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Economies sickened by virus { April 21 2003 }

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April 21, 2003
Economies Sickened by a Virus, and Fear

PORT DOUGLAS, Australia, April 19 Michael Glynn rested barefoot on the deck of his fishing boat at the dock here after unloading his catch, and talked about how an outbreak of disease 3,400 miles away had wrecked his livelihood.

Restaurants in Hong Kong, by far the biggest buyers of live Australian reef fish, halted their purchases four weeks ago when severe acute respiratory syndrome, or SARS, prompted diners to stay home in large numbers. The restaurants have barely bought any since, and fish prices have collapsed.

"A lot of the guys have thrown their arms up and stopped" fishing, said Mr. Glynn, who had to go out fishing anyway for three straight days and two nights on the Great Barrier Reef because he had just bought a house. "The mortgage won't go away."

The troubles of Great Barrier Reef fishermen, who operate Australia's largest fishing fleet, show how even small, out-of-the-way industries are feeling the effects of SARS. The disease and more important, fears of the disease are starting to cause measurable economic and commercial harm around the world, particularly in sections of the Asia-Pacific region.

SARS is causing the worst economic crisis in Southeast Asia since the wave of bank failures and currency devaluations that swept the region five years ago. The economies of Hong Kong, Singapore and Taiwan have not just abruptly stopped growing but have begun shrinking, the economies of Malaysia and Thailand are probably next and even China's booming industrial expansion is beginning to slow, said Andy Xie, an economist with Morgan Stanley.

"Outside of China, the whole region is contracting because of this crisis," he said.

With nervous customers staying away from stores and restaurants in areas where cases have been reported, and travelers canceling or postponing trips, industries that offer services to people, like restaurants, hotels, airlines or cinemas, are being hit particularly hard. Also being hurt are suppliers to service industries, like Mr. Glynn and NAV Canada, which plans to start charging more for air navigation services partly because SARS is reducing the number of flights. Other heavily affected industries involve discretionary products, especially luxury goods, rather than necessities.

With fewer than 5,000 actual cases of SARS reported worldwide, manufacturing companies are so far experiencing little or no disruption at their factories but face thinning order books as buyers stop attending trade fairs and other commercial events.

In places like Paris and London, executives at luxury goods companies are finding that the grounding of many business travelers by companies afraid of SARS, together with a slump in tourism, has meant fewer sales of Burberry raincoats and other costly items frequently sold at or near airports, hotels and tourist areas.

Manufacturing Continues

"The SARS virus has clearly had an impact on Asia, with many airlines cutting their capacity," said Michael E. Metcalf, Burberry's chief operating officer. "The Hong Kong consumer has been choosing to stay rather more at home, and not to get out there and shop as usual."

LVMH Mot Hennessy Louis Vuitton, for its part, has been annoyed by photos showing Hong Kong residents wearing masks to protect from SARS that bear counterfeit Louis Vuitton logos that have been showing up in European fashion magazines, including Elle.

By contrast, workers and executives at companies making things like automobiles and consumer electronics say there has been little effect so far on production.

In Foshan, a gritty southern Chinese city where doctors first observed SARS cases last November, factory workers are still putting in long hours. Zheng Xiao Di, who tests portable compact disc players at the end of an assembly line where young women earning 50 cents an hour perform every task by hand, said that she and her co-workers did not know anyone who had fallen sick. They have become less worried about the ailment with the passage of time, she said.

For now, manufacturers seem to be having more trouble transporting their goods than making them. Apple Chan, the foreign trade manager at another Foshan factory that makes radio antennas, said that nearly 8 percent of the factory's shipments had been late reaching customers because ports in Europe had delayed the entry of ships from Asia for health reasons.

But the biggest story is that many buyers have deferred placing orders because of a reluctance to travel to east Asia, even to countries like Taiwan with fairly few reported cases and no deaths.

Peter Chang, the sales manager for a communications equipment company, has put in long hours in his company's booth at the Taipei International Electronics Spring Show, which opened on Friday, but has made so few sales that he expects his business will produce 20 to 30 percent less equipment in the six months until the next big trade show.

"Most of my buyers didn't come this year," he said.

Even if the outbreak proves short lived, the effect is already apparent in travel-related industries around the globe. Hotel occupancy is down to 20 percent in Singapore and even lower at many Hong Kong hotels, while retail sales have been cut by as much as half in both cities. Cathay Pacific, based in Hong Kong, has canceled two-fifths of its flights, while other airlines with large Asian operations, like Singapore Airlines and some American carriers, have undertaken more modest reductions in service.

In Singapore, the government on Thursday unveiled a $130 million aid package for the tourist industry. In announcing the package, the government said visitor arrivals to Singapore had dropped 61 percent in the first 13 days of April, and retail sales had dropped by as much as 50 percent.

