Scenarios push economic forecasts into the side

Subject

Scenario analysis is growing in importance.

Significance

Mainstream forecasts have their uses, but scenario analysis is increasingly being used to look for deeper and darker insights. While extreme scenarios are typically of low probability, if the number of disaster scenarios being discussed escalates, alarm bells will ring and could warn of an increased likelihood of baseline trend projections missing the mark.

Impacts

• Scenarios can drive economic agents to modify their behaviour, with more aggressive action more likely when scenarios point to disaster.
• Such reactions may alter the chance of a scenario being realised -- it may become a self-fulfilling prophecy or could be suppressed.
• Little time for effective action makes it hard to suppress a high-speed crisis.