[interdoc-y2k 306] Yardeni: 70% chance of Y2K recession

[Bob Olsen <bobolsen@tao.ca>]

From: "Philip Sutton" <psutton@pegasus.com.au>
Organization: Green Innovations Inc.
To: y2k-l@joey.tce.rmit.edu.au, uk-y2k-action@egroups.com
Date: Mon, 29 Mar 1999 02:05:04 +0000
Subject: : Yardeni STILL says: 70% chance of Y2K recession

An extract from:

YEAR 2000 RECESSION?
"Prepare for the worst. Hope for the best."

http://www.yardeni.com/cyber.html  >> then go to link for Y2K web book

Dr. Edward Yardeni

Version 11.0, March 7, 1999  (Note: taken from the web on 25th March)

As of March 1999, ....... I believe there is a 70% chance of such a
worldwide recession, which could last 12 months starting in January
2000 and could be as severe as the 1973-74 global recession.........

My basic premise is that most computer systems will be fixed in time,
but some important ones won't be ready. The question, then, is whether
the resulting disruptions will be significant enough to cause a
recession. If so, then how severe could it be? I am using the 1973-74
oil-crisis recession as a possible analogy. Information is just as
vital as oil for running our economies. If information is harder to
obtain, the amount of commercial and financial transactions, i.e.,
GDP, we can support will necessarily be reduced. In the United States,
real GDP dropped 3.7% from peak to trough during 1973-74. I estimate
that an identical drop, starting in 2000, would reduce real GDP by
$300 billion, back to where it was in early 1998, or three years prior
to the end of 2000.

Is this too pessimistic, or realistic? Actually, in my opinion, it
might be too optimistic to believe that the information gridlock won't
be even more damaging, sending us further back in time, when the level
of GDP that our information systems supported was even lower.
Nevertheless, for now I am forecasting a 3% drop in real GDP for the
US in 2000, with a recovery starting late next year. The following
table lists the five possible economic effects of Y2K in 2000. The
overwhelming consensus of my colleagues is that it will be a nonevent.
According to a quarterly USA Today survey of economists conducted
September 18-22, 1998, Y2K is likely to add 0.1 percentage point to US
economic growth in 1999 as businesses gear up spending on updating
their computer systems. The economists surveyed estimate the economy
will grow about 2% in 1999. The economists estimate that Y2K
disruptions would probably shave 0.2 percentage points off U.S. gross
domestic product growth in 2000. I agree with the 1999 forecast, but I
see a much more significant downturn in 2000.

I think I know enough about Y2K now to give you a more detailed
assessment of my subjective probabilities of the five alternative
scenarios. I assign 10% and 5% probabilities to the most optimistic
and the most pessimistic scenarios, respectively. Unfortunately, most
discussions and debates of the subject tend to focus on these two
extremes, namely, either it is a hoax or it is doomsday.
  
Probability    Y2K Economic Scenarios

10%              Minor disruptions. Business as usual. Only a few
                    problems, which will be fixed rapidly. Stock
                    market unaffected

20%              Same impact as natural disaster. Business as
                    usual within a few weeks. Stock market
                    unaffected. 

25%              Multiple problems will cause modest 6 month
                    recession. Real GDP down 1%-2%.  Stock market
                    down 10%-15%, then soars. 

40%              Major global recession lasting 12-24 months. Real
                    GDP down 2%-5%. Stock market down 30%-40%. Flight
                    to quality. Deflation. 

5%                Depression lasting 2-5 years. Blackouts. Social
                    and plicitical upheaval. Stock market...you don't
                    want to know. 

The last three recession scenarios still have a joint probability of
70% in my opinion. The mild recession scenario is at 25%, the severe
recession is at 40%, and the depression is at 5%.

---end of extract---




   .............................................
   Bob Olsen, Toronto            bobolsen@tao.ca
   .............................................