AMP Capital’s chief economist Shane Oliver has a note out on the implications of the Ebola outbreak in west Africa, which has now killed more than 1,100 people.
Oliver notes that the experiences with swine flu, SARS and bird flu have shown that fears of pandemics rarely come to pass, and assigns a 90% probability to a scenario where the outbreak is contained to Africa. But he also looks at two other scenarios where the outbreak is less contained. While it is written from an investment risk perspective, it’s a thought-provoking look at what might happen next with the outbreak which the world has been watching with increasing unease, especially since the spread to Nigeria, Africa’s most populous country.
Evidence of the outbreak reaching countries beyond Africa would of course be a cause for concern, but Western countries in particular are better equipped to contain the spread of the virus. Among the widely-recognised factors behind the continued spread of the disease in Africa are suspicion and fear of health workers, and a lack of education.
Ebola starts showing in victims with flu-like symptoms a couple of weeks after infection, and then progresses to weakening of bodily functions, diarrhoea and vomiting, and in some cases, profuse bleeding. But because it is spread by contact with bodily fluids, the risk of transmission is considered lower than other flu-like viruses which can transfer through the air.
Oliver says that while the “key for investors at this stage is to be alert, but not alarmed”, investors should monitor developments closely because “the risk is not insignificant”. A global pandemic would have a devastating effect on economies as people would stop travelling and showing up for work, while even a more contained spread beyond Africa could also rattle markets with the uncertainty it would create.
Here’s an excerpt from the note, republished with permission. The full article is here.
The severity of the latest Ebola outbreak tells us there is reason for concern, but history tells us it might all come to nothing. Given the range of possibilities, the best way to get a handle on the economic and investment market impact of Ebola is to consider several scenarios. We suggest three.
1. Containment to Africa – the number of cases continues to rise for a few months but it remains mainly contained to West Africa.
- The global economic impact would be minor as the affected countries are of minor global economic significance.
- There might be bouts of share market nervousness (particularly airline stocks), but these would be limited.
2. Spread globally but contained – a significant number of Ebola cases appear in western countries from travellers returning from Africa but quick action by health authorities contains the outbreak to, say, a few thousand cases and there is no widespread transmission in western countries.
- News of cases popping up in western countries would cause significant uncertainty which might have a small negative impact on economic activity. The travel industry is most likely to be affected (much as occurred with SARS) as people stop travelling and there may also be some effect on economic activity as people avoid crowds. But the impact should be small and short-lived.
- Share markets are likely to fall on news of a spread to western countries but the fall is likely to be limited to a normal correction after which markets would rebound.
3. Global pandemic – Ebola spreads globally turning into a global pandemic, against which available medicine has little initial impact and attempts at containment are unsuccessful resulting in millions of deaths.
- This scenario would see a major negative impact on economic activity. Global travel would virtually cease. Many would simply not come into work – a reasonable estimate is around 20% of workers, although this might be spread over time. This would see a sharp slump in GDP and the onset of a global recession. Australia would not be immune.
- Share markets would likely fall sharply – maybe by 20% or so – reflecting the huge economic and profit uncertainty. Cash would be the place to be for investors.
- However, if history is any guide economic activity would rebound quickly once it’s clear the pandemic is under control. Share markets are likely to anticipate this and rebound even as economic conditions remain bleak.
You can read the full note here.
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