Central Bankers Adopt Scenario Forecasting for Post-Virus World
The Bank of England (BOE) building stands in the City of London, U.K. (Photographer: Simon Dawson/Bloomberg)

Central Bankers Adopt Scenario Forecasting for Post-Virus World

(Bloomberg) -- Central bankers who are used to forecasting the economy’s trajectory in simple ranges are now resorting to scenario projections, underlining just how difficult it remains to pin down the impact of the coronavirus pandemic.

The Reserve Bank of Australia is one of several global central banks that have offered alternative outlooks: a base, upside or downside case, depending where unemployment hits. The Bank of England is publishing projections based on a possible scenario, without committing to formal forecasts.

Federal Reserve policy makers are downplaying expectations of accurate forecasting, with Philadelphia’s Fed President Patrick Harker now talking in scenarios. One of those is a second infection wave and “a painful economic contraction of GDP in 2021 as shutdowns are reintroduced.”

Central bankers and economists who were wrong-footed when the global financial crisis hit a decade ago are now finding an even more monumental challenge in forecasting how the world economy responds to a slow reopening. The agility and lethality of the virus, as well as consumers’ responses when mobility restrictions are lifted, are some of the many variables that make forecasting in the Covid-19 era something of a fool’s errand -- even at the highest echelons of the economic profession.

“Much of the outlook depends on the outcome of pandemic mitigation and suppression measures,” said Taimur Baig, chief economist at DBS Group Holdings Ltd. in Singapore. “Hence calculations -- such as the impact of monetary and fiscal measures, response to oil-price decline -- fall short of affording a reasonable degree of forecasting confidence.”

Social Distancing

The RBA’s base case sees unemployment at 10% in June, easing back to 7.5% at the end of 2021. In the upside case unemployment falls to 5% by mid-2022, while in the downside scenario joblessness hovers near 10%, with a deep contraction for the foreseeable future. That’s all contingent on whether consumers voluntarily distance long after government restrictions are lifted, alongside weaker-for-longer consumption, investment and employment.

“It is difficult to be precise about the magnitude and timing of these effects, so it makes sense to think in terms of scenarios,” the RBA said in its Statement on Monetary Policy, released last week.

Elsewhere in Asia and in Europe, policy makers are similarly flummoxed. China is considering dropping its traditional numerical GDP target, which would give the central bank and other policy makers some latitude during the recovery.

In the U.K., the central bank last week published projections based on a scenario where current social-distancing measures and government support remain as they are until early June, before gradually being unwound by the end of the third quarter. That was accompanied by a table showing the impact of various changes to that outlook.

In the scenario, which officials were at pains to point out wasn’t a forecast, the BOE said the economy could shrink 14% this year because of coronavirus restrictions -- the biggest contraction since 1706 -- before rebounding strongly in 2021.

Unprecedented Crisis

The central bankers’ approach mirrors that of the International Monetary Fund, which in mid-April adopted three alternative scenarios to its baseline, each more dire than the last. Chief Economist Gita Gopinath said at the time that Covid-19 was “a crisis like no other, which means there is substantial uncertainty on the impact it will have on people’s lives and livelihoods.”

As governments have piled on more than $8 trillion in fiscal stimulus, central banks are left to calculate how that and their own actions might help economies start to dig their way out of crisis sooner.

Even then, the big unknown remains the potential for a timely virus cure. For economists at Standard Chartered Plc, both the upside and more pessimistic scenarios are premised on the consensus among health experts that no effective treatment or vaccine will be available until at least 2021, according to the bank’s research note Monday.

©2020 Bloomberg L.P.

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