The economists and the institutions today are faced with a typical challenge to forecast the future levels of economic activities in extremely uncertain conditions. A forecast is defined as a statement of what is expected to happen in the future, especially in relation to a particular event or situation.
Covid19 has made the task of making predictions about the rate of recovery in global economy an extremely difficult task as it is contingent on a host of factors, and especially on the intensity and duration of the pandemic and the discovery of a vaccine.
The other factors include Global geopolitical tensions, over-leveraged non-financial sectors – particularly elevated debt levels among governments, businesses and households –and the ongoing losses of jobs and incomes.
Forecasting in uncertain times
Analyzing the impact of covid 19 on each nation and its response to it is a mammoth job particularly under the uncertain conditions as are seen today. So there are forecasts based on the most likely, likely or worst scenarios. This is like we tend to hope for the best and be prepared to face the worst.
The reason is that the pandemic has hurt both the lives and the livelihood of the people at the global level and in varying degrees. Some nations are affected less than others and some are showing signs of improvement more than others.
According to the World Economic outlook the advanced economies are likely to contract by around 8 per cent this year and the developing and emerging economies by about 3 per cent. But the good thing is that they are likely to recover by 4.8 per cent and 5.9 per cent respectively in the following fiscal.
This data is coming in the backdrop of consistent improvement in the PMI index for both categories of counties. Although it is still less than the 50.0 but it is getting better in May 2020 compared to April 2020. However, the OECD has projected a “double – hit” scenario in which a second wave of infections erupts in the later part of 2020; in this scenario, the global economy could contract by 7.6 per cent in 2020.
Not only covid19 is unprecedented, the uncertainty about global growth is also unprecedented. Therefore the regulatory and financial institutions are having a tough time presenting the projected future outlook for the economies both at global and local levels despite the resilience shown by the financial markets in response to unprecedented fiscal and monetary stimulus.
For instance, in India, a combination of fiscal, monetary and regulatory measures have reportedly helped the financial markets and intermediaries to work in a stable way yet the uncertainties loom. And so even as subdued bank credit is seen as indicative of risk aversion tendencies and foreign exchange reserves are reaching record levels, yet the disconnect between financial market optimism and the weakening of the real economy is leading to an apprehension that the pandemic may amplify financial vulnerabilities in case of severe economic contraction.
The policy response to uncertain outlook is a challenge to reckon with
The concluding remarks of the Financial Stability Report of the RBI mention about restarting financial sector reforms on their path of convergence with global best practices and standards while adapting to the specific requirements of India’s developmental strategy. I think this could be the dilemma most economies are facing. The risks are far more for the economies that were already under stress in the pre-pandemic times as well.
If a vaccine is found to deal with Covid19, economic activities may resume in the most severely affected sectors but at what pace the normalcy could be achieved may be anybody’s guess as it is contingent on whether enough doses are produced at affordable rates and are made accessible to all.