The World In A Week 56.5 – Forecasting Uncertainty

We previously wrote, just two weeks ago, about the risk of economic forecasts during this period of uncertainty. The unreliability of data during the lockdowns will, in turn, make the forecasts equally unreliable.  Although there is some consensus around how long economies will take to get back to pre-crisis levels, the range of forecasts for how much damage will be done is historically wide.

The one forecast that did hit the headlines was from the Office of Budget Responsibility (OBR), who caveated their forecast by stressing it was not a forecast at all.  Their ‘illustration’ of the potential fiscal effects of a three-month lockdown gave us a 35% reduction in output and unemployment of two million. The silver lining beyond the headlines that the media ran with was OBR’s assumption of “no lasting economic damage” beyond a short downturn.

Naturally, focus is starting to centre around what an exit-strategy from lockdown will look like, however, not all economies will have the same experience of dealing with different phases of the virus.  Reinvigorating a weak economy from a lockdown will depend on having sufficient stimulus in place and a consumer base willing to consume. That means keeping unemployment as low as possible.

The Federal Reserve announced this week that it will expand the size and scope of its lending facilities to provide up to $2.3 trillion in loans, in support of the US economy. This is to provide business with much needed liquidity to ensure that as many jobs as possible remain open when the furloughing ends.

We must also remember that this slowdown is not due to structural imbalances around the globe; but a deliberate policy-induced slowdown, which may not echo previous slowdowns.  It is about keeping an open mind to the range of possible outcomes and not jumping to conclusions too early.