COVID scenarios: bad, worse, worst (or perhaps not as bad as expected...?)

The COVID crisis has brutally shaken up the outlook for the economy and financial markets, and has created a lot of uncertainty most of all. In the financial markets, this is reflected in strong price movements. On stock exchanges in particular, prices sometimes go up or down by several percentage points a day. Economists, too, are groping in the dark about the effects of the COVID crisis on the global economy. A tried and tested tool in uncertain times is ‘scenario analysis’: instead of a clear prediction of where the economy is heading, research institutes present a range of possible outcomes, with or without a probability distribution.

CPB scenario analysis: from bad to worse

In the Netherlands, the CPB Netherlands Bureau for Economic Policy Analysis (CPB) is the leading authority on economic scenario analysis. CPB was quick to present a scenario analysis for the Dutch economy in late March, less than a month after the first COVID case was established in the Netherlands. Not surprisingly, this analysis presents a gloomy picture. In all four CPB scenarios, the Netherlands will face a recession in 2020, which will even be more severe than the ‘great recession’ of 2008-2009 according to three of the four scenarios. The main differences between the scenarios mostly concern the severity and duration of the expected recession, which, in turn, depend on how strict and prolonged ‘contact restrictions’ will be. In the most optimistic (or rather: least pessimistic) ‘scenario 1’ economic recovery will set in already in the second half of 2020, whereas in the most adverse ‘scenario 4’ economic contraction will persist even in 2021. Given the major uncertainties, CPB expressly (and rightly) does not wish to make any statements as to which scenarios are the most or least likely to occur.

Click the link below to read the entire article (in PDF, Dutch).