The chickens have come home to roost, and they are carrying H5N1. Australia confirmed its first cases of the highly pathogenic avian influenza this morning, completing the virus's grim tour of every inhabited continent. For a global financial editor, the immediate question is not just about the poultry industry, but about how this will feed through to gilt yields, inflation expectations, and the cost of hedging sovereign risk.
Let us start with the numbers. Australia is the world's third-largest exporter of chicken meat and a significant player in egg production. A major outbreak would hit supply chains already stretched by labour shortages and feed costs. The Australian Bureau of Agricultural and Resource Economics estimates that a severe avian influenza episode could reduce poultry output by 12% to 15%. That would add to global food inflation, which the Bank of England has already warned could push UK CPI above 5% again by the autumn.
But the real story here is capital flight. Australia has been a darling of international investors thanks to its high interest rates and commodity wealth. A biosecurity crisis, combined with the potential for human cases, could trigger a reassessment of sovereign risk. The Australian dollar has already slipped 0.4% against the pound this morning. If the virus spreads to poultry farms in Western Australia or Victoria, we could see a broader sell-off in Australian government bonds, which are a staple of global fixed-income portfolios.
For the UK, the immediate concern is biosecurity. The Department for Environment, Food and Rural Affairs has raised the alert level to 'high', meaning all poultry keepers must follow strict housing and biosecurity measures. That is sensible. But the market will be watching for import bans. The UK imports approximately 15% of its chicken from the EU and 5% from non-EU countries, including Thailand and Brazil. If H5N1 disrupts those supply lines, we could see supermarket price rises for chicken breast and eggs within weeks.
The bigger macroeconomic picture is the risk of a 'bird flu premium' in inflation expectations. The five-year breakeven inflation rate in the UK has already risen 10 basis points this week to 3.1%. That is a signal that investors are pricing in supply-side shocks. The Bank of England will be acutely aware that avian influenza, like Covid-19, is a 'black swan' event that central banks cannot easily manage with interest rates. A rate hike to combat food inflation would be like using a sledgehammer to crack a walnut, and it would only hurt mortgage holders.
Then there is the human element. H5N1 has a mortality rate of around 50% in confirmed cases, though it rarely transmits between people. That 'rarely' is the word that keeps public health officials awake at night. If the virus mutates to become more transmissible, we are back to lockdowns and travel restrictions. The market has not priced that risk. The CBOE Volatility Index, or VIX, is still below 20, suggesting investors are complacent. They should not be.
Let me be clear: this is not a panic call. The UK is better prepared than most, with a stockpile of vaccines and a robust surveillance system. But the fiscal implications are real. The Treasury is already borrowing at 4.2% for ten-year gilts. A biosecurity crisis would widen the deficit as the government compensates farmers and funds health services. The Office for Budget Responsibility would be forced to revise its fiscal forecasts, and that would put upward pressure on gilt yields.
In summary, the Australian H5N1 confirmation is a canary in the coal mine for global supply chains and inflation expectations. The UK market is not yet reacting, but it should be. The bottom line is that the virus is a reminder that nature does not care about diversification or hedging. It only cares about transmission. And markets hate uncertainty.
