Today, we are pleased to present a guest contribution written by Enrique Martínez-García (Senior Reserach Economist and Policy Advisor, Federal Reserve Bank of Dallas). The views expressed here are those solely of the author and do not reflect those of the Federal Reserve Bank of Dallas or the Federal Reserve System.
The fact that economists—international organizations like the IMF, but also governments and private forecasters—have a poor track record predicting recessions is a well documented finding. And the ongoing global crisis indeed appears to fit this pattern. However, by now little doubt remains that the rapid spread of the COVID-19 pandemic and the governments’ stringent responses to it have put much of the global economy on standstill for the sake of “flattening the curve” and saving lives.
The great lockdown has also come with heightened global uncertainty, challenging decision-making as well as upending the efforts of forecasters to get a grasp of the changing outlook. Global growth forecasts have historically been punctuated by periods of optimism and pessimism, but even so the shift in expectations during the current crisis has been swift and unprecedented in scale.
The International Monetary Fund (IMF) projected in its World Economic Outlook (WEO) release of April 14, 2020, that global GDP growth will fall by 3 percent in 2020 followed by a strong rebound of 5.8 percent in 2021. In its WEO update of January 9, 2020, the IMF had still expected solid global growth of 3.3 percent in 2020 and 3.4 percent in 2021.
Once can also glean the remarkable change in expectations from the daily forecasts of the professional forecasters polled by Consensus Economics Inc. I do so following a bottom-up approach that aggregates a sample of 33 country forecasts (accounting for 81.1 percent of world output in PPP terms in 2019, according to the IMF) weighted with PPP-adjusted GDP weights. Private forecasters make their country forecasts based on their own assessment of domestic economic conditions and their own projections about the impact of international spillovers, the path of the exchange rate, etc. that may differ from those of the IMF.
Chart 1 plots the evolution of the global output path projected by the IMF and that implied by the 33-country aggregate of private forecasters’ projections at selected days, using the January 9 and April 14 releases of the WEO as points of reference. What we observe in Chart 1 is that, at the beginning of 2020, the global output path implied by private forecasters looked very similar to the IMF’s own. Differences have become starker particularly since private forecasters began to fundamentally reevaluate their projections for 2020-21 by early March. By the time the April 2020 WEO projections came along, private forecasters had already come to expect a global recession.
While there is a high degree of concordance (qualitatively) between private forecasters and the IMF in their assessments of the recovery path, substantial differences have emerged regarding the severity of the global contraction. As a result, private forecasters still appear to retain a more benign view of the global economy over the 2020-21 forecasting horizon than the IMF does.
What’s perhaps more interesting here is that the April 2020 WEO release has not changed significantly the views of private forecasters about the severity of the global economy’s contraction. As of April 27, 2020, global growth for the 33-country aggregate of private forecasts comes at only -1.2 percent in 2020 followed by a bounce-back to +5 percent in 2021.
It is too early to judge the broad macroeconomic consequences of the pandemic on the global economy, but much of it—even the efficacy of fiscal and monetary policies being currently deployed to support the economy—hinges on how private agents’ expectations about the future (such as those in Chart 1) continue to evolve. More on how private forecasters’ global growth outlook is taking shape since the COVID-19 outbreak can be found in my recent Dallas Fed Economics blog post here: https://www.dallasfed.org/research/economics/2020/0505.
This post written by Enrique Martínez-García.