INSEAD professor warns of dangerous macro-market gap
By Kim Bo-eun
The stock market is widely considered a leading indicator of what's going to happen in the economy but the discrepancies in recent months between stocks and indices for the real economy around the world have baffled investors.
Major market indices plunged in March, in what appeared as a reflection of the coming shock in the second quarter. Since then, however, major market indices have climbed about halfway back toward pre-crash levels, despite the likelihood that already pessimistic projections may fall further.
"Clearly their views today are optimistic. I can argue that they are wrong because there is still a lot of pain ahead," said Antonio Fatas, a professor of economics at INSEAD.
"But I could also argue that they are pricing the future, not just the next two years and at some point we will defeat the virus," he said, noting the volatility of financial markets.
In mid-April, the IMF projected the COVID-19-triggered recession would be the worst since the Great Depression in the 1930s. The international organization forecast the U.S. to contract by 5.9 percent this year, China's growth to slow down to 1.2 percent and Korea's economy to shrink by 1.2 percent.
Economic activity has resumed in many parts of the world, as the infection rates slow down. This has raised concerns infections may begin to rise again.
"We have to have the ability to live with some infections in order to come back to normal economic activity," Fatas said. "This does not mean the economy becomes the priority ― it means that we can reopen as long as we feel confident numbers are under control."
In the meantime, with reopening, the economy will likely pick up, but it is unclear how long this will take.
"What we know is that we will not go back to the levels of GDP prior to the crisis soon," Fatas said. "By the end of the year we are likely to be below the activities level a year before, in some cases by a large amount."
He noted the situation will depend on progress in development of a vaccine.