April PMI survey data showed an escalating downturn in the global economy due to the coronavirus disease 2019 (COVID-19) crisis. Worldwide responses to the pandemic highlighted how lockdowns and social distancing measures have led to record slides in business activity and employment, thereby greatly increasing the likelihood of a global recession in 2020.

Against this backdrop, business uncertainty soared to record levels in March and April as shutdowns quickly spread across the globe. Firms are now more fearful than ever of a recession and largely expectant that the downturn will persist throughout the coming year. Manufacturers have caught up with their services counterparts in terms of COVID-induced pessimism, as new export orders data suggest a slump in global demand that could have long-term consequences for goods producers.

Business uncertainty spikes from pandemic

The Future Output Index from the J.P. Morgan Global Composite PMI series (compiled by IHS...

Since last July, we have been utilising a technique called 'dynamic factor' modelling to provide high-frequency estimates of current quarter GDP, leaning heavily on the signals provided by our PMI data.

However, in the face of recent events, we've found these models have been a little slow to react to sudden changes in economic conditions, particularly in the face of unforeseen shocks. We noted that, in these instances, reverting to more simplistic model specifications is likely to yield more reliable indications of current economic activity.

That said, even this approach can quickly run into problems with evidence that the traditional linear relationship between our PMIs and changes in GDP could break down in extreme circumstances.

We therefore propose a new working nowcast model to track current quarterly changes in GDP, which not only accounts for both the non-linear quirks in this traditionally strong positive linear relationship, but also aims to...