Likelihood of a coronavirus recession: Views of leading US and European economists

Romesh Vaitilingam

As tumbling stock markets indicated growing fears about the potential economic impact of the coronavirus, the IGM Forum at Chicago Booth invited its panels of leading economists in the US and Europe to express their views on the likelihood of a major recession. This column reveals a broad consensus across the experts that there will be a sharp downturn in the economy, but less agreement on how prolonged the dip is likely to be. Asked about the relative importance of supply and demand shocks damaging the economy, reactions were more mixed. But over two-thirds of the European economists are highly doubtful of the readiness of the economic policy institutions of the euro area to respond effectively to the potential damage from COVID-19.

The World Health Organization (WHO) has declared a global pandemic as the coronavirus spreads rapidly across the world (WHO 2020). As tumbling stock markets reveal growing fears about the potential economic impact, a number of economists have responded quickly with research-based commentary on the likely damage, the mechanisms of economic contagion and what governments can do about it (Baldwin and Weder di Mauro 2020).

The IGM Forum at Chicago Booth, which, for nearly a decade, has been regularly polling some of the world’s top economic experts in the US and Europe for their views on topical issues of public policy, invited both its US and European panels to express their views on the likelihood of a major recession. The economists were also asked about the relative importance of the supply and demand channels through which COVID-19 is affecting and will affect the economy (IGM Forum 2020).

Following the standard format of the IGM polls, the experts were asked whether they agreed or disagreed with the following statements, and, if so, how strongly and with what degree of confidence:

(a) Even if the mortality of COVID-19 proves to be limited (similar to the number of flu deaths in a regular season), it is likely to cause a major recession.

(b) The economic effects of COVID-19 coming from reduced spending will be larger than those coming from disruptions to supply chains and illness-related workforce reductions.

In addition, the European panel were asked about the readiness of euro area policy institutions to respond effectively:

(c) The economic policy institutions of the euro area are well equipped to ameliorate the potential economic damage from COVID-19.

Of the 43 US experts, 36 participated in this survey; of the 46 European experts, 38 participated – for a total of 74 expert reactions.

Likelihood of a major recession

On the first statement on whether there will be a major recession, weighted by each expert’s confidence in their response, 19% of the US panel strongly agreed, 44% agreed, 31% were uncertain, and 8% disagreed.

Among the European panel (again weighted by each expert’s confidence in their response), there was a bigger majority agreeing that a major recession is likely: 48% strongly agreed, 34% agreed, 13% were uncertain, and 4% disagreed.

More details on the experts’ views come through in the short comments that they are able to include when they participate in the survey. These indicate a broad consensus across both panels that there will be a sharp downturn in the economy, but less agreement on how prolonged the dip is likely to be.

For example, Anil Kashyap (Chicago Booth), who refers to the NBER’s definition of a recession (NBER 2010), comments: “a sharp slowdown is likely, whether it will be persistent enough to rise to the level of a recession is not clear yet”. And Jean-Pierre Danthine (Paris School of Economics), who, like Kashyap, said he was uncertain, notes: “Two quarters of negative growth, yes; major recession: very uncertain, depends notably on policy reactions.”

Of the small number of experts who disagreed that a major recession is likely, Kenneth Judd (Stanford) says: “If it is like ordinary flu, then the economy should quickly recover. COVID-19 only threatens old and feeble economic expansions.”

Among the majority who agreed or strongly agreed with the statement that a major recession is a likely consequence of the pandemic whatever its ultimate death toll (62% of the US panel and 82% of the European panel), several note the economic impact of the measures being taken to contain the pandemic. For example, Elena Carletti (Bocconi) says: “The contagion rate worries more than the mortality rate itself as it shuts down the whole economy to contain effects on the health system.”

Along similar lines, Patrick Honohan (Trinity College Dublin) responds: “Even if death rate is low, it will be because containment has been effective and that will adversely affect aggregate supply and demand.” Luigi Guiso (Einaudi Institute for Economics and Finance) adds: “To stop its spread it requires stopping economic activity altogether – a major supply shock.” And Richard Schmalensee (MIT) comments: “’Major’ might be a bit too strong, but the precautionary measures being taken in many countries will have a significant disruptive effect.”

Other experts point to what might be called ‘fear factors’: Larry Samuelson (Yale) says: “The COVID-19 wreaks more havoc through panic and disruption than death. To avoid recession, we could view COVID-19 as we do the flu.” Nicholas Bloom (Stanford) notes: ‘Huge supply, demand and uncertainty shock. VIX [an indicator of expectations of market volatility] is almost as 50.” And Darrell Duffie (Stanford) comments: “We see initial signs of a recession in debt and equity pricing, and in fiscal and monetary policy responses.”

