ECONOMIC EFFECTS OF SARS ON THE ASIA-PACIFIC CASE STUDY ASIAN REGION

Transcription

1 ECONOMIC EFFECTS OF SARS ON THE ASIA-PACIFIC CASE STUDY ASIAN REGION This sample essay is provided for the purpose of study and analysis. The information contained within should be used as a guide only A1 Discount Tuition.

2 INTRODUCTION Financial markets in Asia are coming under pressure as countries there start to feel the economic impact of the mystery virus that is spreading through the region. Severe Acute Respiratory Syndrome (SARS) is a condition of unknown etiology, which causes fever and atypical pneumonia. An outbreak of SARS has been identified in the Peoples' Republic of China (mainland China and Hong Kong); Hanoi, Vietnam, Singapore and Toronto, Canada (Detroit Medical Centre, 2002). The unexpected outbreak and spread of SARS has brought about significant impact to the world economy, especially the Asian economies, and aroused concerns from governments, international organisations and the business community. This impact has been caused by a number of reasons. Firstly, there is little information about the virus, its cause, its effects and implications. There is no known cure, and the virus has struck with great impact in a very short amount of time. The World Health Organisation has reported 764 deaths and 8360 cumulative cases as at May 31 st 2003, since it began keeping records on November 1 st 2002 (WHO, 2003)(see Appendix 1). Although these are global statistics, greatest impact has occurred in the Asian countries of China, Hong Kong, Taiwan and Singapore. These figures can be explained by the belief that the virus originated in mainland China. THE SARS VIRUS To gain a better understanding of why the SARS virus has caused such panic in the community it is important to note how the virus is spread. People may be exposed by close contact with a person with SARS. Respiratory droplets released during coughing or sneezing may expose others directly. In addition, the virus may be transmitted by hand contamination and contact with environmental surfaces or objects that have become contaminated with the virus. The virus may live from 1 to 3 hours after drying on surfaces (Detroit Medical Centre, 2002). Due to the ease of transmittal of the disease, almost every person who has contact with an infected person is at risk. Economic effects of SARS are quite broad and so far have significantly affected the Asian regions in which the virus is most prevalent. Although the effects felt in the Asian region have been most prominent, particularly, Hong Kong, Singapore and China, the ripple effect will also influence the global economy to some extent. At this stage, it is unclear to what extent; however, the focus of this report will be the concentration on the Asian region and on the facts that are clear up to this day. AGGREGATE DEMAND The SARS virus mainly affects economic activity and growth. It does so through the reduction of aggregate demand in the economy. Generally, consumer confidence has significantly declined in the countries affected. People have opted to stay at home to reduce the probability of infection rather than to participate in normal economic life. This has lead to a significant decline in retail sales and consumption spending, a major component of aggregate demand. Services involving face-to-face contact have been dealt a severe blow by the widespread fear of infection through such interactions. Other components of aggregate demand are investment expenditure, government expenditure as well as net exports. Each of these components has been affected to some extent by the existence of the virus. The following section will outline the effects that the virus has had on each component of aggregate demand. CONSUMPTION EXPENDITURE In Australia, consumption expenditure makes up about 70% of total aggregate demand; therefore, a reduction in this component of aggregate demand has significant impact on total demand in the economy. Although the weighting of this component of aggregate demand will vary from economy to economy, it will nevertheless be by far the most considerable component in the aggregate demand formula.

3 Consumption expenditure is the expenditure by households on goods and services of a domestic nature. These goods and services can be broken into durables and non-durables. Durable goods include items such as furniture, whitegoods, computer equipment and the like. Non-durable goods, or perishables, are mainly foodstuffs. Because most people buy goods and services of this nature, in many cases on a daily basis, the consumption expenditure component of aggregate demand will always be quite substantial in relation to other components of aggregate demand. As a result of a decline in consumer confidence in the Asian regions affected by SARS consumer have tended to purchase less goods and services. Apart from purchases of essential items such as food, consumers tend to stay in doors and wait until the epidemic passes. A reduction in expenditure means that shop owners and businesses earn less revenue. There is a two-fold consequence of such a situation. Firstly, there is a reduced need for labour, which in many cases causes workers to be laid off. Secondly, the reduced revenue means that business owners will have less income and so they will spend less in the economy, creating a declining demand spiral. This spiral is further magnified by the fact that workers are retrenched, which reduces their income and spending capacity, again leading to a decline in consumer demand. INVESTMENT EXPENDITURE Investment expenditure is expenditure by private enterprises for business purposes, and is probably the most volatile of the aggregate demand components. Investment expenditure changes significantly in response to changes in economic activity and the economic outlook. The reason for this is that investment expenditure can be delayed if required, and this type of expenditure is made for the purpose increasing the organisation s profitability and capacity. For increases in profitability to occur, a strong and growing economic environment needs to exist. This type of environment is also required for there to be any point in increasing capacity. Due to SARS, the Asian region has witnesses a major decline in investment expenditure. The overall decline in demand and economic growth has caused profit in many firms to decline as well as reduce their earnings forecasts. Currently this type of environment has heightened uncertainties and increased risks. The reduction in demand will already cause excess capacity to emerge, without the need for increasing capacity even further. Firms are increasingly continuing to struggle in the current environment, which has reduced the desire for investment expenditure. Foreign investment into the region has also declined considerably for the reasons mentioned. Overseas investors will enter new markets in order to increase their market exposure or due to excessive returns being made available in a foreign country. In the current environment, the only increased exposure that overseas investors will face will be those of exposure to the SARS virus, which is not what they desire. With declining profits, economic activity and demand, the Asian region does not offer excessive returns at this stage, therefore the majority of foreign investment will probably be delayed. GOVERNMENT EXPENDITURE The government expenditure also a key component of aggregate demand. The government spends in the economy through transfer payments, capital expenditure on public works as well as on wages for public servants for example. One of the roles of government is to provide economic stability to a country. During this time of crisis the governments of most affected countries will increase their spending to mitigate the impact that the Virus is having on the economy. This will be done in order to stimulate the other components of aggregate demand and increase economic activity. NET EXPORTS Net exports are the sum of exports less imports, and include both merchandise and service exports. Imports to the region have declined in line with an overall decline in demand. Service exports, in particular tourism-related exports, have been affected particularly hard over the last six months in the Asian region. SARS has had a particularly devastating effect on business travel to Asia. According to MeetingNews.com, an online trade publication, half of corporate travel managers who took part in a survey by the National Business Travel Association said that SARS had caused a reduction in travel at their companies. (The war with Iraq and the sluggish economy were two other major factors cited in

