An interview with Sherry Cooper - Part Two
Interview by: James Nelson
Dr. Sherry Cooper is Global Economic Strategist and Executive Vice-President of the Toronto-based BMO Financial Group. A former economist at the U.S. Federal Reserve Board in Washington, D.C., she served there as a special assistant to then US Federal Reserve Chairman, Paul Volcker.
A frequent speaker and TV commentator, Dr. Cooper is known for her ability to de-mystify the murky waters of economics and finance, and she ranks among the most influential women in her adopted Canada. In 2002 she was named by Bloomberg News as the top gross domestic product forecaster for the U.S. economy.
Over recent months Dr.Cooper and her BMO colleagues have undertaken an intensive research project on the potential human and economic consequences of a global influenza pandemic evolving from the bird flu virus. She talks here with James Nelson about her research findings and her call for action.
What do you see as the broad sweep of economic repercussions for the global economy resulting from a bird flu pandemic?
The bottom line is that a pandemic, even one less virulent than the 1918 Influenza breakout, would have hugely disruptive effects. Depending on its length and severity, its economic impact could be comparable, at least for a short time, to the Great Depression of the 1930s.
The impetus this time would be the rapid spread of the disease and the panic that would follow. The disruption in world trade would be extreme, but even worse given that the free flow of people across borders would no doubt be curtailed. The resulting collapse of the airline, land and water transportation industries, tourism and hospitality sectors, much of the retail and wholesale trade along with essential imports and exports would be devastating. This would trigger foreclosures and bankruptcies,credit restrictions, and financial panic. In addition, whole swaths of the population would be unable to work – either because of illness, care giving or quarantine. Schools and possibly nursing homes would close as young children and the elderly might well be particularly vulnerable to getting and spreading the disease. This would throw many able-bodied workers into care-giving status. Yet, if the experts are correct that this could be similar to the 1918 virus where those with the strongest immune systems are the most likely to die, then the bulk of the labour force in the 20-to-40 year old age range would be severely incapacitated.
Business would suffer the consequences of reduced labour at a time when labour markets in many countries are fairly tight. Moreover, the insurance industry in particular would be decimated. Health care would be strained beyond the breaking point. All public gathering places would close, as would mass transit and non-essential services. Front-line health care and nursing home workers would be essential, and judging from past experience, many of them would be subject to infection and quarantine despite our best efforts at isolation, immunization and antibiotic protection.
Businesses would voluntarily quarantine a meaningful portion of their essential staff at remote locations to have a stand-by team in case of emergency. Large cities with dense populations in residential, shopping and office space would be most harshly hit. People would shun high-rise office buildings because of nature´s microbial attack. Stock piling of basic food, drug, water, energy and safety supplies would initially lead to shortages and then skyrocketing prices.
"Businesses would voluntarily quarantine a meaningful portion of their essential staff at remote locations to have a stand-by team in case of emergency."
In relatively short order, the slowdown in almost all non-essential economic activity would trigger a rampant decline in spending. Then deflation and high levels of “involuntary unemployment“ would set in. Households would be unable to make mortgage and credit card payments. Businesses would default on their debts. Loan losses at banks could rise sharply as financial institutions scramble to provide liquidity, alleviate or reduce credit burdens, and keep their trading and lending businesses going with severe labour shortages.
At some point the wealthy countries would bounce back from all this. What about the poorer countries?
The poorest countries would be the hardest hit, because they have little advance preparations, effective public health teams or financial resources. China and India, with their 2.4 billion people, many of whom live in close quarters to animals and birds, would also be especially hurt. And the impact of their decline would have devastating effects on the rest of the world. Today, these two countries represent about 35 per cent of the world´s population and have the fastest growing economies in the world. They are directly responsible for growth in other Asian economies, Russia and Latin America. Likewise they provide a boost for Australia, Canada and other commodity-producing countries. China is especially important because it is the number- one consumer of cement, iron ore, steel, aluminum, copper and coal, and the number-two consumer of oil, second only to the USA. A major slowdown in China and the rest of Asia would lead to a huge disruption of the global supply chain.
How would a pandemic touch our daily lives?
In a world of just-in-time inventory management for material inputs, finished goods and labour, disruption at ports, airports, borders and rail lines would quickly lead to empty shelves. Health care services, vaccines and antibiotics, masks and other protective materials would be in short supply regardless of price. Every sector and every business in every country would be affected.
Food chains and supplies would be disrupted as people in panic shift from animal foods to a more vegetarian diet. Not only would poultry and eggs be shunned, but so would pigs and other animals that could provide the conduit for disease transmission to humans. Thailand and China are major producers of export chicken.
Panic-driven irrational behaviour would follow. People would be constantly washing hands with antibacterial agents; would discriminate against Asians and Asian restaurants; be afraid to leave their homes; and obsess on the real-time Internet monitoring the latest number of cases and deaths.
Sounds like an enormous amount of personal apprehension and financial uncertainty.
Those who were over-extended with debt would lose their homes and businesses, and the surging supply of houses and rental properties would burst the housing bubble as homeowners and tenants die or can no longer afford them.
