Lehman Brothers' latest weekly outlook for Asia warns that avian flu, which hasnÆt been front-page news for some time, should still concern us all.
"It may have a low probability, but it poses the highest potential cost to the global economy," writes the firm's economists, Rob Subbaraman and Wenzhong Fan.
They point out, of course, that there are numerous downside risks to the global economy, including high oil prices, large trade imbalances, tightening liquidity conditions, possible hard economic landings in the US and China, and an avian flu pandemic.
However, they argue that avian flu is particularly relevant for Asia ex-Japan economies û particularly Hong Kong, the Philippines and Singapore, for they are the most exposed to such a pandemic.
You probably know the basics -- there are 144 types of avian flu virus, most of which do not infect humans. But the strain H5N1 has spread through bird populations in Asia, on to Europe and Africa, crossing the species barrier and infecting 206 humans, of whom 114 have died. The important thing is, so far, there is no evidence of efficient human-to-human infection.
But what if it mutates to transmission via a cough or sneeze? The 1918 Spanish flu,1957-58 Asia flu and 1968-69 Hong Kong flu pandemics killed anywhere between 43 to 53 million people.
Lehman Brothers analysts concede that the world is better prepared this time than say in 1918, and health systems are certainly more advanced. But we are certainly more interconnected û consider how quickly severe acute respiratory syndrome (SARS) spread from Hong Kong to Canada. Our jet-set lifestyle could cause a flu pandemic to spread more quickly and have a bigger economic impact than before. Highly mobile capital could result in greater financial contagion, argues Lehman Brothers.
Consider that SARS, which was relatively contained, took a full two percentage points off Asia ex-JapanÆs year-on-year gross domestic product (GDP) growth in the second quarter of 2003. Although there was a sharp rebound in the next period, SARS was blamed for economic decline in nearly every listed companyÆs annual report that year.
Lehman Brothers focused on several other studies which show that depending on the assumptions used, and the severity of the pandemic, world GDP growth could fall by 1-13%.
To try to gauge which countries are more exposed to a flu pandemic, Lehman Brothers examined population density, services as a share of GDP, exports as a share of GDP, public health expenditure per capita, and hospital beds per 1,000 people to construct a composite vulnerability index. The results show that Singapore and Hong Kong are by far the most exposed, but there are also many other Asian countries in the top 20 of the 51 countries that the firm surveyed. Hong Kong could see an impact on its annual GDP growth drop by as much as 26.8 percentage points, while the Philippines and Singapore could plunge by 19.3 and 11.1 percentage points respectively.
Despite these fears, Lehman Brothers û overall û has a positive outlook for Asia, forecasting as many analysts across the region predict, that growth will move from export-driven to fuelled by domestic demand.
But the high price of oil poses a risk. Concerns about the impact of oil, of course, are not limited to Lehman Brothers. Pura Saxena, a Hong Kong-based analyst is predicting oil prices will hit $200 a barrel in the next decade û a price that would change the world as we know it.
"The high price of oil is eating into the purchasing power of households," write the Lehman Brothers economists. "Meanwhile, the sharp appreciation of many Asian currencies could slow export growth at a time when the domestic economies are looking more fragile."
Each regional nation has its own bugbears. Lehman Brothers argue, for example, that ChinaÆs economy has too much liquidity, which is fuelling wasteful and speculative investments. "The latest rate hike notwithstanding, the economy is still at risk of chronic oversupply, which could be followed by a hard landing. Indeed, we recently raised our probability on ChinaÆs GDP growth slowing to 5% or less over the next five years, from 20% to 25%, an outcome that would have a very damaging effect on the rest of Asia," write the analysts.
As for other regional countries, Lehman Brothers worry about souring Taipei-Beijing relations hurting investment, and the sudden sharp rise in household debt, coupled with rising rates, constraining consumption. In Thailand they argue that the current account is likely to soon return to deficit, so if political risk rises anew, it would not take much weakening in capital inflows to pressure the baht. Malaysia's not all smooth sailing either. Lehman Brothers note that private credit growth is easing, consumer confidence has fallen, and industrial output growth fell to 3.6% year-on-year in March.
There are some bright spots. For example, generous oil price subsidies have been cut in Indonesia, which will keep the budget deficit in check. While this caused 15.4% inflation and high interest rates (12.50%) late last year and in the first quarter of this year, Lehman Brothers posits that foreign direct investment is showing signs of reviving, which will allow Indonesia to capitalise on its abundance of natural resources. And the Philippines is getting its act together: Structural reforms have led to a drop in consolidated public debt to 83.2% of GDP from 96.3% in 2004. Korea's growth is generally positive û with strong exports and recovering consumption - but the sharp appreciation of the won and rising oil prices could retard both, warn the analysts.
Finally the outlook for SingaporeÆs and Hong KongÆs economy û barring the bird flu scare û is fairly rosy. But Singapore, because its so small, remains more exposed to a global economic slowdown than any other in the region. And Hong KongÆs benefits are largely down to China, so it needs its behemoth neighbour to stay the course.
Despite all this û Lehman Brothers is optimistic that the region can continue to strive forward û it just has to be mindful of the pitfalls. And the birds.