The IMF speaks of the ‘Great Lockdown’

On 14 April 2020 the International Monetary Fund published forecasts anticipating the worst global recession since the 1930s. Naming the situation, it spoke of a “Great Lockdown”. In Spain, that same week construction and part of industry returned to work, after the two-week halt of non-essential activity. It was a sign of gradual reopening, not of a return to normal.

The two pieces of news coexisted with a sense of deep uncertainty. On one hand, international bodies warned of a fall in activity without recent precedent; on the other, economies were beginning to reopen gradually and tentatively. For business owners and families, the question was how to make reasonable decisions when even the experts did not have a clear picture of what lay ahead. In that context, the value of a forecast lies not in getting the figure right, but in helping to think in an orderly way.

What the IMF said

The International Monetary Fund periodically publishes growth forecasts for the world economy. In April 2020 it drew a scenario without recent precedent: a global recession comparable in severity to that of the 1930s. The name it chose, “Great Lockdown”, summed up its cause.

The reference to the 1930s was not a casual comparison. That decade is remembered as the one of the Great Depression, the most serious episode in recent economic history. Using that reference showed that those making the forecasts considered the situation to be of an exceptional order of magnitude, even though the nature of the blow, a halt in activity for health reasons, was different from that of the time. Historical comparisons serve to gauge scale, not to predict.

How far to trust a forecast

Crisis forecasts tend to get the detail wrong but the direction right. In an unprecedented situation, with so much uncertainty over the health outlook, any specific figure should be read as guidance, not as a promise. What is valuable is the order of magnitude and the direction of movement. A business owner does not need to know whether the fall will be exactly one size or another to understand that liquidity must be protected.

That does not mean ignoring them. A forecast serves to set a framework and to know how much caution the situation demands, but not to commit irreversible decisions to a decimal point. Anyone who treats a forecast as a certainty risks fitting their plan too closely to a figure that will probably be revised several times before the year is out. The sensible attitude is to adjust the plan as the data change, without clinging to the first estimate or dropping it at the first piece of news.

Scenarios, not a single number

For planning, more useful than a single figure is preparing several scenarios and deciding what to do in each. A business owner can define what he or she would do if activity recovers soon, if it takes longer or if it falls again, and set in advance which signals would prompt a change of plan. That avoids deciding blind when the moment comes. Writing down decision criteria before the pressure rises makes it easier to act consistently.

A practical exercise is to write three versions of the year: a favourable one, an intermediate one and a demanding one, with the income, costs and cash of each. Then identify the decisions that hold in every case, such as keeping liquidity or reviewing fixed costs, and those that depend on the scenario. Doing so with the adviser brings an outside view and helps avoid fooling oneself with optimism. Decisions common to every scenario, such as looking after cash, are the ones worth taking without waiting.

A plan built on scenarios withstands surprises better than one built on a single forecast.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.