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In the abyss of economic forecasts
Bruno Cavalier
Chief Economist at ODDO BHF
Seeing the initial economic data reflecting the shock of the coronavirus, it looks like there must be a typo. We double check, but no, these are the right numbers... Since lockdown measures were introduced in China, then in Europe and in the US, these economies have been operating 25% to 35% below their potential. Each week of confinement lops around half a percentage point off GDP. A month and a half of this regime (hard to do less) and then a gradual resumption of activity over a similar length of time, and this adds up to roughly 5 points of GDP that have evaporated. It will not take much to have an even more severe shock.
The duration of confinement is the key factor
Typically, in developed countries, one-year forward growth forecasts have a standard deviation of less than half a percentage point. When forecasters disagree, it is generally to the tune of a few decimal places. In twenty years, only two events have led to a rapid and radical revision of GDP growth forecasts, the 9/11 terrorist attacks and the demise of Lehman Brothers. Likewise with the coronavirus shock, but in an unprecedented proportion1 . With the first macroeconomic and sectoral data published since countries have implemented containment measures, it is indeed possible to estimate, albeit very approximately, what the economic cost of combating the coronavirus pandemic will be. It is now certain that this will amount to several points of GDP. Adieu decimal places! To fine-tune the forecast, three parameters warrant examination: 1) the immediate impact of containment, 2) the duration of containment and the process of returning to normal, 3) the economic policy response.
- The impact of confinement – For the most accurate estimate possible, the approach consists in breaking down the effects on supply or demand as much as possible in a disaggregated way. On the supply-side, one can examine the degree of disruption to production by major sectors. The OECD estimates that tourism, retail and leisure services, including catering, construction and the transport equipment industry will experience contractions in activity of between 50% and 100%. On the demand side, one has to look at which segments of consumption are diminished (durable goods, transport services, tourism) and which are being boosted (some primary goods). Several studies are now available covering a wide range of countries2 . Their results may differ depending on assumptions about the loss of activity in each sector. The INSEE study, for France, has the advantage of being based on field observations from various professional organisations, but the orders of magnitude of the other studies are plausible. It goes without saying that the immediate impact evolves if production processes are adapted to health requirements (example of the aerospace sector in France). The other source of difference between countries is the economic structure, for example the weight of tourism or the primary sector.
For the vast majority of G20 countries, the scale of the loss of business is in the range of 25% to 40%.
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