The SARS crisis could lower economic growth in Canada by as much as 0.8 percentage points in the second quarter of this year and by 0.4 points in the third quarter, according to a report by BMO Nesbitt Burns inc.

The report, released Tuesday before the decision by the World Health Organization to lift its travel advisory against Toronto, says the impact of severe acute respiratory syndrome would be to lower annualized GDP growth to 2.2% in Q2 and 3.5% in Q3 mainly because of the reduction in travel for both business and leisure, particularly in the Toronto area.

“In our analysis, it is assumed that concerns about SARS in Toronto remain at a heightened level through mid-to-late-May, but dissipates after that,” said Paul Ferley, assistant chief economist for BMO. “The problem does not spread beyond the Greater Toronto Area.”

Under the most likely scenario, Q2 GDP growth, at an annual rate, would be lowered by 0.50 percentage points via reduced travel expenditure, 0.24 percentage points by lower consumer spending, and less than 0.1 percentage points in total from lower exports to the Asian region and the quarantining of workers – a total of 0.8 percentage points, Ferley said. However, the decline in the third quarter would be lowered to -0.4 percentage points as an expected rebound in consumer spending would provide some offset to continuing weakness in business and leisure travel.

Over the four quarters of 2003, GDP growth under this scenario would be lowered by 0.3 percentage point to 3.1% on a fourth quarter-over-fourth quarter basis, he said.

The report says the SARS impact would be felt most in four main areas. Most hurt would be travel for business and leisure, followed by retail spending, exports to other affected areas primarily in Southeast Asia, and production from individuals in quarantine.

There are several unknowns, says the report. One is the duration of the crisis. “A relatively quick resolution would result in some activity, such as retail spending, merely being delayed rather than foregone altogether. However, a more protracted problem could see a rising proportion of this spending permanently lost. As well it would result in a higher percentage of the workforce going into quarantine with a more pronounced negative effect on employment and output.

“The other key unknown is the form and extent of the reaction of businesses and consumers to uncertainty about the spread of the virus. “

The report says a relatively quick resolution would result in some activity, such as retail spending, merely being delayed rather than foregone altogether. However, a more protracted problem could see a rising proportion of this spending permanently lost. As well it would result in a higher percentage of the workforce going into quarantine with a more pronounced negative effect on employment and output.

The report says foreign visitors spent $17.8 billion on both business and leisure travel in Canada in 2002 (of which an estimated one-fifth was spent in Toronto). “The amount spent by foreign tourists in Canada is equivalent to 1.6% of the value of Canada’s gross domestic product. In the most likely scenario we have assumed a 50% plunge in foreign visits to Toronto and a 10% reduction in foreign spending elsewhere in Canada.”

Under a more negative set of responses, BMO says there could be a drop in tourism of 70% in the Toronto area and 20% on average elsewhere in the country. This would almost double the impact on the Canadian economy compared to the most likely scenario.

“Under this more negative case, GDP growth for 2003 as a whole would be lowered a more substantial 0.5 percentage points.”