Xavier Freixas (Universitat Pompeu Fabra) remarks on the impact of globalisation: “Contemporary interconnectedness between industries and countries turns a gridlock in one industry into a complete recession”. Christian Leuz (Chicago Booth) also alludes to interconnectedness: “The severity of the downturn likely differs by country, but in many countries the knock-on effects are already quite severe.” And Alberto Alesina (Harvard) says: “If what is happening in Italy happens broadly, it will be major recession”.

Pete Klenow (Stanford) raises the spectre of wider costs of recession in terms of people’s broader economic wellbeing (Jones and Klenow 2016): “Sadly, the loss in welfare will exceed the decline in economic activity, given mortality and morbidity”.

Supply and demand shocks

On the second statement about the demand-side effects of COVID-19 on the economy being more significant than the supply shock, 44% of the US panel agreed, 52% were uncertain, and 3% disagreed.

The results were similar for the European panel. Like the US panel, weighted by each expert’s confidence in their response, 4% strongly agreed, 43% agreed, 41% were uncertain, and 12% disagreed.

The absence of agreement among the experts on the relative importance of supply and demand shocks is also reflected in the comments. Pol Antras (Harvard) says: “Both will be at play. For some sectors (services) demand will be key; but supply disruptions will be serious in manufacturing.” Karl Whelan (University College Dublin) adds: “This is both a major supply and demand shock. It is hard to see any circumstances in which measured GDP does not decline significantly.” And John Vickers (Oxford) comments: “Hard to disentangle supply and demand effects. And beware financial consequences – credit crunch, loan defaults, effects on insurers, etc.”

Of those who agree that demand-side effects will dominate supply-side effects, David Autor (MIT) notes: “Supply chains are mostly about goods production, but manufacturing is under 20% of GDP. Services are a larger share of GDP and may be more exposed.” Austan Goolsbee (Chicago) adds: “Especially in rich countries where services dominate the economy, social distancing and withdrawal will be the toughest part.’”And Robert Shimer (Chicago) comments: “Supply chain disruptions look to be short-lived. Income loss for hourly workers and those in travel, entertainment, etc. will matter more.”

Barry Eichengreen (Berkeley) warns: “As someone who's estimated lots of models designed to distinguish supply and demand shocks, good luck identifying them.” Christian Leuz replies: “Obviously hard to separate supply and demand, but the question is essentially asking whether there is a big multiplier from the shock: my answer is yes.”

European institutions

The third statement, put only to the European panel, was on the readiness of the economic policy institutions of the euro area to respond to the potential damage from COVID-19. Weighted by each expert’s confidence in their response, only 14% agreed that they are well equipped, 17% were uncertain, 48% disagreed, and 21% strongly disagreed.

Among the over two-thirds majority who disagreed or strongly disagreed, several comment on the inability to coordinate a fiscal response. John Vickers notes: “Lack of fiscal coordination. And financial sector measures could have adverse fiscal consequences in some scenarios.” Karl Whelan says: “The absence of a common fiscal instrument (e.g. eurobonds) makes it difficult to have a large coordinated fiscal response.” And Olivier Blanchard (Peterson Institute) concludes: “Not without a change in fiscal attitudes and rules – which may come, under pressure.”

Others assume that it will not be euro area institutions that come to the rescue. Charles Wyplosz (Graduate Institute, Geneva) says: “Besides the European Central Bank, which will play second fiddle, the really important actions will be at the national level, coordinated hopefully.” And Joachim Voth (Zurich) comments: “Just like in 2007-08, Europe is out for lunch when it matters. The one viable actor in times of crisis is the nation state.”

Agnès Bénassy-Quéré (Paris School of Economics) points to her call, along with a number of other leading European economists, for the EU to take responsibility for a catastrophe relief plan (Bénassy-Quéré et al 2020).

Finally, among US panel responses to the first question, Christopher Udry (Northwestern) alludes to the policy implications of the economic impact of the pandemic: “An unusual recession, driven by the interactions of epidemiology, politics, psychology and economics. Needs a more creative response.”

References

Baldwin, R, and B Weder di Mauro (eds) (2020), Economics in the Time of COVID-19, VoxEU ebook.

Bénassy-Quéré, A, R Marimon, J Pisani-Ferry, L Reichlin, D Schoenmaker and B Weder di Mauro (2020), ‘COVID-19: Europe needs a catastrophe relief plan’, VoxEU.

IGM Forum (2020), ‘Coronavirus’.

Jones, C I, and P J Klenow (2016), ‘Beyond GDP? Welfare Across Countries and Time’, American Economic Review 106 (9): 2426-57.

NBER - National Bureau of Economic Research (2010), ‘US Business Cycle Expansions and Contractions’.

WHO (2020), ‘Coronavirus disease (COVID-19) outbreak’.