserted, will hurt global economic prospects.

Some even think the disease could usher in a global recession, although others say it's too soon to tell.

One thing is certain about Sars, which has killed 100 people worldwide and infected more than 2600: in economic terms, it could not have hit in a worse place. With the US and European economies weak and Japan's in stagnation, Asia was the world's strongest region.

"Unfortunately, the Sars effect is concentrated on Asia -- long the fastest-growing region in the world and the one area that had basically been keeping the global economy afloat," Morgan Stanley chief economist Stephen Roach said in a research note. "Had the world economy been growing more vigorously prior to the outbreak of Sars, this shock probably would not have made such a difference. Sadly, this is not the case."

Even before Sars, policymakers from North America to Europe have been looking at ways to bolster growth, from keeping interest rates low to pushing fiscal measures.

Against the already war-clouded backdrop, Sars has added a fresh laundry list of economic bad news.

Airlines, already reeling from terrorism fears in the aftermath of the September 11 attacks and the war with Iraq, are feeling the most noticeable pain. Carriers have cut back on flights to Asia and analysts say industry losses will only deepen on the Sars outbreak with business travelers turning to email and videophones rather than making business trips.

According to a survey released on Monday by the Business Travel Corporation, a US-based trade group that monitors business travel, about 58 per cent of 144 large US companies have banned travel to parts of Asia -- up from 24 per cent of respondents polled a week earlier.

Retail sales in Hong Kong, where surgical masks are becoming essential, have plunged 50 per cent and restaurants have shut their doors. Conferences in many of the Sars hot spots have been canceled.

With all this in mind, economists are paring back forecasts for growth in economies from China and Thailand to Singapore and Hong Kong.

There are still few US cases but in Canada, which has the dubious distinction of the third-highest number of Sars cases, 10 people have died and thousands have been quarantined.

Roach, regarded as one of the gloomiest forecasters on Wall Street, thinks Sars will spark an outright global recession.

He has cut his estimate for 2003 global economic growth to 2.4 per cent from an earlier estimate of 2.5 per cent. The usual definition of recession in a single country is two consecutive quarters of contraction, but since the entire world is unlikely to contract at once, Wall Street regards anything less than 2.5 per cent growth as amounting to a world recession.

Still, Roach estimates the global economic impact of Sars at about US$30 billion ($56.26 billion) -- an amount that pales beside the hundreds of billions of dollars of economic activity erased by the 1997-1999 Asian economic crisis, when the region's financial system all but collapsed.

For Roach -- who had already cut his forecasts due to high oil prices, the long buildup to war in Iraq, geopolitical uncertainties, corporate governance issues and weak stocks -- Sars is the straw that broke the economic camel's back.

"The world economy has been fragile ever since the technology bubble popped three years ago," he told Reuters on Monday. "We could easily be in our second global recession in three years. Sars is perhaps the tipping point to this latest dip in world prospects."

The disease has curtailed tourism in one of the most tourism-intensive regions in the world. Depending on the country, tourism accounts for 4-8 per cent of gross domestic product in Asian countries, excluding Japan. In China, domestic tourism alone accounts for as much as 4 per cent of GDP.

Sung Won Sohn, of Wells Fargo Bank in Minneapolis, also believes Sars will shave one-tenth of a percentage point from global economic output. But the Wells Fargo chief economist is more upbeat on world prospects, forecasting global growth of 2.7 per cent this year, even after the impact of Sars.

"It's too early to conclude a global recession," Sohn said. "Clearly it's having an impact on airlines, restaurants and retail stores and some other business activity."

The disease has hit southern China, Singapore and Hong Kong hardest but has been largely an Asian issue so far, although it is taking a toll in Canada as well.

Sohn said if the virus became widespread, the impact on the global economy could be severe. The 10 deaths to date in Canada are a major concern, he said.

"This is not what the aviation industry needed on top of a war which makes people not want to fly," Canadian Finance Minister John Manley told Reuters in Washington. "I think it's having some effect on flight."

On Monday India, another economic powerhouse in Asia, reported its first suspected case of the deadly Sars virus.

A World health Organisation expert said on Monday the course of the deadly Sars appeared to be slowing at its source in southern China. The pneumonia-like disease, which originated in China's Guangdong province, hit neighbouring Hong Kong in March and has been spread around the world by air travelers.

- REUTERS