4 reduced travel.) More than half the respondents said they expect their total travel spending to be down in Three-quarters of those responding said the business travel industry would not recover until 2004 or later. As visitor arrivals have dropped, hotel occupancy rates have fallen significantly in Hong Kong, China and in Singapore. The hotel occupancy rate in Singapore and other Southeast Asian countries affected by SARS has been hovering around 20 percent. The reduction of hotel rates has not been able to lure travelers back. This is a huge economic and commercial disaster, given that 6-7 percent of these countries' gross domestic products rely on tourism (Beng, 2003). Indeed, three of the region's leading airlines, Cathay Pacific, Singapore Airlines and Malaysia Airlines, have had to reduce their flights by half - with no relief in sight (Beng, 2003). Cathay Pacific, for example, has issued a warning about the impact on its first half earnings as passenger numbers have fallen by a third compared to the same period last year, and announced the immediate suspension of flights to Malaysia (Airwise News, 2003). OTHER ECONOMIC EFFECTS INFLATION Inflation, which is a sustained increase in the level of prices, is inversely related to aggregate demand. As overall demand has fallen in the Asian region, firms have been forced to reduce prices in order to attract customers and maintain sales. This downward pricing pressure has been the key factor in helping to reduce inflation. This is supported by economic data of Hong Kong. According to a Bloomberg Investor Services news alert, April was the 54 th month in a row in which prices actually declined in Hong Kong (See Also Appendix 2). UNEMPLOYMENT Unemployment is directly related to aggregate demand in the economy. When there is a lack of adequate demand for goods and services, management of firms will usually reduce labour in order to cut costs and maintain profitability. This will increase unemployment. As highlighted in this case study, aggregate demand has been severely affected by the SARS epidemic, particularly in those countries where the virus has been most prevalent. Hong Kong Trade Development Council Statistics show that Hong Kong has seen a steady rise in unemployment to the current record high of 7.8% (See Appendix 2). As the economy continues to stagnate due to SARS this record high unemployment rate will most certainly continue to increase. FUTURE IMPACT Once the virus becomes contained, or better still, a cure is found and normality returns to the affected regions, the countries that are currently affected most could see the greatest rebounds. However, the return to pre-sars economic activity may take a considerable time. Consumers may compensate for their current reduction in consumption by subsequently increasing their spending. While domestic consumption could quickly change once confidence resumes, it may take a longer period for foreign travelers and investors to return.

5 BIBLIOGRAPHY Beng, K. P. SARS could doom China's leadership role, Asia Times Online, Apr 26, Bloomberg Investor Services & Foxtel channel 39, Detroit Medical Centre, Wayne State University, Hong Kong Trade Development Council Economic & Trade Information on Hong Kong, May 30, Unknown. SARS effect Hurts Cathay Pacific, Airwise News, Apr 11, See web article at: World Health Organisation

6 APPENDICES

7 APPENDIX 1 Cumulative Number of Reported Probable Cases Of SARS Country China, Hong Kong Special Administrative Region China, Macao Special Administrative Region Cumulative number of case(s) Number of new cases since last WHO update Number of deaths Number recovered Date last probable case reported Date for which cumulative number of cases is current Australia /May/ /May/2003 Brazil /Apr/ /Apr/2003 Canada /May/ /May/2003 China /May/ /May/ /May/ /May/ /May/ /May/2003 China, Taiwan /May/ /May/2003 Colombia /May/2003 5/May/2003 Finland /May/ /May/2003 France /May/ /May/2003 Germany /May/ /May/2003 India /May/ /May/2003 Indonesia /Apr/ /May/2003 Italy /Apr/ /May/2003 Kuwait /Apr/ /Apr/2003 Malaysia /May/ /May/2003 Mongolia /May/ /May/2003 New Zealand /Apr/ /May/2003 Philippines /May/ /May/2003 Republic of Ireland /Mar/ /May/2003 Republic of Korea /May/ /May/2003 Romania /Mar/ /Apr/2003 Russian Federation /May/ /May/2003 Singapore /May/ /May/2003 South Africa /Apr/2003 3/May/2003 Spain /Apr/2003 7/May/2003 Sweden /Apr/ /May/2003 Switzerland /Mar/ /May/2003 Thailand /May/ /May/2003 United Kingdom /Apr/ /May/2003 United States /May/ /May/2003 Viet Nam /Apr/ /May/2003 Total SOURCE: World Health Organisation.

8 APPENDIX 2 Major Economic Indicators for Hong Kong Latest Population (million) a Gross Domestic Products (US$ billion) b Real GDP Growth (%) b GDP Per Capita (US$) 24,800 24,400 24,000 24,000 b Inflation (% Change in Composite CPI) c Unemployment Rate (%) d a End-2002; b January-March 2003; c 2002; d January-April 2003; e 3-month moving average ended April SOURCE: Hong Kong Trade Development Council.