The World Health Organization has declared a global pandemic as COVID-19, popularly known as the coronavirus, spreads rapidly across the world. As tumbling stock markets reveal growing fears about the potential economic impact, Chicago Booth’s Initiative on Global Markets invited both its US and European economic experts panels to express their views on the likelihood of a major recession. The panelists also weighed in about the relative importance of the supply and demand channels through which COVID-19 is affecting and will affect the economy, and European economists further considered the Eurozone’s readiness to combat the economic effects of the virus.

Statement 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.

Responses weighted by each panelist’s confidence

On the question of whether there will be a major recession, a majority of respondents on both panels agreed a recession is likely, with a bigger majority among European panelists than US panelists.

More details on the experts’ views come through in the short comments that they were able to include when they participated 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 of Chicago Booth, who referred to the National Bureau of Economic Research's definition of a recession, commented: “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 of the Paris School of Economics, who, like Kashyap, said he was uncertain, noted: “Two quarters of negative growth, yes; major recession: very uncertain, depends notably on policy reactions.”

Among the small number of experts who disagreed that a major recession is likely, Kenneth Judd of Stanford wrote, “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 percent of the US panel and 82 percent of the European panel), several note the economic impact of the measures being taken to contain the pandemic. For example, Elena Carletti of Bocconi University said, “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 of Trinity College Dublin responded, “Even if [the] death rate is low, it will be because containment has been effective, and that will adversely affect aggregate supply and demand.” Luigi Guiso of the Einaudi Institute for Economics and Finance added, “To stop its spread it requires stopping economic activity altogether—a major supply shock.” And Richard Schmalensee at MIT commented, “‘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 of Yale said, “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 of Stanford noted, “Huge supply, demand, and uncertainty shock. VIX [an indicator of expectations of market volatility] is almost at 50.” And Stanford’s Darrell Duffie commented: “We see initial signs of a recession in debt and equity pricing, and in fiscal and monetary policy responses.”

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

Peter J. Klenow at Stanford raised the specter of wider costs of recession in terms of people’s broader economic wellbeing: “Sadly, the loss in welfare will exceed the decline in economic activity, given mortality and morbidity.”

Statement 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.

Responses weighted by each panelist’s confidence

On the question of whether the demand-side effects of COVID-19 on the economy will be more significant than the supply shock, large portions of both panels agreed or were uncertain, with a small percentage of respondents disagreeing.

The absence of agreement among the experts on the relative importance of supply and demand shocks is also reflected in the comments. Pol Antras of Harvard said, “Both will be at play. For some sectors (services) demand will be key; but supply disruptions will be serious in manufacturing.” Karl Whelan of University College Dublin added, “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 of Oxford commented, “Hard to disentangle supply and demand effects. And beware financial consequences—credit crunch, loan defaults, effects on insurers, etc.”

Of those who agreed that demand-side effects will dominate supply-side effects, David Autor of MIT noted, “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 of Chicago Booth added, “Especially in rich countries where services dominate the economy, social distancing and withdrawal will be the toughest part.” And Robert Shimer of the University of Chicago commented, “Supply chain disruptions look to be short-lived. Income loss for hourly workers and those in travel, entertainment, etc. will matter more.”

Barry Eichengreen of the University of California at Berkeley warned: “As someone who's estimated lots of models designed to distinguish supply and demand shocks, good luck identifying them.” Chicago Booth’s Leuz replied, “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.”

Statement C: The economic policy institutions of the Eurozone are well equipped to ameliorate the potential economic damage from COVID-19.

Responses weighted by each panelist’s confidence

The third statement, put only to the European panel, on the readiness of the economic policy institutions of the Eurozone to respond to the potential damage from COVID-19, found most panelists pessimistic about the area’s preparedness.

Among the over two-thirds majority who disagreed or strongly disagreed, several commented on the inability to coordinate a fiscal response. Oxford’s Vickers noted, “Lack of fiscal coordination. And financial sector measures could have adverse fiscal consequences in some scenarios.” University College Dublin’s Whelan said, “The absence of a common fiscal instrument (e.g. eurobonds) makes it difficult to have a large coordinated fiscal response.” And Olivier Blanchard of the Peterson Institute concluded, “Not without a change in fiscal attitudes and rules—which may come, under pressure.”

Others assumed that it will not be Eurozone institutions that come to the rescue. Charles Wyplosz of the Graduate Institute, Geneva said, “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 of the University of Zurich commented: “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 of the Paris School of Economics points to her call at VoxEU, along with a number of other leading European economists, for the European Union to take responsibility for a catastrophe relief plan.

All comments made by the experts are in the full survey results available here.

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