Just how serious will the economic impact of the coronavirus be? Amid vast uncertainty, some very large numbers are flying around, and there’s a lot of confusion over what they mean. Peering through this fog, it’s worth noting: Authoritative official forecasters are far more pessimistic in the short term than most private-sector analysts.
My Bloomberg colleague Justin Fox recently drew attention to one persistent source of muddle about the numbers – namely, the US habit of annualising quarterly rates of growth. When Goldman Sachs, for instance, recently said output would fall by 34 per cent in the second quarter, it meant that it would actually fall by around 10 per cent. (The bigger number is what the annual decline would be if that quarterly rate persisted for a whole year.)
The coronavirus has upended the global economy.Credit:Getty Images
The usual practice of annualising quarterly rates, questionable in the best of times, is downright absurd under current circumstances. This isn’t just a matter of understanding that there are two equally valid ways of presenting the numbers and needing to know which one is being used. Extrapolating a quarterly change to an annual rate, when the change in the quarter is due to a sudden and extraordinary economic lockdown, is plain wrong.
Imagine, for instance, that output will fall as Goldman expects, by 10 per cent in the second quarter. This rate of decline won’t persist. Goldman doesn’t expect it to persist. Even if the recovery is less strong than hoped – even if it stalls entirely – there are no grounds to think that output will fall by another 10 per cent in the third quarter, and then another 10 per cent in the fourth, and then another 10 per cent in the first quarter of 2021. Three more quarters of no recovery at all would still leave output just 10 per cent below its level in the first quarter. Annualising the quarterly 10 per cent alludes to an entirely imaginary extended decline. To give a sense of what’s actually being predicted, short-term drops in output should be expressed as drops in levels – using quarterly, not annualised, rates.
This Post was originally published on www.smh.com.au