Swine flu dampens economic outlook, markets mixed

NEW YORK (Reuters) - Fears that an outbreak of swine flu could become a pandemic brought a new threat to the global economy on Monday, just as some economic indicators appeared to be bottoming out.

A health worker stands by ready to ask incoming passengers to remove any head gears before temperature screenings at the International Airport in Hong Kong April 27, 2009. Asia, a continent that has battled deadly viruses such as the H5N1 bird flu and SARS in recent years, began taking steps over the weekend to ward off a new flu virus. REUTERS/Vincent Yu/Pool

Mexicans returned to work in large numbers after the weekend, despite worries over a virus that has killed up to 149 people there, and spread to the United States, Canada and Europe, but economists have warned that a global outbreak of deadly flu would seriously curtail economic activity.

The World Bank estimated in 2008 that a flu pandemic could cost $3 trillion and result in a nearly 5 percent drop in world gross domestic product.

An outbreak of severe acute respiratory syndrome, or SARS, which disrupted travel, trade and workplaces in 2003, cost the Asia Pacific region an estimated $40 billion. It lasted six months and killed 775 of the 8,000 people it infected in 25 countries.

The current flu outbreak tempered optimism that the global downturn could be starting to slow after governments committed trillions of dollars to interventions and stimulus.

“We almost have to wait to see not so much the contagion aspect but how deadly is this,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut. While a mild strain may have a limited impact, “if you start getting a number of fatalities, then it ramps the issue up substantially at every level, from a human standpoint and from an economic standpoint,” he said.

In Washington, the Obama administration said it was too soon to determine the potential economic impact but U.S. Treasury officials were monitoring the situation.

Regardless of the effect of the virus on the global economy, International Monetary Fund Managing Director Dominique Strauss-Kahn said he did not see a global economic recovery before 2010.

Strauss-Kahn told CNBC television he hoped the worst was over but that “green shoots” in the global economy were mostly in the United States.

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A Reuters survey of analysts across European and the United States taken April 21-27 found a slim majority saying the bottom had yet to be hit in the worst global recession since World War Two. The vast bulk of them said the crisis would last anywhere from six months to another two years.

“Financial and macroeconomic stability are still some way off and we don’t yet have the foundation for a solid recovery,” said Lena Komileva, chief G7 market economist at interdealer broker Tullett Prebon.

Mexico’s peso dropped more than 4 percent and U.S. stocks fell in volatile trading as investors fretted about the flu outbreak. The Dow Jones industrial average closed down 0.6 percent.

European shares recovered from early losses, with the FTSEurofirst 300 index closing up 0.4 percent. Airline and leisure-related stocks were hit by fears the outbreak would hurt travel but drug makers rose on hopes the virus would result in strong vaccine sales.

Separately, General Motors Corp said it would close plants, eliminate brands and exchange $27 billion of bonds for equity in a last ditch effort to avoid bankruptcy and earn continued government support.

Despite risks of more financial turbulence, European Central Bank President Jean-Claude Trichet said lowering interest rates is not necessarily the best way to fight a recession.

“Our actions have been different from those taken by other central banks, reflecting differences in economic and financial structures,” he said of the ECB’s reaction to the crisis in a speech to the Foreign Policy Association in New York. “Indeed, given the different economic structures, they need to be different to reach the same objective.”

The ECB meets on May 7 and markets expect it to cut the benchmark interest rate from 1.25 percent to 1.0 percent. The U.S. Federal Reserve starts a two-day meeting on Tuesday and is expected to leave benchmark rates at or near zero.

Earlier, other European Central Bank policymakers suggested further reductions in the main refinancing rate but differed as to how far they should go.

The delicate state of the global economy was underlined by the Japanese government, which cut its economic forecasts on Monday, saying gross domestic product would shrink 3.3 percent over the next year.

The Bank of Japan is expected to keep interest rates near zero when it meets on Thursday but has maintained a cautious view on the global outlook. BOJ Governor Masaaki Sharakawa has signaled the BOJ’s monthly policy review will predict a gradual recovery toward the end of this year or early in 2010.

Reporting by Reuters correspondents worldwide; Writing by Dena Aubin; Editing by Patricia Zengerle