From bad to worse...

It’s too early to say with any certainty how much the outbreak of the new influenza virus, AH1N1, and the measures to control it will accentuate the economic contraction this year but there’s no doubt it will. On May 5, Hacienda advanced an estimate that AH1N1 will cut growth by 0.3 – 0.5 percentage points this year. Other estimates go as high as a full percentage point.

It’s important to put the estimates of the impact of AH1N1 in a broader context: even before the outbreak of AH1N1, economists, public and private, were revising their projections to predict a larger drop in GDP in light of the data that’s been published on the economy’s evolution in the first months of the year. The IGAE, the monthly indicator of economic activity which gives us a preliminary read on GDP, contracted in January and February at rates that can only be described as shocking. Published on April 28, when the uncertainty about the extent and danger posed by AH1N1 was at its height, INEGI reported that February’s IGAE dropped 10.8% (compared to February 2008). The secondary (industrial) sector of the economy plunged 13.2% and the primary sector (agriculture) fell 7.1%. The tertiary (services) sector dropped 9.6%. With the secondary and tertiary sectors accounting for all but 4% of GDP (35% and 63%, respectively), the outlook for the first quarter is bleak indeed: Hacienda is projecting a 7% drop in GDP in the first quarter.

The impact of the AH1N1 influenza virus will show up in the second quarter growth figures, when the growth rate will also suffer from the Semana Santa comparison. (Semana Santa fell in March of 2008 and in April this year.) The first half of this year will be disastrous, in terms of growth.

On April 29, Banco de Mexico (Banxico), the central bank, projected that GDP will fall 3.8% to 4.8% this year – without taking into account the impact of AH1N1. Hacienda is projecting a drop of 3.8% to 4.0% -- pre-AH1N1. The contraction this year should still not be as bad as in 1995, but we’re getting uncomfortably close…

On May 5, Hacienda announced an “anti-epidemic stimulus program”. Of the $18.8 billion, $10.0 billion consists of tax income the government won’t receive and for which the government won’t compensate by cutting other expenditures or raising taxes. The rest – $8.8 billion – is less than 0.1% of GDP.

The “anti-epidemic stimulus program” demonstrates the government’s awareness of the damage AH1N1 is wrecking on the economy. But, as far as mitigating its impact goes, the program’s importance is symbolic.