Scenario Analysis for Global Macro Economics

What different paths could the economy take?

What would a soft landing, recession, persistent inflation, policy error, or supply shock look like in the data—and what evidence would distinguish those paths? Macro scenario analysis is a way to organize conditional possibilities, not to assign certainty to a forecast. Define a time horizon and describe each scenario through growth, prices, employment, credit availability, and likely policy constraints rather than relying on a label alone.

Build scenarios from mechanisms

In a soft-landing case, inflation pressure eases while activity slows without a broad collapse in employment or demand. It is a scenario, not a policy outcome guaranteed by a single favorable inflation release. A recession case instead considers a sustained weakening across activity, labor income, hiring, and credit. Survey deterioration may arrive before hard data, but its breadth and persistence need corroboration.

Persistent inflation can arise from several sources, including demand pressure, constrained supply, or renewed cost increases. A supply shock—such as a disruption to energy, transport, or production—can raise prices while reducing output, leaving policymakers with a tradeoff rather than a simple demand-management response. Different shocks have different duration and pass-through; do not assume one historical episode is a reliable template.

A policy-error scenario asks whether policy becomes too restrictive for the evolving economy or remains accommodative while inflation pressure persists. The policy rate is only one input: financial conditions, fiscal choices, bank lending, exchange rates, and lags influence the broader transmission. A market move after a meeting does not establish that the policy decision caused it.

Specify triggers, not just narratives

For each path, list observable evidence that would raise or lower its plausibility. Examples include the breadth of price increases, wage and employment trends, new orders, credit spreads, lending standards, and energy or shipping conditions. Set out both confirming and disconfirming evidence. A scenario should be revised when the evidence changes, rather than defended by selecting only supportive releases.

• Soft landing: easing price pressure with activity and hiring still resilient
• Recession: weakness spreading from surveys or production into jobs and spending
• Supply shock: input disruption with price and output effects that may diverge
• Policy error: inflation and activity evidence conflicting with the policy stance

Keep probabilities and consequences separate

A probability is a judgment conditional on current information; it is not an observed fact. Scenario consequences can be important even when a path is not the base case, and apparent precision in numerical weights may exceed the evidence. Review assumptions, timing, and what would invalidate each case. Do not treat a market-implied probability as an objective forecast: prices also reflect risk premia, positioning, and instrument design.

Use the exercise to expose uncertainty

A sound scenario set makes the unknowns explicit: how persistent inflation is, whether demand cools gradually, and how credit and policy interact. Updating those assumptions is more defensible than claiming one release has settled the outlook. This is educational information, not individualized investment, tax, legal, or accounting advice.