Forecast: GDP decline in 2020 between 0% and 100%

That economic growth will be negative this year should now be a foregone conclusion. But by how much will GDP shrink?

Arnis Kluinis, in an article in nra.lv (in Latvian) has some rather scathing remarks to comments made by Mārtiņš Kazāks, Governor of the Bank of Latvia, about the possible GDP decline and is seemingly (?) settling scores dating back to the financial crisis. I have no idea what that is about but demanding precise forecasts at a time like this really doesn’t make sense – neither demanding them, nor trying to provide them.

Let us (that is, economists) be humble: We are always treading on thin ice when trying to make predictions in times of abrupt changes and/or when in uncharted territory and currently both apply. That said, we are being asked to gauge the impact of changed behaviour across the whole population – barely a single individual behaves as he/she did just a month ago in terms of earning, spending, saving, borrowing.

So, close to two million people and thousands of companies behave differently, in some cases radically so. Add to this the following as yet unanswered questions: 1) How long will the lockdown be? The longer, the more GDP will drop. 2) After the lockdown, how long will it take to normalize production and life in general? 3) Crucially, what will not normalize after the lockdown? (Will travel “just” resume? Will supply chains be restored? Will people again flock to theaters? Etc. etc. This will also have a major impact on economic development; we economists cannot answer these questions and I doubt even anthropologists can. 4) How severe will be liquidity constraints for firms and individuals? Banks are helping to mitigate the impact but how much and for how long can they do so? 5) What will be the size and types of measures of support from the government? We know quite a bit about this but there could be more in the pipeline. 6) For this open economy, what will be the impact from abroad? Less exports, yes, but by how much? Impossible to tell right now.

Put all this together and it is impossible to produce “the” number for GDP decline.

Why did Bank of Latvia then nevertheless come up with a forecast of minus 6.5% for 2020? a) It added that the forecast is very uncertain, of course. b) But should GDP behave like that, then, with a high degree of certainty, one can predict what will happen to e.g. unemployment and to tax revenue – and this will help the government providing a reasonable and targeted fiscal response for the economy.

My “forecast” (the headline of this article) is correct – and also completely useless, of course. Then rather uncertain forecasts that may need revisions rather frequently – it just cannot be done much better at this time, given so many unanswered questions.

 

Morten Hansen is Head of Economics Department at Stockholm School of Economics in Riga and a member of the Fiscal Discipline Council.

Points of view expressed here are not necessarily those of the Fiscal Discipline Council.