Health Scare Aggravates Mexico GDP Drop

If swine flu persists, analysts expect further contraction in Mexico’s economy, which is already under the gun. “Our estimates are that each week that Mexico remains shut down it will lower GDP growth by 30bp,” says Pablo Goldberg, EM strategist at HSBC. Other shops see the overall impact being more tempered. If the outbreak has a length and dimension similar to SARS, Mexico could lose a further 1.0% of annual GDP, estimates Barclays associate director Jimena Zuniga. She explains that for the SARS outbreak retail sales in affected countries fell about 5% in a quarter. In Mexico, she says, “a 5% drop in retail sales for 1 quarter would cost between 0.1% and 0.5% of GDP.” Tourism is in for a hard time too. “During SARS tourism arrivals dropped 50% in one quarter. Assuming a 50% drop in internal and external tourism in Mexico in one quarter, you end up with a drop in GDP of 1.0%,” Zuniga says. However, if the SARS pattern is seen in the new virus, activity is likely to rebound to normal after 3 months. “During SARS, losses were concentrated in 1 quarter. Following that quarter, activity returned to trend,” the economist says. Others are more sanguine. “We expect the flu will shave less than 50bp off this year’s growth,” says Felipe Illanes, head of research at BofA-Merrill Lynch. Mexico’s central bank says the country’s GDP will contract by 3.8%-4.8% this year, and estimates that in Q1, it shrank by 7.0%-8.0%. However, the bank warns that the forecast does not factor in the swine flu impact. Finance minister Agustin Carstens told reporters Thursday that the flu could whack GDP by 0.3%-0.5%, with the economy recovering from the impact in 2-3 months.