Swine flu precautions may slow economy

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swine flu precautions may slow economy

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Jim Haughey

RCD Chief Economist

Apr 30, 2009

The outlook for the ebbing of the recession is on hold for a few weeks.

The Mexican government has asked everyone except essential service workers to stay home for five days. This is enough to produce a measurable drop in Mexican economic activity. Mexico is the third largest customer for US exports. If substantial crowd avoidance continues beyond five days investment spending will be hit via both reduced profits and reduced expectations for capacity needs. Mexico bought nearly $50 billion of US equipment last year.

The 2003 SARS outbreak in Toronto caused substantial crowd avoidance for 3-4 months and a partial shutdown of the public economy for several weeks. RCD’s Canadian economist, based in Toronto, recalls that there were tens of thousands of jobs lost due to crowd avoidance and a sluggish regional construction market relative to the rest of Canada for more than a year.

The current situation in the US has not yet reached the degree of crowd avoidance now in Mexico City or in Toronto six years ago. 100 US schools are closed today but there is no evidence that business at crowded venues (restaurants, theatres, stadiums, public transit) has been measurably impacted. But we could move to the Mexico City/Toronto situation within days either with more reported flu cases here or elsewhere or even more crowd avoidance precautions. We are at the mercy of our most cautious neighbors. Suppose a few percent of the population cancels plans to eat out, go to the movies or visit relatives via public transit. This is enough to set off a spiral of reduced income and spending that will reach the capital goods markets within weeks and could persist through the spring.,

The scale of the risk is hard to assess. The least likely outcome is that the incidence of the flu reaches pandemic level or the seriousness of each confirmed case escalates. This could produce an impact equivalent to a serious recession. In the current depressed economy, recovery could be postponed for up to a year.

There is a higher risk that the incidence worsens but is short of the pandemic level. This would result in a Mexico City/Toronto impact with GDP dropping a fraction of a percent for 1-2 quarters and construction spending dipping 3-4 % over the same period. We could get the same result if crowd avoidance behavior becomes much more cautious without any change in the incidence of the flu.

However, the most likely outcome is that the current situation – brief school shutdowns and crowd avoidance in the neighborhood of confirmed cases – continues for a few more weeks. The negative economic impact will be measurable in hospitality, entertainment and travel industries but not in the overall economy and will not spill into the construction market.

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