The main variable in every economist's calculation of the effects of SARS lies not in the number of industries affected but in how long the outbreak could last a question that economists, like doctors, are at a loss to predict.

David A. Dodge, the governor of the Bank of Canada, spoke for many analysts assessing the economic effects of SARS when he said this past week that the disease would have a "short-term impact" on the Canadian economy, but warned that "an epidemic like SARS, if it carries on, is obviously going to be quite serious."

Indeed, economists face an even more puzzling question than doctors. Economists must guess not just how long the disease will persist, but they must also figure out how long fears about the disease will last.

Service Companies Affected

If the outbreak and related fears prove enduring, one casualty could be the growing integration of the global economy, which has lately been extending beyond manufacturing to include service industries as well. Many companies have found gains in efficiency by moving operations to whatever country offers the highest productivity at the least cost, but some say they may have to reconsider these moves.

Polaris Software, a company based in Madras, India, has been reviewing its recent opening of a data center in Singapore.

"Singapore is considered a neutral zone, but with SARS we began viewing the country in a new dimension," said S. R. Ramaswami, the company's head of audits and risk management. "Just as business got used to the idea of the globe being a village, along comes a virus that affects something as fundamental to business as travel itself."

Polaris is just one among many of the companies in service industries that need to be available to consumers at all times. SARS is forcing managers in such industries to think about how they would stay in business if one or two employees fall sick and all their co-workers must be sent home for a week to 10 days.

Financial services companies, like commercial and investment banks or brokerages, cannot afford even brief shutdowns. Regulators in financial centers like Hong Kong require such companies to have backup sites and elaborate business continuity plans. Some of those plans are being tested now, as institutions like HSBC start using backup trading floors originally intended as precautions against disasters like fires or earthquakes.

As financial institutions try to decide what to do if problems grow worse in Hong Kong and Singapore, some are looking to Sydney. Australia is an English-speaking nation of 19.3 million, it lies only two hours ahead of the two Southeast Asian nations and it has a low cost of living.

Some big banks expanded their backup centers in Australia after the terrorist attacks on Sept. 11, 2001. One bank, which insisted that it not be named, has rented three separate offices in the Sydney area that it keeps empty but ready, one near the airport, one in a beach suburb and one in an outer suburb.

A Decision to Stay or Go

The Macquarie Bank, an Australian institution, has given its Australian employees in Hong Kong the option of coming home, with the majority doing so. Most banks have been wary of making any move to pull out of Hong Kong or Singapore for fear that doing so might invite retaliation by the governments in either place.

Some banks have put decisions on moving employees on hold for now because Good Friday and Easter Monday are public holidays in many former British possessions, including Hong Kong, and many bankers take the weeks before and after Easter as vacations. By the end of April, however, many companies will be assessing whether to begin transferring expatriate employees out of Hong Kong for good if the problem does not appear under control, one investment banker said.

"You've got most of the expat population offshore already, the families at least, and if this goes on, people will start to say, `Why don't you relocate me?' " the banker said.

Some parts of the world are experiencing little economic impact from SARS. In South America, nervousness about the spread of the disease has been growing, especially since Brazil reported its first case, that of a British journalist arriving in So Paulo from Malaysia to cover a Grand Prix race. But because of Holy Week celebrations, many businesses are closed anyway, and vacation travel patterns have remained normal across the continent.

Restaurants like Chuk Yuen Seafood Restaurant on the Kowloon peninsula in Hong Kong have seen little recovery so far. Until SARS hit, the restaurant used to buy 200 live coral trout a month, which arrived by air freight from Australia in large bins filled with specially oxygenated water.

The fish, actually a species of cod that lives among staghorn and brain coral formations on the reef, is speckled with blue spots and in beautiful shades of red, pink and brown. The restaurant kept them in some of the 18 aquariums that line its entrance. Following a popular Chinese practice, the restaurant would let customers choose the fish they wanted for dinner.

But the restaurant has sold only 20 coral trout in the last month and has not ordered any more, said John Yuen, the restaurant's general manager. "Since SARS, no one has parties any more," he said.

When Hong Kong health officials announced a new outbreak of disease a month ago, restaurants and wholesalers across the territory stopped buying any more coral trout while trying to sell the fish they still had alive. After loading his catch aboard a truck here, Mr. Glynn stayed on his boat and recalled that the price at the dock for live coral trout had dropped from $14 a pound to $6 and then $4.50.

It has recovered gradually, but still is only $6.70 now, a price that barely covers fuel costs. To travel 45 to 300 miles to coral trout fishing grounds and bring the fish back to port alive requires very fast, diesel-guzzling boats.

So Mr. Glynn finds himself struggling to cope with the effects of SARS. "I didn't think that it would be the struggle that it has been in Australia," he said. "And it doesn't seem to be over yet."

Copyright 2003 The New York Times Company |

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