Those who could protect their assets and hoard cash would ultimately benefit by buying real estate, farms, businesses and stocks at extraordinary bargains. I know this sounds callous, because the death toll could be so high, but those with liquid assets in the lead-up to the Depression were able to scoop up the property of those who were heavily indebted. A pandemic would be even worse in that many would avoid homelessness and soup lines having paid the ultimate price.
One could assume even those who don´t become ill would be at risk of long-term psychological scars.
The psychological effect of a pandemic might even be longer lasting, though more difficult to quantify. Post Traumatic Stress Disorder (PTSD) would develop gradually after the first emergencies and could last for an extended period, even a whole generation. We´ve seen the first few years of this in the USA since September 11, 2001, and we are only beginning to see it in the UK since July 7, 2005. Both the Israeli population and the Palestinians have suffered from PTSD for years. People tend to lose confidence, become depressed, tired, irritable, sleep-deprived, more cautious and then the finger-pointing begins. Some politicians and public officials would lose their jobs as the blame game ravages confidence and goodwill. Countries will turn against other countries and become antagonistic toward international bodies like the UN or the WHO for not doing enough to prevent or stop the pandemic. Personal liberties and freedoms might be at risk as governments restrain the movement of people. Civil liberties would also be jeopardized by ill-founded aversions to Asians.
Businesses that support their affected workers and customers, as well as their families will be lauded, but many will be seen as uncaring and heartless. This will be a huge burden for many companies, especially smaller ones and those that have suffered very high mortality rates.
You don´t sound at all optimistic that we might manage to dodge this whole thing.
Look, we don´t know for sure if a pandemic will occur in the next few years. And if there is one we don´t know how severe or long lasting it might be. So my comments should be taken as suggesting what might befall us. But the longer I think about this the grimmer it appears.
I can suggest these effects because I´ve recently lived through a mini-test case of a health crises, the SARS outbreak in Toronto. The city was dramatically affected, yet there were only 252 cases and 44 deaths. If you compare this to the devastation of previous pandemics you´ll see just how “minor “ this outbreak was. So anything like the H5N1 avian flu pandemic many health officials are now predicting would make SARS look relatively trivial. It would easily infect more people in one hour than all the victims of SARS, and kill twice as many people in one day as SARS did in six months.
Does history show that democracies are adept at managing pandemics?
Government will not hesitate to impose quarantining including requiring people who may have had exposure to the virus to stay within their homes, denying landing rights to airplanes and ships from countries where the disease is spreading, forcibly isolating people showing suspicious symptoms, banning concerts and sporting events, and making businesses liable for enforcing such emergency rules on their staffs. The population will accept such restrictions as long as the initial panic lasts, but when the strains on the health care system and the economy become too painful, and new infections do not seem to be appearing, the populace resists government controls. Singapore is one country constituted to manage such an epidemic. Most other democracies, of all stripes, are not.
And the financial markets, how can we expect them to react?
Most people are unwilling to believe that “ mere flu “ could be lethal on a scale reminiscent of Black Death. This probably means the stock market reaction would take a little longer to develop than if the pandemic were some supposedly more fearsome disease. This might be a window of opportunity for those who understood the challenge avian flu offered. WHO flatly predicts that stock markets would close once a pandemic was confirmed, but that forecast probably assumes a sequential response – with Asian markets closing first, and North American and European markets staying open until local business closures and soaring death rates precipitated panics.
Once an outbreak starts, where do you see commodity prices headed?
Commodity stocks have been among the best performing sectors in global financial markets. But their performance depends in large measure on continued economic strength in Asia, particularly China. So a runaway pandemic would hit commodity prices especially hard. The combination of collapsing demand from China and India and the likelihood of a collapse in demand for housing and cars in the OECD nations would mean prices of base metals and steel would plunge. Oil prices would also plummet, because of the ending of the China boom and because of the sudden reduction in the number of consumers in the OECD. There would be no rush into precious metals from other financial assets, if only because high global death rates would mean large scale estate liquidation of jewellery.
Could technology stocks in general be a safe haven for investors?
For numerous reasons, information technology and broadband equipment stocks would be extremely vulnerable. First, they have high price / earnings ratios, and in most cases pay no dividends. Second, they are heavily integrated into East Asian economies – particularly China and Taiwan – both as component suppliers and contract manufacturers, and therefore they´re at risk from supply chain disruptions. Third, much of their sales growth has come from that region, so they share the commodity producers´ problem that a severe contraction there would be very painful for their top and bottom lines.
So how can companies and individuals best prepare themselves financially for all of this?
Well, think about what you would do if you couldn´t work for five or six months, or if your business was completely disrupted for the same period. In addition, assume you´d be trying to assure you would not be forced to sell your assets at a dramatically reduced price, for example your home or stocks you own. You would only want to be in very high quality investments, such as blue-chip dividend-paying stocks. In other words putting yourself in a position where you could sustain yourself for those five or six months without selling assets. So you´d need alternative income sources, while at the same time reducing liabilities. This means paying off any debt as quickly as possible and avoiding any new debt. It all comes down to pulling in the purse strings, spending less than you earn. Hopefully, one would have a reasonable period of time to initiate all this, but we just aren´t sure, so all the more reason to evaluate such measures now.