April 3, 2020 / 9:13 AM / 2 months ago

COLUMN-Wild variation in recession calls underlines volatility shock: Dolan

 (The author is editor-at-large for finance and markets at
Reuters News. Any views expressed here are his own.)
    By Mike Dolan
    LONDON, April 3 (Reuters) - Forecasting the depth and
duration of the coming world recession is like playing "pin the
tail on the donkey" and the sheer range of outcomes emerging
leaves markets flailing blindfold.
    Measuring how almost $90 trillion of annual global output
will be hit by the pandemic and the economic standstill called
to stop it is complicated by uncertainty over the disease's
trajectory and the impact of the biggest monetary and fiscal
rescue on record.
    The unprecedented shock is tough for markets that, while
priding themselves on being forward-looking, continually riff
off the recent past and have been blindsided twice in just over
a decade after years of apparently serene conditions.
    The "Great Moderation" of ebbing volatility in world output
that defined two decades before the last crash was only briefly
disturbed in 2008/09 and its resumption afterwards left many
assuming the Great Financial Crisis was something of a one-off.
    In just three weeks, the world's top financial economists
have raced out projections of what is set to be first
contraction in global output for 12 years, probably the deepest
since the 1930s -- and perhaps, due to the scale of government
support mobilised, the shortest-lived in recent history.  
    The blizzard of estimates underscores the sudden sharp
resurgence in both macro and market volatility.
    Updated calls from six global investment banks show
second-quarter U.S. GDP ranging from a relatively mild 9.5%
annualised contraction -- forecast by UBS -- to the plunge of as
much as 42% predicted by Nomura. 
 Q2 2020                                                        
 %q/q,     J.P.    Goldman    Nomura  Morgan    UBS    Deutsche
 saar      Morgan  Sachs              Stanley          Bank
 Global      -1.2  -            -6.2  -          -0.8  -
 China       57.4  -            52.4  -            38        6.6
 United       -14        -34   -41.7       -38   -9.5       -9.5
 States                                                
 Euro         -22      -38.4   -43.4     -32.9  -22.9      -11.4
 area                                                  
 Japan         -1       -7.2   -12.4  -         -18.2         -3
    For the year and world as a whole, projections swing from a
near-1% overall expansion of global GDP in 2020 to a 4% tumble
-- a difference in outcomes spanning more than $4 trillion.
    Asset managers are similarly divided. 
    BlackRock's Amer Bisat reckons the world economy could
contract by 11% in the first half of 2020, losing $6 trillion in
output. Legal & General Investment Management's chief investment
officer Sonja Laud said her team is working on the assumption
that global output fell by 20% in the year through April.
    The 20% drop in the MSCI world stock index so far this year
chimes with the latter but the array of calls on what will
happen supports equity volatility gauges still above 50%.
    
    JUST HOW RARE ARE GDP SHOCKS?
    Deutsche Bank strategist Jim Reid says data going back
centuries show major economies shrank 10% or more during the
Depression of the 1930s, times of war and pandemics such as the
14th century Black Death. Mostly, there were "no central banks
to step in and stabilise the situation".      
    Deutsche's forecast of a 6.5% contraction would make 2020
the third worst year for the British economy since 1900, after
1919 and 1921. Contractions of 12.9% in 1932 and 11.6% during
post-war demobilisation in 1946 mark the sharpest U.S. slumps,
with 2020 only the 18th worst of 230 years if Deutsche's
forecast of a 4.2% drop in GDP proves correct.
    But the swings of the past 40 years have been more subdued. 
    Many economists blame this "Great Moderation" for why so few
people saw the financial crisis of 12 years ago coming:
globalisation and evaporating inflation encouraged ever-cheaper
credit and what seemed to financial markets entirely rational
risk-taking and leverage that eventually exploded spectacularly.
    On the eve of the coronavirus pandemic, measures of rolling
five-year global GDP volatility compiled by JPMorgan hit their
lowest on record.
    For an interactive version of the chart below, click here reut.rs/3bMcJzK.
    JPM strategist Jan Loeys says one of the reasons has been
that governments have grown intolerant of any downturn
whatsoever and have met threats like the 2011/12 euro zone
crisis or 2014/15 oil price plunge with huge stimulus to calm
markets and support output and jobs.
    The multi-trillion monetary and fiscal response to this
year's shock may be appropriate public policy but shows the same
pattern and may well be successful in igniting a quick recovery,
 suppressing GDP volatility and borrowing rates once more.
    Where will it end? For Loeys, the gradual loss of policy
ammunition and accumulation of government debts now points
inexorably toward some form of helicopter money and direct
central bank funding of government deficits. 
    And this, he says, is "playing with fire" because the
absence of GDP volatility was in many ways just the flipside of
years of suppressed inflation. 
    If central banks end up migrating from quantitative easing
to direct funding of government spending, then long-dormant
inflation may finally reawaken -- and truly end an era.

    
 (By Mike Dolan; Table and charts by Ritvik Carvalho, with
JPMorgan data; Editing by Catherine Evans  Twitter:
@reutersMikeD)
  
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