How deep will the world recession be this year? Don’t look at current economic forecasts for any guide. The only certainty is that measures of containment to fight the coronavirus pandemic, with lockdowns and a halt of economic activity in most western countries, will shrink gross domestic product in most of the world. By how much? These days, your guess is as good as mine.
The main reason is that “uncertainty” is no longer one of those potential risks envisioned by economists to caution about their own forecast. Uncertainty isn’t a marginal danger hovering over the economy, as the threats of trade wars or Brexit were when mentioned only a few weeks ago. Uncertainty is now the economy itself. In this context, the only accurate forecast is: “it depends.”
It depends, first, on the length of the lockdowns. The Organization for Economic Cooperation and Development, whose economic studies are among the most reliable, estimated this week that each month of containment costs any given country some 2 percentage points of growth. A three-month lockdown — say, from mid-March to mid-June — would cost 6% of GDP. Europe was expected to grow less than 1.5% this year in the last pre-virus forecasts. If the OECD is right, that means Europe’s economy would shrink this year by about 4.5%.
But only a month ago, the OECD could also safely predict that most of Europe and the U.S. would still grow, albeit barely, this year as it was taking into account the first predictable consequences of the pandemic. And looking at other forecasts, it has become clear that a 4.5% recession would look like a best-case scenario.
But there is worse: the job of economists and forecasters won’t be made any easier by the current context, where actual data or surveys no longer seem to mean anything. How do you really measure inflation, for example, when whole sectors, notably in services — think restaurants or so-called nonessential shops — are shut down? What does it mean to assess business “confidence” when companies are threatened with bankruptcy and queue up at governments’ windows to request aid to simply survive through these nightmarish months?
This doesn’t make economists and forecasters useless — quite the contrary. But it is their reasoning that matters in the current period, not their statistics and numbers — and certainly not forecasts presented up to the decimal. Their only certainty so far is that life in the statistics tunnel will be temporary. Meanwhile, better get used to being guided by the blind.