Economies On Empty

By now, everyone knows the early signs of SARS are high fever and a dry cough. But there's a second set of symptoms: canceled business trips, the collapse of tourism and falling stock prices. SARS (and fear of the mysterious disease) has already infected economies in Asia and Canada. Now U.S. markets are starting to look a little sickly, too. Last week analysts here blamed SARS for both a domestic stock slump and the airline industry's most recent woes. That's got economists pondering the kinds of questions doctors usually worry about: how far will this contagion spread, and what will be its final toll?

In Asia, where tourism can account for as much as 9 percent of a country's gross domestic product, companies and families alike are canceling travel plans and locals are staying home. Hotels and restaurants in Hong Kong and Singapore now regularly go more than half empty, if they're open at all; analysts estimate that more than 40 percent of China's annual $67 billion in tourism-related income may be lost this year. Food prices across Asia have tumbled as restaurants cut down on purchase orders, leaving the region's farmers and fishing fleets high and dry. The only luxury goods flying off shelves are fake Louis Vuitton surgical masks. "It's pretty clear the Chinese economy will shrink this quarter," says chief economist Mark Zandi of "That's taking out a growth engine for the entire global economy." Morgan Stanley chief economist Stephen Roach has pared his forecast for global economic growth down to 2.4 percent; 2.5 is the Rubicon for worldwide recession.

On Friday, the Federal Reserve acknowledged that economic troubles abroad were starting to cause ripple effects at home. The U.S. stock market, already weakened by war and winter weather, slid even further last week as the chairman of American International Group, the world's largest insurer, said that SARS fears were behind weakening sales in Hong Kong and China. The Air Transport Association reported that transpacific travel was down 40 percent compared with this time last year. Chinatowns in San Francisco and other cities became ghost towns. All this without a single American death.

Despite these developments, SARS isn't likely to be lethal to the U.S. economy. In fact, it might even have an upside. If fewer firms invest in China, says Diane Swonk, chief economist of Bank One Corp., that's not necessarily a bad thing. "Everyone says China is the new Asian tiger, but it's lacking in infrastructure," she notes. "Maybe this will puncture the hype--and bring that investment back to the U.S." Cutting back on travel could also benefit some companies, especially in tough times.

But SARS's unpredictability makes assessing its potential economic impact difficult. So far, most projections have assumed that the United States will stay relatively SARS-free and the rest of the world will get things under control by late May. But if those predictions turn out to be wrong and a major outbreak hits, say, Orlando, it could send the U.S. economy plunging faster than the Space Mountain roller coaster. For SARS to have any real impact on GDP, though, it would have to cause a collapse in tourism to almost all parts of the United States, and that's never happened before. The upshot: no one in the world knows what to base predictions on. Last week a London consultancy claimed SARS would have an even greater impact than Asia's 1998 currency-devaluation meltdown, particularly because face-to-face contact is a cornerstone of Asian business. But, says Swonk, "the Asian financial crisis was the result of years of overinvestment, of building skyscrapers with nobody in them. This is much more isolated."

If SARS's major economic effects do remain limited to Asia, it'll largely be due to smart thinking by national governments. Most of Asia moved quickly to curb the virus's spread, and China is taking big steps now to make up for lost time (more than 4,000 are quarantined in Beijing alone). Ailing Asian economies are also getting heavy doses of medicine, including a $1.5 billion relief package for local businesses announced by the Hong Kong government last week. Throwing big bucks around will help, but the only sure cure will be to control the disease.