What would a swine flu pandemic do to the economy?

As the swine flu epidemic has moved from Mexico to Canada, the United States, New Zealand, and Spain, global financial markets are already feeling the effects of the outbreak. In the United Kingdom, several stocks have fluctuated based on speculation about the disease's effects, and American indexes started lower on flu concerns. (BloggingStocks takes a look at stocks that could be affected by the epidemic.)

At its heart, swine flu is a fairly traditional respiratory disease. It has an incubation period of one to two days, and causes fevers, lethargy, loss of appetite, coughing, runny nose and sore throat. In some cases, it can have a gastric component, leading to nausea, vomiting and diarrhea. In the past, swine flu has been passed from animal to human, but not from human to human. The current strain, however, appears to be making the human-to-human leap.

The present epidemic has infected approximately 1,300 people in Mexico, killing 81. In the United States, the outbreak has been linked to a private Catholic school in Queens, New York, where a dozen students recently took a trip to Mexico, picked up the flu, and passed it on to their classmates. Although only 20 cases have been confirmed, over 150 students are currently ill.

In the short term, the economic effect has been pretty much what one might expect. In the United Kingdom, shares of pharmaceutical companies GlaxoSmithKline (GSK), Roche, and Shire have all risen on the news that they have ample stockpiles of medication for the disease. Airlines, cruise lines, and travel companies watched their stocks tumble as it became clear that travel to Mexico will be off the table for many people, at least for the time being. Finally, companies that deal in pork production and sales also saw their prices drop.

In the United States, the market's response was not quite as clearly delineated. Standard & Poor's index dropped by 1.6 percent to 852.3, while the Dow Jones fell by 1.7 percent to 7,923, and the Nasdaq 100 tumbled 1.7 percent to 1,352. By and large, the drop seemed predicated more on a lack of overall confidence than on any sort of measured analysis.

In the short term, it seems likely that agricultural and food stocks will fall, followed by a rebound when people figure out that swine flu can't be caught from eating pork. Similarly, the bump in pharmaceutical stocks should be fairly short-lived, as the medications for treating swine flu have already been heavily stockpiled. Moreover, as the Squawk Box's Mike Huckman noted, in 2008, GlaxoSmithKline's worldwide sales of Relenza, its swine flu treatment, "were $105 million overall [...] that's lunch money for a pharmaceutical company [their] size."

On the other hand, the drop in airline and travel stocks, particularly among those companies that do a lot of business in Mexico, will probably last longer. Going into the summer, many vacationers will automatically rule out the beautiful beaches of Zihuatanejo, Cancun and Puerto Vallarta. Piled on top of a current wave of fiscal conservatism among consumers, it promises to be a hard year for the travel industry.

While long term economic predictions of a full pandemic suggest a two percent drop in global GDP, these forecasts are based on a few highly-questionable assumptions. First, they extrapolate the effects of the 2003 SARS epidemic and the 1918/1919 flu epidemic into the contemporary world. The 1918 pandemic is a problematic comparison: contemporary public health preparation is miles beyond that of a century ago, and treatments for respiratory illnesses have taken several quantum leaps in that time. Simply speaking, today's doctors know a lot more about how diseases spread, both in bodies and populations, and are much better prepared to fight them.

The 2003 SARS comparison is far more apt, although it's worth noting that the Asian flu outbreak came during an economic upswing; it's not clear whether an epidemic that occurred during a recession would be more or less damaging. On the one hand, fewer people at work would allow fewer opportunities for infection, and increased unemployment means that flu deaths would be less likely to cause production slowdowns. On the other hand, as fewer workers have health care, they would be less likely to visit doctors, resulting in higher mortality rates and more public expenditures on expensive late-term medical care.

Ultimately, the swine flu outbreak will probably result in a spike in sales of vitamins, over-the-counter cold meds, hand sanitizers and surgical masks. Businesses that disinfect outbreak sites will hire more short-term employees, as will hospitals. Perhaps, if it lasts long enough, the flu will encourage many companies to let their employees work from home, which may help increase the evidence that telecommuters can be extremely productive. Similarly, it may also restart the public conversation about properly funded public health care. In all likelihood, though, it will simply result in a lot of crowded emergency rooms and people phoning in sick.

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