In its semi-annual World Economic Outlook, the International Monetary Fund (IMF) writes that the world is in a unique crisis. For the first time since the Great Depression of the 30s, both developed and emerging markets are entering recession simultaneously.
According to the IMF, the growth of the world economy is -3%. In October 2019, the fund still expected 3,3% growth. If the spread of the coronavirus peaks in the second quarter and starts to ebb after the summer, the IMF sees the global economy growing by 2021% in 5,8. The expected recovery is therefore insufficient to make up for the damage from 2020. It seems surprising that the IMF is so negative. That's not the IMF's. But the more I thought about it, the more sense it made.
To begin with, if the IMF had put the situation into perspective, it would implicitly mean that the extensive anti-crisis measures taken by governments and central banks were exaggerated. That was also not the IMF's fault: the organization usually advocates more activism, not less. But there is another more important point to make.
Ocean scientific research
Just like other similar organizations and banks that make forecasts about economic growth, the IMF also states that these forecasts are the results that come from the heavy economic models. However, an ocean of scientific research has clearly shown for years that these models are anything but accurate.
No matter how bad their track record is in normal economic years, the models become truly useless around turning points in the economy. So, for example, during transitions from growth to shrinkage and vice versa. It's as if the fuel and speed gauges in your car are broken, but you have to predict how long it will take you to drive from Amsterdam to Maastricht.
Handful of correction predictions
Research shows that the analyst guild has collectively missed every turning point in the US economy in recent decades. A more recent example concerns the period 2008 to 2012. There were a total of 88 recessions around the world in those years. The estimates from Consensus Forecast, where predictions from important parties are combined and one collective estimate is produced, shows that only a handful have been predicted correctly.
In 2008 and 2009 there were 62 recessions: not one was announced the year before. The recessions in 2011 and 2012 also did not appear on the economic radar screens in 2010. Ben Bernanke, the then president of the US central bank Fed, stated in March 2007 that the consequences of the subprime crisis on the markets and the economy would not be as bad as expected.
Lack of timely information
And his predecessor Alan Greenspan said in August 1990 that “those who say we are already in a recession are wrong.” It should therefore come as no surprise to anyone that the American economy - as it turned out - had already been in recession for a month. Research shows that the estimates of the Fed, the OECD and other similar institutions also have a poor track record. There are a few possible causes for this, including the lack of timely information. Economic models make predictions with the data fed into them. The fewer hard figures and the more assumptions, the less reliable the end result is.
If developments are also very rapid, such as with the corona crisis, then the models by definition cannot keep up. Add to this the fact that they do not take shocks into account, such as the outbreak of a virus. It is then clear that estimates made during a crisis must be taken with many grains of salt. The more serious the crisis and the faster the developments follow each other, the more granules are needed.
Falling back on logic
The above doesn't just apply to economic models, the same applies to anyone trying to say something about future growth...like me. We are now experiencing something unprecedented, in the sense that a shock is hitting so many countries so hard at the same time. This means that it is much more difficult than before to say anything about how things will proceed. That said, it is especially in these types of circumstances that it is good to fall back on logic. I still expect economic growth to recover in the second half of the year. Not because I necessarily want to be an optimist, but based on the following reasoning.
Economic damage is mainly caused by loss of global trade due to lockdowns and social distancing policies in Europe, the US and the rest of the world. Both are a direct result of the spread of the virus. That spread appears to be slowing down. Not in one country, but worldwide. There has often been talk about relaxing the measures. That is not going to happen as quickly as they are set, that is also irresponsible. But the trend of more and stricter lockdowns may have reversed. Unfortunately, we are not there yet and in my view the majority of the economic damage still has to come in the second quarter. What concerns me is the direction in which the situation is developing.
Hitting the billiard ball hard
I have no choice but to work on the basis of facts, with the assumption that the spread of the virus will slow down further. That in turn means that sooner or later there will inevitably come a point where the spread will stop and then fade away. It can best be compared to a billiard ball that you hit hard with your cue. It initially flies over the table but slows down over time and eventually stops.
If I extend that reasoning, it paves the way for (further) relaxation of the law stay home policy and eventual repeal. Because that policy is the main reason for the economic damage - in the sense that growth is affected - you can assume that the economies will recover accordingly slowly.
I won't be surprised if recovery starts this summer or after. This coincides with the fact that many announced measures by governments and central banks will only have a positive effect in a few months. An example: many have taken advantage of the further reduced interest rates to refinance their mortgage loan. This sometimes means significantly lower monthly costs, but that will only take effect in a few months. After all, it takes a while before the transfer of the mortgage loan is properly processed and effectuated.
Economic help desperately needed
I agree with the IMF that the recovery may be slow and it may take a while to repair the damage. But when reading the report, I keep in mind the structural shortcomings of the instruments with which the IMF, among others, works. I expect this under the assumption that the virus fades away in the coming months. That is an assumption that is not based on hope but the situation I see around me. If that changes, my assessment of the future will also change.
Since the corona crisis, I have been more concerned about this decade, for example because of the measures taken by governments and central banks in recent weeks. These work out well in the short term, but mean that very little or nothing is left for later. And later, I fear, the economy will desperately need help.