BlackRock Investment Institute

Macro insights

Oct 19, 2020

Comparing Covid to a natural disaster

To navigate the Covid-19 shock, we focus on the cumulative losses in economic activity that might build up over time, rather than volatile near-term growth forecasts. The usual business cycle and recession analysis does not apply to this shock. Instead, we see the situation as a natural disaster: A deep and very visible shock that lacks a more damaging propagation mechanism – such as the deleveraging phase that followed the GFC.

Chart sizing the GDP shock

Sources: BlackRock Investment Institute, with data from  Reuters News, October 2020. Notes: This chart shows hypothetical total shortfall of U.S. GDP relative to 2019 levels over the next two years based on a Reuters poll of economists. We use the Reuters poll of economists published on Sept. 25, 2020 but trim the sample by taking the estimates within the 20th and 80th percentiles (dark grey shaded band). We derive our range of estimates and median from an adjusted sample of 39 forecasts for which we have complete forecasts. The grey-shaded areas show the full range of estimates, with the most pessimistic estimates showing the lower quintile of forecasts. For illustrative purposes only. There is no guarantee that any forecasts made will come to pass. The hypothetical scenario is subject to signification limitations, in particular that this is an evolving situation and we are still trying to understand the potential for more extensive activity shutdowns due to the virus.

The most bearish consensus forecasts estimate the eventual cumulative loss from this crisis in the U.S. at 20% of 2019 GDP. See the chart. This is far smaller than the 50% hit to GDP seen in the decade after the financial crisis. This point was underscored by new International Monetary Fund (IMF) growth forecasts that were more optimistic than its June estimates. Yet we believe the hardest part of the restart is still to come – and renewed virus outbreaks could weigh on the recovery. The IMF also mentioned the risks of long-term scarring to the economy and the struggle that many emerging market economies may face.

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