Quotes of the Day

Before news about avian flu hit, 2004 was shaping up as a great year for Asia's economies. Last year, while the U.S. rebounded and fast-growing China greedily consumed exports from around Asia, the region's consumers took advantage of low interest rates to spend freely on everything from fridges to cars to houses. Economies boomed, and stock markets soared. With the U.S. and China likely to continue expanding strongly in 2004, many had been predicting an encore from Asia. Merrill Lynch forecasts the region's economies, excluding Japan's, will grow 6.1% this year, and U.S. investment house T. Rowe Price expects corporate profits across Asia to surge about 15%.

Does avian flu change all that? If bird flu is not curtailed soon, it "could cost the region tens of billions of dollars," warns the Asian Development Bank's assistant chief economist, Jean-Pierre Verbiest. It is already leaving a mark. Thailand's $1.25 billion poultry industry is set to be devastated as exports to many markets are temporarily cut off. And tourism may also be poised for pain. So far, most tourists have decided to travel as planned, though some have placed worried calls, says Marcel Schneider, general manager of Diethelm Travel, a major Bangkok-based agency. Among his clients, three tour groups have canceled trips to Thailand based on fears of avian flu, says Schneider, but "by no means does this compare to SARS." Still, SARS struck largely from May to October, the off-peak season for Asian tourism. "High season is January to March," says Schneider. "So if bird flu reaches a high level then, it will be worse than last year."

But for now, an apocalyptic scenario looks unlikely. "I do not see the bird-flu incident spinning out of control at the present moment," says Daniel Lian, a Thailand analyst at Morgan Stanley. He points out that even if Thailand's poultry exports were to fall to zero for the first three months of the year, avian flu would reduce the country's total exports by only 0.4% in 2004. Unless the flu spreads, Lian expects Thailand's projected 8% growth for this year to drop by only 0.11 of a percentage point.

So far, few local and foreign investors have been in a hurry to pull out of Asia's stock markets. One of the region's leading foreign investors, Mark Mobius, a fund manager for U.S. firm Franklin Templeton, says he's not unduly worried. "The SARS impact was, at the end of the day, rather muted. I expect the same will happen with avian flu unless it becomes substantially larger and more widespread." Markus Rosgen, chief Asia strategist for Dutch investment bank ING, agrees: "Our outlook for Asia remains sanguine," in part because Asian governments "have learned a lot from SARS."

Nevertheless, avian flu adds to a number of factors that could make 2004 a tougher year than expected. For a start, the region faces lots of political uncertainty, with many countries—including India, Indonesia, the Philippines, Taiwan and Thailand—facing certain or likely elections. Taiwan's election is particularly crucial, as its outcome could determine whether tensions between Beijing and Taipei escalate. Some also worry that last year's strong growth has engendered its own perils. Unless China moderates its blistering pace of growth, for instance, it could start to face an inflation problem. And many economists fear that as the U.S.'s fiscal and trade deficits worsen, the dollar could fall sharply, prompting the Federal Reserve to raise interest rates. That could slow U.S. growth and crimp the country's appetite for Asian exports, hurting export-driven countries like South Korea and Taiwan.

Another concern is that Asian stocks have become too expensive for comfort. "We are wary that local investors have become euphoric, and the markets might have got too excited," says Mark Edwards, a fund manager for T. Rowe Price. In Hong Kong, for instance, share prices of Chinese stocks are high by historical standards, and initial public offerings this year will add $15 billion worth of new shares to the market, raising the possibility that supply will outstrip demand.

Nevertheless, even if jitters over avian flu do hurt Asia's markets, there should still be plenty of opportunities to profit from the panic. "The lesson from the SARS experience was that markets bounce very quickly once the disease is contained, and therefore investors will regard disease-related pullbacks as buying opportunities," says Edwards. In the meantime, it may be prudent to take a wait-and-see approach, as the psychological impact of an avian-flu epidemic on investors and consumers is hard to predict. Indeed, the ultimate economic impact will depend not only on how quickly governments control the spread of the disease but also on how deftly they manage international perceptions of the threat. Says Ken Scott, spokesman for the Pacific Asia Travel Association: "We can point out repeatedly that Asia is safe. But once we delve into the realm of perception management, we cannot control the images of chicken culling in print or on TV."

• Aravind Adiga
• SARS was an economic disaster. Could bird flu be as bad?