Getting realistic about risk
In January, I wrote about what was then a health scare out of China. I wondered, “Will coronavirus impact growth? At this point, we simply don’t know the lasting impact, but there is likely to be at least a short-term effect, which could cause ripples that are worth monitoring.”
That last sentence may be my biggest understatement of the year.
I noted that China would experience a hit to its economy, which was due to grow by about 6% in 2020. How big that hit became is shocking. In the first quarter of 2020, the world’s second largest economy collapsed, shrinking by 6.8% from a year ago and by 9.8% from the previous quarter. It was the first quarterly decline in gross domestic product since the government began tracking in 1992 and probably the first in nearly 50 years.
Back in January, economists were trying to predict how the spreading virus would impact countries and industries outside of China. Many told me that they were watching China’s big trading partners “in Asia, Europe, South America and even ... the U.S.”
My sources weren’t alone in underestimating the financial fallout. At his first press conference of 2020, Federal Reserve Chairman Jerome Powell said the central bank is “very carefully monitoring the situation . ... There will clearly be implications at least in the near term for Chinese output.”
As reports of the virus were making the rounds, the International Monetary Fund forecast global GDP to be at 3.3% and at 2% in the U.S. Compare those seemingly rosy numbers with today’s reality: Recently, the IMF predicted that the pandemic-induced global recession (what the organization has now labeled “The Great Lockdown”) would be the worst downturn since the Great Depression, much deeper than the 2008-09 financial crisis. The IMF now anticipates that the global economy will drop by 3% in 2020 and the U.S. economy is expected to shrink by 5.9%.
COVID-19 has quickly changed how we live and work. Very few of us could have imagined a world where all but essential workers would be sheltering in our homes and wearing masks and gloves. In a matter of weeks, as millions were sidelined from the labor force, American consumers reversed course and pulled back on spending in most sectors of the economy.
March Retail Sales plunged 8.7% from February, the largest monthly decline since the government started tracking these stats in 1992. Sales cratered at: food service and drinking establishments (-26.5%); auto dealers (-27%); department stores (-20%); and most strikingly clothing and accessories (-50.5%). The bright spots were: grocery stores (+27%); general merchandise (+6.4%); and building materials and garden supplies (+1.6%).
It‘s understandable that at the onset of any crisis, our first reaction may not be the right one. As neuroscientist Tali Sharot noted, “It’s our tendency to overestimate our likelihood of experiencing good events in our lives and underestimate our likelihood of experiencing bad events . ... We’re more optimistic than realistic, but we are oblivious to the fact.”
That’s why in the beginning of the pandemic some were flouting rules and engaging in risky behavior.
None of us wants to lose that ingrained optimism. But amid the pandemic, it is instructive to look back and forward to change what we do, how we think and what we say as credible information emerges.
We can be optimistic, while also being realistic about risk.