Swine 'Flu Darkens Mexico's Economic Outlook

Concerns over the economic impact of the outbreak of swine 'flu are growing, and Mexico is by far the most seriously affected country. As of yesterday, the epidemic has infected 2,498 people and killed 159 in Mexico; approximately 1,300 people are currently hospitalised, and the rest have been released. The impact in other countries of the region is still minimal.

From an economic perspective, the impact of an epidemic may be assessed from both supply and demand perspectives:

Supply-side impacts include deaths, worker absenteeism, lower labour productivity, overwhelmed healthcare systems, closed schools and public transit systems, restrictions on travel, tourism, and trade, and a severe crackdown on illegal immigration.

The demand-side impacts include most categories of discretionary spending, including travel/mass transit, tourism, retail/wholesale (except online), hotels/restaurants, and other entertainment (movies, theatres, concerts, and sporting events). An over-reaction by financial markets could exacerbate demand-side effects. The response of national and local governments would be crucial in limiting the negative impact on consumer and business confidence. An export-orientated economy such as Mexico is especially vulnerable to demand-side shocks.

The outbreak is hurting Mexico's economy in many ways. Fear surrounding the virus will deter foreign tourists from visiting. The most affected area of the country is the capital, Mexico City, which accounts for 22% of the nation's GDP. The fright and panic caused by the virus will lead residents to stay away from public places as much as possible. Consequently, the most immediate economic impact will be on tourism and consumer markets. Given the importance of tourist receipts and consumer purchases to the country, the downside economic risk of the virus is substantial.

In Mexico City, all schools have been closed until 6 May, but this deadline may be extended; convention centres, gymnasiums, restaurants, pubs, and nightclubs have also shut down. Hotels' occupancy rates are at record lows, between 5% and 10%. Preliminary estimates by local authorities point to daily losses in the capital of 777 million pesos (US$57 million); in addition to this, 600,000 workers at restaurants and hotels may have to take forced holidays.

Moreover, should the epidemic be prolonged, damage would spread to other sectors. The Mexican economy was already in dire straits as contagion from the U.S. recession and the global financial crisis was at its peak in the first quarter of the year, so the damage from the outbreak is being imposed on an already weak economy.

As the epidemic is ongoing and developments are rapidly changing, it is difficult to pinpoint the economic toll the outbreak may impose on Mexico. Consequently, IHS Global Insight has analysed the effects under two scenarios:

1. Contained Outbreak—the epidemic is contained by the end of the second quarter this year.
2. Serious Outbreak—swine 'flu continues to be a problem until the end of September.

We believe that the contained outbreak scenario is more probable, especially as the Mexican authorities have reversed their course to aggressively confront the epidemic, and given that anti-viral treatment (with zanamivir or oseltamivir) appears to be effective. World Health Organization (WHO) authorities have praised the prompt quarantine route taken by local authorities, which may prove crucial to contain the spread. Under the contained outbreak scenario, the negative impact would be mainly felt in the tourist and retail-trade sectors: still, the Mexican economy will be hard hit, with growth reduced by 0.8 percentage points in 2009 from the previous baseline, which was already a negative 5.3%. Should the swine 'flu remain a serious problem through the third quarter of the year, the toll on the economy would obviously be much larger, and last longer.

China and SARS

In March 2003, the WHO declared SARS a pandemic, and by June of that year, it had already lifted an advisory warning against travelling to SARS-affected countries. According to the Asian Development Bank, the cost of SARS in terms of lost GDP in nominal terms for East and Southeast Asia was about 0.6 percentage points of GDP, as expected tourism and retail sales were the most affected areas.

Outlook and Implications

Our baseline scenario is one of a relatively rapidly contained outbreak, but one that is nonetheless very harmful to an economy estimated to have contracted by 8% in the first quarter of 2009. The effect of the fear of sickness is much more severe than the effect of security concerns relating to the drug-cartel operations in the country and along its border with the United States, thus adding an additional toll to the tourism sector. Tourism, and thus tourism revenues, will be almost non-existent for at least six weeks through to the end of May, with only a partial recovery in June. Commerce activities will also be negatively affected. We do not expect tourism to resume normal levels until July. Under the contained outbreak scenario, disruption to trade would be limited, and the economic impact would be mostly limited to tourism and retail sales. We project the overall impact on economic growth to be -0.8% in 2009, and -0.3% in 2010.