This COVID-19 crisis has brought the surreal to our everyday lives in many ways. Perhaps the most surreal financial market manifestation has been the collapse in oil prices. At the start of this year, the US crude oil benchmark, West Texas Intermediate, traded above $60. Before the expiry of the April futures contract, that price had fallen to minus $37 as producers literally paid buyers to take the oil. As we learn of the shocking rise in unemployment in the US, we also note the surreal gap emerging between the economists’ expectations of the economic loss resulting from lockdown and equity market fantastical evaluations of the same.
In this piece we pull at that gap and note that either economists have become too pessimistic or that equity valuations need to come back down to earth.
Last week the International Monetary Fund (IMF) published their latest World Economic Outlook and their economic forecasts for this year and next (Figure 1). The forecast for global growth was particularly alarming, showing a contraction of 3%. That would be more than three times the scale of contraction predicted in their November 2008 forecast in the wake of the Lehman failure. Forecasts for global growth are almost always positive. The expected extent of the global synchronization to this slowdown could be a first. The IMF have also forecast the US to contract by nearly 6% this year, more than double the size of the contraction experienced during the last recession (Figure 2). While an expected recession may no longer be a surprise, the scale of the likely lost output really is quite alarming.