SARS has not yet retreated from the front pages, but even when it does its economic impact will linger.
Quantifying its effect on the business outlook is really not possible, but we can do some arithmetic to bring its potential impacts into a more familiar perspective.
The direct impact of SARS on Canada is mainly on Toronto’s tourism and hospitality sector, which represents approximately one per cent of Canada’s economy. Right now, we have only anecdotal information on how much business is being lost, and we do not know how long the stigma will last.
But to illustrate by example, if Toronto’s hospitality business were to fall by 50 per cent and then return to normal after six months, Canada would have lost about 0.25% in annual GDP.
Layoffs in Toronto’s tourism sector would mean less spending in general, which would impact the entire country. Assuming the second-round effects were less than the initial impacts, the total impact on Canada would very likely be less than 0.5 per cent of GDP, or under $5 billion in lost business. People are also shopping less, but it is reasonable to assume that they will still make most of their purchases later.
SARS is having its biggest impact on Asia, but this, too, could have significant implications for Canada. The economy of non-Japan Asia today is the locomotive of global economic growth, driven by a burgeoning consumer sector. Yet the streets of Beijing and Hong Kong are virtually empty.
Travel to the region has fallen dramatically.
Estimates are beginning to emerge suggesting that China’s GDP might decline by as much as five per cent during the April-June quarter. Some of this loss would be permanent, such as when a foreign traveller cancels a trip to China. But some would be temporary, as consumption spending would still occur after the situation normalizes. Accordingly, the first estimates of the effect of SARS on Asia’s economy are for growth this year to be reduced by one to two per cent.
How would such a shock affect Canada?
Less than three per cent of Canada’s total exports are to non-Japan Asia, so the immediate effect would be simply to trim growth in our Asian sales from around 10 per cent to perhaps six to eight per cent this year – which could mean around $400 million in lost sales.
But all our other trading partners would feel the effects of Asia’s slowdown as well, including the U.S. Global GDP growth could be reduced by between 0.25 per cent and 0.5 per cent, cutting Canada’s export growth by between 0.5 per cent and one per cent – a figure closer to $2-4 billion in lost sales. Such a shock could cut Canada’s GDP growth rate by 0.2-0.4 per cent and shave 20,000-40,000 jobs from employment rolls.
The bottom line? The economic impact of SARS will not be known for several months. Even then, it will be difficult to separate from the other uncertainties keeping the world economy on pause.
These illustrative calculations should not be construed as estimates, but they do suggest that the economic effect of SARS is likely to be material, yet unlikely to be overwhelming.
(Stephen Poloz is vice-president and chief economist for Export Development Canada.)
