Herd mentality may influence figures used for forecasts

Economic statistics could become unreliable across the world due to the lockdown effects on contact surveys by statistical agencies and the inaccessibility of households and firms.

The pace of change in the economic environment is unprecedented, such that if one forgets to press the send button for a day after a forecasting exercise that forecast will be dated and require revision. Combined with unreliable economic statistics, this will move forecasting from difficult to less useful and perhaps dangerous for policymakers and business leaders. Scenario analysis could be of greater help to manage risk.

A deep global and domestic recession is upon us, and fiscal and monetary authorities are, by necessity, throwing everything in their toolkit to protect lives, livelihoods and businesses. What is surprising is that every forecast beyond 2020 seems optimistically to project a V-shaped recovery. The Reserve Bank and IMF say that the economy will contract 6.1% and 5.8%, respectively in 2020, before rebounding to 2.2% and 4% in 2021. Every other forecast from reputable institutions and economists points in this direction, and I wonder if this is due to some kind of herd mentality that may be misleading.

The current policy configurations appear to be based on the SA economy recovering swiftly in 2021. The fiscal package announced by the president this week gives a guidance of six months, especially for those depending on social security and the unemployed, for whom income relief is most pressing. Given this guidance, businesses and households may also be planning on a one-year contraction before a strong rebound in 2021.

Yet if we read the tea leaves from elsewhere in the world and previous pandemics, it is not so obvious that we will see a quick recovery. Medical experts tell us a vaccine will take a minimum of 18 months, maybe less if we are lucky, but the point is it takes longer than some expect. If this is the path the pandemic follows, it puts us into the winter of 2021 before a concrete solution is found.

In the meantime, the economy will have to be opened up, because businesses will soon run out of the oxygen provided by the state and central bank. But opening up before a vaccine is developed may result in a wave of new infections, and that may necessitate another lockdown. In turn that will result in yet another economic contraction.

In that scenario a new set of economic measures would be required in addition to what we now have. If policymakers are throwing everything in their toolboxes at it now, will there be anything left in case of a far worse scenario? If not, it would be appropriate to think about alternative scenarios that are far worse than is currently understood, and to prepare policy tools to be deployed.

Colleagues and I have advanced a proposal that the Bank consider assisting systemically important nonfinancial companies if their collapse could have financial stability consequences. Others elsewhere called for the Bank to simply print the R500bn and hand it to the Treasury to spend. The middle ground is a sensible one, which entails a modulated intervention by the Bank, working in concert with other institutions rather than exhausting the most crucial fire hydrant early on in the crisis.

There are dangers in printing for all sorts of reasons. The first is that it creates future moral hazard by opening up the possibility of the Bank printing money for all sorts of spending plans, including elections. Where will the printing stop?

Second, what if the forecasts are wrong and instead of a Vshaped recovery we have an Lor W-shaped recovery? What will the economic game plan be in such an environment? Something must be left in the toolkit to guard against this risk.