From the Harvard Business Review, May 18:
The coronavirus pandemic has introduced extreme uncertainty into nearly
every aspect of society. Will health care systems hold up? Will
scientists develop a vaccine? Are essential workers safe? When can
regular employees go back to the office? The answers to these questions —
when there are answers — seem to change daily. And with each change the
stock market (and our hopes) rises or falls.
Since the Covid-19 pandemic began, we’ve seen pervasive uncertainty
manifest in a sudden and massive divergence in macroeconomic
projections. For example, in early February, the spread among economic
growth forecasts for Q2 in the U.S. was 3.5 percentage points according
to FocusEconomics data. By April 29, the most optimistic forecast among
the 28 institutions in our weekly coronavirus survey saw the U.S.
economy contracting 8.2%. The most pessimistic projected a huge 65.0%
contraction — a spread of 56.8 percentage points — with an average of
-31.4%. While most institutions expected a rebound in Q3, some saw
further declines. And in Q4, although all economists projected growth of
some form, forecasts ranged from a minimum of +1.1% and a maximum of
+70.0%. The spreads observed in recent weeks are by far the widest
recorded since we started covering the U.S. a decade ago.
Looking at countries with a longer time horizon, the current forecast
spread among analysts is far larger than at any point during the past
20 years, and significantly above that seen during the height of the
financial crisis — the last period of extreme, prolonged global
uncertainty. For example, during the 2008 financial crisis, both Brazil
and Mexico saw the spread for annual GDP forecasts widen to close to six
percentage points, before returning to under three for most of the
2010s. The percentage point spread is now well over seven percentage
points.
Why So Much Divergence?
The short answer to why there is so much divergence is because no one
knows for sure what is going to happen. Digging deeper, three key
factors are causing forecasters particular difficulties.
First, the economic impact and speed of policy changes have never
been higher. In normal times, most governments can be relied on to at
least attempt to encourage economic growth and preserve employment.
Today, however, they are deliberately provoking recessions to save
lives, and containment measures are crushing domestic activity. Simply
miscalculating the end date of a nationwide lockdown by a couple of
weeks throws annual GDP forecasts completely off-kilter.
Moreover, bills
which generally endure months of parliamentary ping-pong are being
rushed through legislatures in days as governments and central banks
race to respond to the rapid advance of the virus. Many governments have
adopted emergency powers allowing them to rule by decree. What’s more,
the fiscal and monetary stimulus being announced to palliate the
downturn dwarfs that seen during the financial crisis. For economic
forecasters, keeping up with the constant flurry of measures and
correctly incorporating them into models poses challenges....MORE
