2020 Whipsawed Economists

Forecasters’ inability to pin down how businesses and shoppers would respond to the Covid-19 outbreak echoes the black eye suffered by pollsters in this year’s presidential election.

Economists had no comparable events to predict either the path of the virus or the measures governments would take in response. Now, with infections and deaths are surging again and as governments reimpose or weigh reimposing restrictions, economists are again marking down forecasts—though not as drastically as earlier this year.

The pandemic was a “very, very uncertain situation” and forecasters’ swing to very pessimistic and back is “understandable behavior and good, because otherwise they’re not really calling it as they see it,” said Prakash Loungani, an economist at the International Monetary Fund who has written about economists’ tendency to miss the magnitude of recessions. “From my perspective, forecasters have actually done a good job this year relative to their past performance.”

The economy this year appeared to start on a solid footing, coming off 2.3% growth in 2019. In The Wall Street Journal’s January monthly survey of economists, business and academic forecasters on average expected gross domestic product to increase 1.9% in the fourth quarter of 2020 from the fourth quarter of 2019. That held steady in February, even as the U.S. began to register its first coronavirus deaths.

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Rosier Forecast

Since the June Federal Reserve meeting, projections for GDP growth in 2020 have improved

Fed officials’ projections for GDP growth

Full range

Central tendency

For end

of 2020

End

of 2021

End

of 2022

Month this year that forecast was made

In early March, they lowered expected growth modestly, to 1.2%. One reason for the restraint: When the coronavirus pandemic emerged, some forecasters looked to its closest modern equivalent for clues about how it would play out. In late 2002 and early 2003, severe acute respiratory syndrome emerged in southern China then spread to several other countries, killing hundreds of people.

That experience suggested a short, sharp shock to GDP followed by a quick rebound was feasible. At the depth of the SARS downturn during the second quarter of 2003, Hong Kong’s economy shrank 2.4% from the previous quarter, before growing 6.1% in the third quarter. China’s growth slowed to 9.1% in the second quarter of 2003, when SARS peaked—down from an 11.1% growth rate in the first quarter.

Yet Covid-19 spread asymptomatically and thus more easily than SARS, stymying containment efforts. Countries responded with measures never used before: closing all nonessential businesses and schools and ordering people to stay home. As economic activity came to a screeching halt, markets cratered and economists revised 2020 U.S. growth to a contraction of 4.9% in April, then 6.6% in May, the worst since the Great Depression.

But economic activity bounced back much more quickly than expected, and as of December, economists now think GDP will fall 2.7% this year, similar to the drop recorded in the fourth quarter of 2008 from a year earlier.

Why was the Covid-related toll less bad than initially feared? “I think that in many cases the lockdowns started to be reversed and activity returned,” said Mr. Loungani.

Another reason, said Jeffrey Frankel, a professor at Harvard University who has studied economic forecasting, was massive fiscal stimulus that lawmakers enacted in March to support the economy and household incomes. “That was a surprise in the midst of a partisan Congress,” he said.

The twists and turns of private forecasts were echoed by official bodies. In March, Federal Reserve officials didn’t issue their usual economic projections, then in June said GDP would contract 6.5% in 2020. By September, they had revised that up to a 3.7% contraction and at last week’s policy meeting, revised it up further to a 2.4% drop. The smaller-than-expected drop in 2020 has led them to expect a smaller bounceback in 2021, when the Fed now sees growth of 4.2%, compared with 5% in June.

The IMF in June expected the U.S. economy to shrink 8.2% in 2020 and grow 5.4% in 2021. By October, the forecast had improved to a contraction of 4.1% in 2020, but expected growth in 2021 slipped to 3.2%.

“All countries are now facing what I would call ‘The Long Ascent’—a difficult climb that will be long, uneven, and uncertain,” IMF Managing Director Kristalina Georgieva said in early October.

Mr. Frankel said fiscal stimulus now remains essential. Policy makers who “prematurely declared victory and stopped fiscal stimulus” in the wake of the Great Depression in 1937-1938, and in 2011 after the 2007-09 recession, ended up slowing the economic recoveries, he said. “I’m worried about a double-dip recession,” he added. “We’re not out of the woods yet.”

Write to Harriet Torry at [email protected]