Publications: Notes at the Margin

No Certainty (April 20, 2020)


We were flooded with forecasts last week. The IEA and OPEC issued projections of global oil demand, and the IMF released its expectations for global economic growth. Other organizations such as Consensus Economics put out additional views.


The keyword associated with every forecast was uncertainty. The IMF’s April World Economic Outlook began with this caution:


"There is extreme uncertainty around the global growth forecast. The economic fallout depends on factors that interact in ways that are hard to predict, including the pathway of the pandemic, the intensity and efficacy of containment efforts, the extent of supply disruptions, the repercussions of the dramatic tightening in global financial market conditions, shifts in spending patterns, behavioral changes (such as people avoiding shopping malls and public transportation), confidence effects, and volatile commodity prices."[1]


The uncertainty led the IMF to offer a base forecast and three alternative projections. The base case projects global GDP to decrease by three percent instead of increasing by two percent in 2020, followed by a recovery of five percent in 2021.


The IMF bases its three alternative cases on different assumptions regarding the COVID-19 pandemic. In the worst case, it sees global GDP falling by six percent in 2020 and almost two percent in 2021.


According to the IMF, then, the outlook really depends on acts of God.


The IEA’s April Oil Market Report also stressed the murky situation:


"We cannot emphasize enough that current estimates are fraught with uncertainties. Data for aircraft and car traffic are more widely available than ever, but they are incomplete. It remains to be seen how they correlate with actual fuel demand."


Most importantly of all, there is no certainty that the spread of the virus can be brought under control after two months of quarantine (and several more weeks of more limited containment measures) which is the current assumption in our models. For now, we assume that the virus will be largely contained by June or July at the global level, even if the economic outlook is likely to remain clouded for a much longer period. Of course, we cannot rule out more waves of the coronavirus over the coming 18 months, with the accompanying containment measures that would follow."[2]


One must hope, along with the IEA, that "the virus will be largely contained by June." However, the evidence does not support this outcome. Instead, economic activity will likely be depressed through much of 2020 as the world adjusts to living with the virus. Most medical experts indicate that a return to the lifestyle prevailing before the outbreak will require widespread vaccination against the virus even though social distancing seems to have "flattened the curve" of infections and hospitalizations. Many expect a second wave of disease in the fall. This development would mean that lower economic activity combined with limited or almost no international travel may continue through the year and even into 2021, barring a medical miracle.


Global economic growth could be further slowed by the move away from globalization. The shift to manufacture "critical" goods in the United States or Europe rather than buy them from China will initially cut growth in China. At the same time, the offsetting pickup will likely be delayed as firms scramble to reshore capital.


The losses suffered by the more than twenty-five million laid-off Americans may also slow the recovery, particularly as they fall behind on rents and mortgage payments. The feedback on the housing sector could be severe. Preliminary data on housing activity already warn of serious problems.


With this background, one must ask whether the quick drop and recovery in oil market forecasts truly capture the current situation.

[1] International Monetary Fund, “The Great Lockdown,” Chapter 1, World Economic Outlook, April 2020 [], p. vii.

[2] IEA, Oil Market Report, April 2020 [], p. 5.


To receive the full report along with futures issues of Notes at the Margin, please Contact Us or send us an Information Request for subscription information.