The fog surrounding coronavirus economy

Just how serious will the economic impact of the coronavirus be? Amid vast uncertainty, some very large numbers are flying around, and there’s a lot of confusion over what they mean. Peering through this fog, it’s worth noting: Authoritative official forecasters are far more pessimistic in the short term than most private-sector analysts.
When Goldman Sachs, for instance, recently said output would fall by 34% in the second quarter, it meant that it would actually fall by around 10%. (The bigger number is what the annual decline would be if that quarterly rate persisted for a whole year.)
The usual practice of annualising quarterly rates, questionable in the best of times, is downright absurd under current circumstances. This isn’t just a matter of understanding that there are two equally valid ways of presenting the numbers and needing to know which one
is being used. Extrapolating a quarterly change to an annual rate, when the change in the quarter is due to a sudden and extraordinary economic lockdown, is plain wrong.
Imagine, for instance, that output will fall as Goldman expects, by 10% in the second quarter. This rate of decline won’t persist. Goldman doesn’t expect it to persist. Even if the recovery is less strong than hoped — even if it stalls entirely — there are no grounds to think that output will fall by another 10% in the third quarter, and then another 10% in the fourth, and then another 10% in the first quarter of 2021. Three more quarters of no recovery at all would still leave output just 10% below its level in the first quarter. Annualizing the quarterly 10% alludes to an entirely imaginary extended decline. To give a sense of what’s actually being predicted, short-term drops in output should be expressed as drops in levels — using quarterly, not annualised, rates.
So does this mean that the scale of the problem, bad as things might be, is being exaggerated? Unfortunately, it does not. Once you set aside the confusion due to annualising rates, you notice something else — a very big gap between private estimates of the initial impact and some of the still-emerging official estimates.
Note that these official projections aren’t generally being called “forecasts.” Given the current uncertainty, it’s right to avoid that term, since standard forecasting models can’t be used in the normal way — what’s happening lies too far outside the experience captured in historical data. Whatever they’re called, the short-term outlooks that official analysts are weighing are extremely severe.
Economists at the OECD estimate the “potential initial impact of partial or complete shutdowns” to be 25% of GDP for the US, and more than that in Japan, Germany, France and the UK. To be clear, this is the projected initial drop in the level of output due to the shutdown.
—Bloomberg