Global $6 Trillion Slump May Be Optimistic, Economists Warn

The economy has “entered a downturn of unprecedented speed and severity, with most advanced economies facing their weakest performance since the Great Depression,” Tom Orlik and Jamie Rush wrote in a report. “Relative to expectations at the start of the year, the cost of lost output is more than $6 trillion,” the wrote.

That a contraction of this magnitude is based on “optimistic assumptions about both the outbreak and the recovery” underscores the challenge facing policy makers trying to cushion the blow of the pandemic. Under such scenario, U.S. gross domestic product will shrink 6.4%, while euro area GDP is set to contract 8.1%. Japan will shrink 4%, while China will expand at the slowest pace on record.

27,631 in U.S.Most new cases today

-17% Change in MSCI World Index of global stocks since Wuhan lockdown, Jan. 23

-1.111 Change in U.S. treasury bond yield since Wuhan lockdown, Jan. 23

-0.5% Global GDP Tracker (annualized), March

“Downside risks are significant,” Orlik and Rush wrote. As governments move to ease nationwide lockdowns, the risk of a second wave of infections could deepen the contraction to 5.6%. If stimulus is insufficient, output could plummet 7.2%.

But unlike the Asian crisis in 1997 and the global recession in 2009, the current shock isn’t caused by fundamental economic and financial imbalances. This means that countries that have mobilized enough stimulus to compensate for the lost income could stage a swift recovery, the economists wrote.

“Governments should err on the side of doing too much stimulus. In the end, the cost of doing too little would be higher.”

— With assistance by Zoe Schneeweiss

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