The Most Realistic Economic Forecast Is Awful

(Bloomberg Opinion) -- Many forecasters are predicting that there will be a strong economic recovery in the second half of this year after the worst of the coronavirus outbreak has passed. But to have such an economic rebound in the third and fourth quarters, one of five events must have occurred. The first four of these are positive but don't seem sufficiently likely to serve as the basis of an economic forecast:

-- First, scientists discover an effective treatment or vaccine. That would be great, but neither seems likely to happen in the next three to six months.

-- Second, the virus mutates and becomes less harmful. This might happen, but hoping for a beneficial mutation doesn't seem like a good basis for an economic forecast.

-- Third, warmer summer weather in the Northern Hemisphere might dampen the rate of transmission of the virus. This outcome may happen, but it won't help in the fourth quarter.

-- Fourth, the government implements the kind of extensive track-and-trace approach used by South Korea. This would help to keep Covid-19 under control without the draconian social-distancing restrictions that are crushing the economy.  But given what we’ve seen so far, this outcome seems like a long shot.

There is one much more likely -- but deeply undesirable -- way that we could achieve a strong economic recovery: governments relax social-distancing mandates because enough Americans have become infected so that society achieves herd immunity. This outcome is, unfortunately, far from an impossibility. Officially, about 15,000 people in the U.S. have been infected. Epidemiologists estimate that we would achieve herd immunity if about 60% of the population, or a little more than 200 million people, become infected. Even if the number of cases grows by only 10% per day, which is much slower than what we’ve seen so far in Europe and in the U.S., the 15,000 cases would grow to 200 million before the end of June. 

In this scenario, there would be no reason for further social-distancing strictures. And it is true that the economy would begin to grow again in the second half of the year, as has been predicted by many forecasters.

But the costs of this scenario would be enormous. About 20% of those 200 million cases would require intensive care. Literally millions would die -- both from Covid-19 and from other ailments that an overwhelmed health-care system would be unable to treat.

I’m an optimist.  That’s why I believe we won’t see a fast second-half economic recovery.  Instead, we will continue to experience some form of social-distancing restrictions --perhaps relaxed at intervals -- for many months. These restrictions will be a huge drag on economic activity, but we can only hope that they will keep our health-care system and our fellow citizens alive.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Narayana Kocherlakota is a Bloomberg Opinion columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.

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