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What Do Financial Conditions Tell Us about Risks to GDP Growth?

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Abstract

The economic fallout from the COVID-19 pandemic has been sharp. Real U.S. GDP growth in the first quarter of 2020 (advance estimate) was -4.8 percent at an annual rate, the worst since the global financial crisis in 2008. Most forecasters predict much weaker growth in the second quarter, ranging widely from an annual rate of -15 percent to -50 percent as the economy pauses to allow for social distancing. Although growth is expected to begin its rebound in the third quarter absent a second wave of the pandemic, the speed of the recovery is highly uncertain. In this post, we estimate the risks around the modal forecast of GDP growth as a function of financial conditions. Tighter financial conditions led to a widening in the left tail of the distribution of 2020 growth before weekly economic indicators showed any deterioration. The Federal Reserve and the U.S. Department of the Treasury took aggressive actions to reduce financial stresses and support credit flows—moves aimed at stemming long-lasting impacts from steep economic losses. While GDP growth will depend primarily on the speed with which many activities can be resumed safely, the improved financial conditions in April have reduced the likelihood that financial conditions and real growth will jointly deteriorate in the next few quarters.

Suggested Citation

  • Patrick A. Adams & Tobias Adrian & Nina Boyarchenko & Domenico Giannone & J. Nellie Liang & Eric Qian, 2020. "What Do Financial Conditions Tell Us about Risks to GDP Growth?," Liberty Street Economics 20200521, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:88027
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    Cited by:

    1. Chavleishvili, Sulkhan & Fahr, Stephan & Kremer, Manfred & Manganelli, Simone & Schwaab, Bernd, 2021. "A risk management perspective on macroprudential policy," Working Paper Series 2556, European Central Bank.
    2. repec:ecb:ecbdps:202113 is not listed on IDEAS
    3. Kremer, Manfred & Chavleishvili, Sulkhan, 2021. "Measuring Systemic Financial Stress and its Impact on the Macroeconomy," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242346, Verein für Socialpolitik / German Economic Association.
    4. Chavleishvili, Sulkhan & Kremer, Manfred, 2023. "Measuring systemic financial stress and its risks for growth," Working Paper Series 2842, European Central Bank.
    5. Bank for International Settlements, 2022. "Private sector debt and financial stability," CGFS Papers, Bank for International Settlements, number 67, december.

    More about this item

    Keywords

    growth-at-risk; financial conditions; multimodality; COVID-19;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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