The economic ripples of the mysterious SARS virus are spreading almost as quickly as the disease. One investment bank is describing it as the biggest crisis for the Asian economy since the currency meltdowns of 1998. Close to the epicenter of the outbreak in Hong Kong, airlines, retailers, and hotels are among those seeing a sharp drop in business. And with travel fears spreading worldwide, those worries are threatening businesses around the globe.
SO FAR, the mortality rate has been relatively low; as of Wednesday, some 82 deaths had been reported out of nearly 2,200 reported cases of Severe Acute Respiratory Syndrome. But health officials have been stunned with rapid spread of the flu-like disease, which is believed to be caused by a virus that is possibly related to the common cold. The true economic impact of the disease won’t be known — and can’t be predicted — until the scope of the epidemic is better understood.
“We may be at the very early stages of what could be a much larger problem as we go forward in time,” Dr. Julie Gerberding, director of the U.S. Centers for Disease Control and Prevention, said on Tuesday.
But public fears of the disease are spreading as rapidly as the virus, keeping workers home and hammering retail business activity in Hong Kong, the epicenter of the disease. Economists and analysts are already slashing forecasts for economic growth in Asia.
Morgan Stanley on Wednesday cut its economic outlook to 4.5 percent growth in Asian gross domestic product this year from 5.1 percent. (The countries included in the forecast are China, Hong Kong, Taiwan, Korea, Indonesia, Malaysia, the Philippines, Singapore and Thailand.) If the SARS impact continues for another quarter, that forecast would be cut further, the investment bank said.
“This medical crisis is the gravest since the 1998 Asian Crisis,” said Morgan Stanley analyst Andy Xie in a research report Wednesday. “Its ramifications are still difficult to grasp at this point. It is a developing story.”
In Hong Kong, restaurants, movie theaters and hotels have seen business dry up. Tourism represents about 5 percent of the local economy. On the other hand, local residents canceling trips abroad could add back some of that lost growth is they spend more at home, said analysts.
FLIGHTS CANCELED
Airlines, already weakened by travel cutbacks related to terrorism fears, are feeling the brunt of the initial economic impact, as passengers cancel trips and airlines that fly in and out of the region cut back on flights. Asian routes traditionally have been among the most profitable in the world for airlines. On Wednesday, the World Health Organization warned travelers to postpone visits to Hong Kong and China’s Guangdong province due to the SARS virus, the first time the agency has ever issued such a blanket warning.
Air Canada filed for bankruptcy on Tuesday, citing impact from war and SARS. Cathay Pacific Airways, Hong Kong’s main carrier, has cut 47 flights a week to eight destinations including Taipei, Manila, Kuala Lumpur and Tokyo. Most other major carriers with Asia-Pacific flights have also announced cutbacks.
More flight cutbacks may be on the way. Some 27 percent of 180 major companies surveyed by a business travel group are banning travel to Asia as the SARS virus spreads. The televised quarantine at San Jose International Airport Tuesday of an American Airlines flight from Tokyo may bring more such travel bans.
Business and leisure travel outside the region is also being hurt. Bookings in Las Vegas, a major destination for Asian travelers, are down. American Express reports that its travel agents have seen some vacation cancellations, and some cruise lines are changing itineraries.
The economic impact of the epidemic threatens to spread far beyond the travel industry to a wide range of American companies involved in the $13.4 billion in trade with China, the third-largest U.S. trading partner behind Canada and Mexico. So far, the impact on manufacturing has been limited, but the fear is that a widening epidemic could slow or halt production of everything from apparel to video game consoles.
Technology companies throughout the region have been among the hardest hit. Stocks of Taiwan Semiconductor and other Asian high tech firms have been hammered since reports of the SARS epidemic began spreading. Taiwan firms make the majority of the world’s notebook computers and motherboards.
In Singapore, night shift operations at mobile phone maker Motorola were disrupted last week when a worker contracted the virus, prompting the government to quarantine 305 other plant workers for 10 days. Semiconductor giant Intel Corp. said Wednesday it was canceling major technology forums in Taipei and Beijing due to SARS. China is one of Intel’s fastest growing markets. In Hong Kong, Intel sales reps are working from home after a SARS case was discovered in the building that houses the company’s offices.
The toy industry is also scrambling to cope with widespread disruption caused by the disease. Travel to a major trade show in Guangzhou in mid-April is expected to be sharply curtailed. U.S. toy companies like Mattel and Hasbro are restricting travel to Hong Kong, and other toy company executives based in Hong Kong have canceled travel to the U.S.
Other major trade shows are facing massive cancellations. Aric Peters, international sales manager for aerospace and defense contractor Butler National Corp., won’t be at the Singapore Airshow this year.
“A lot of aerospace companies, aviation companies are canceling trips due to the SARS,” he told CNBC.
SWISS BAN WATCHMAKERS
Business disruptions are spreading to Europe as well. Hong Kong watchmakers and jewelers were told Wednesday to stay home from a major trade show in Switzerland, after Swiss authorities cited concerns over the deadly virus. The ban on Hong Kong traders the World Jewelry & Watch Fair 2003 is a major blow to the 317 exhibitors in the Hong Kong pavilion, which is second only to the Swiss pavilion in size, according to the Hong Kong Trade Development Council.
A few companies have seen a boost in business. Videoconferencing is helping fill the gap created by canceled business trips. Some 73 percent of the Fortune 1000 companies surveyed by Salomon Smith Barney said they were relying on teleconferences and videoconferences as a substitute for business travel. And 78 percent of those said they consider that change to be permanent.
“We’ve put in place some provisions to allow us to talk to our customers, over the phone, teleconferencing, videoconferencing and some other things,” said Peters. “We realize it’s very important to get out there and make face to face contact and that’s going to be really hard for a while as long as this is going on.”
Makers of surgical masks, a popular defense against the airborne SARS virus, are struggling to keep up with orders.
“Demand has more than doubled in general,” said Julie Tremblay, marketing director for respiratory protection at Aearo Corp., which makes respirators, safety clothing and first-aid kits. “We are doing our best to take care of the needs but it’s hard to meet the demand overnight.”
Market leader 3M Corp. said it is running its American factories 24 hours a day to crank out disposable facial masks. Other makers of safety masks have also stepped up production.
And shares of ICN Pharmaceuticals Inc. rose 18 percent on Tuesday after World Health Organization listed its anti-viral drug ribavirin as a treatment for SARS. But, because the effectiveness of he drug has not been established, the move may have little impact on ribavirin sales, according to Larry Smith, an analyst at Gerard Klauer Mattison.
Some businesses looking to file insurance claims to cover losses related SARS may be out of luck. While individual health policies cover hospitalization and treatment, so-called “business interruption” coverage may not apply, according to some insurers.
“In many policies, even before this sort of outbreak, any quarantine required by the government is not meant to be covered,” said James Yong, general manager of QBE Insurance in Singapore.
Reuters and CNBC’s Jerry Cobb contributed to this report.