Random Thoughts July 27

a) This is my last post before going on vacation. I will resume blogging in mid August.
b) Swine Flu: at the beginning of last week, new Swine Flu infections have started to increase at a significantly faster rate in Germany. This is probably due to Germans returning from their summer vacations. As written in Deflation due to swine flu?, the swine flu might start to hit especially hard in September when most of the tourists are back from vacation and kids are back to school. Developments so far seem to underpin this scenario. Just to repeat: So far the mortatility rate has been low. Nevertheless, if indeed infections should affect roughly 25% of the population, it will have a significant impact on the economy. Both demand and supply will be negatively affected and therefore the impact on GDP growth is clearly negative.
On a different note, the Warwick Business School has developed an Influenza Pandemic Risk Index, which shows '...the UK most at risk to the spread of an influenza pandemic, ranking number 1 out of 213 countries. The Netherlands, Germany, Italy, Russia, Canada and Japan are also categorised as extreme risk because of their high population density, urbanisation and busy airports.' (for further details see here)
c) Markets: My assessment from last week (Market Update: Near-term risk-recovery not over yet) remains fully valid: it seems that the near-term risk-recovery can run further as Q3 growth is likely to surprise positively. However, growth in final demand promises to be much more subdued and risks moving lower again into autumn/winter. Therefore, the recovery remains a temporary one. While I previously expected the recovery across risky assets to be over by the end of this month, I now think it will likely extend well into August.