How Much Were GDP Forecasts Revised Down by Russia’s Invasion?

The Russian invasion probably explains the bulk of the downward revisions in the WSJ’s consensus.

Figure 1: GDP in bn. Ch.2012$ SAAR (black), mean forecast from WSJ October 2021 survey (green), from WSJ January 2022 survey (blue), from WSJ April 2022 survey (red), and potential GDP from CBO (gray). Source: BEA, WSJ (various issues), CBO (July 2021), and author’s calculations.

2022 Q4/Q4 growth was revised from 3.3% in the January survey to 2.57% in the April.

If one believes the CBO’s estimate of potential GDP, then the economy’s output gap is still negative, and has some way to go before hitting full employment. The observed inflation is then interpreted as cost-push, rather than demand-pull (to use admittedly old fashioned language).

Another piece of evidence consistent with this view is the fact that while inflation expectations moved up in late January and early February, they weren’t large movements (as far as can be seen in typical surveys). That means that it’s the disruptions associated with the Russian invasion (oil prices, commodity prices, economic and economic policy uncertainty) that likely induced the downward revisions in expectations.

Below is the high and low forecasts (20% trimmed on 2022 q4/q4).

Figure 1: GDP in bn. Ch.2012$ SAAR (black), mean forecast from WSJ April 2022 survey (red), 20% trimmed high for 2022 Q4/Q4 (blue) and low (green), and potential GDP from CBO (gray). Source: BEA, WSJ (April survey), CBO (July 2021), and author’s calculations.

Using the optimistic forecast from AC Cutts, output won’t even hit potential GDP until this quarter (Q2).

Note that the recession forecasts we’ve been hearing about are for 2023. 2023 Q4/Q4 forecast mean growth is 2.18% — considerably above the 0.7% forecast by Deutsche Bank that incorporates the late 2023 recession.