Fraser of Allander Institute Why Four Forecasts? Fraser of Allander Institute November 2008

funds & bundled products 1. Background Origin of the current crisis was in the US. Sub-Prime/ Brokers Poor Risk Management Complex Financial Products mortgages Defaults, House Price Collapse & Losses funds loans Lending Customers mortgages Banks losses Investors funds & bundled products Credit Crunch

2. Factors Underpinning the 4 Scenarios Interest rates and monetary policy; Inflationary expectations; Re-capitalisation of banks; Lending behaviour Impact of the finance sector on real economy; Labour market Government debt and fiscal policy and Exports.

3. The Four Scenarios Optimistic – 15% probability; Central – 40% probability– inter-bank lending slows dramatically; Recession and Slow Growth – 35% probability; Sustained Recession – 10% probability.

3. The Four Scenarios - critical factors Optimistic – quick and significant cut in interest rates; recovery plan works; inflation threat absent; exports pick up and lending improves. Central – lending eases after 12 months; sharp contraction in finance sector; labour market falls ; Recession – interest rates cut cautiously; lending slow to change (18mths); impact on real economy is greater and Sustained Recession – Re-capitalisation does not work as expected, banks require more funds, lending behaviour is poor; job losses are severe and real economy hit hard.

3. The Four Scenarios - differences Optimistic :– growth falls by 1% in 2009 but thereafter recovery is quicker, 1.8% by 2012. Central :– growth falls by 1.1% in 2009 but slower recovery (only 1.5% in 2012) ; Recession :– -1.2% in 2009 with growth just above 1% in 2012 and Sustained Recession :– negative growth in 2009 and 2010 with growth only 0.7% by 2012.

3. The Four Scenarios - compared

3. The Four Scenarios - compared Note: the black lines in the figure above indicate the probability of the forecast occurring (weighted by the impact of that event happening – these were the nine factors outlined in the beginning). The optimistic forecast is plotted at the bottom of its range, the margin of error is upwards; The central forecast is plotted mid-range and the margin of error is given by the dotted black line; The sustained recession is plotted at the top of the range and the margin of error is downwards.

4. The Forecasts

4. The Forecasts

5. Central Sectoral Forecast for Scotland (%) 2008 2009 2010 GVA 0.72 -1.14 0.70 Manf. 0.09 -0.12 0.51 Const. -2.10 -2.44 0.70 Services 1.30 -1.31 0.68 2009 is year of trough – job loss concentrated in 2010

5. Central sectoral forecast for Scotland

5. Central sectoral forecast for Scotland

5. Sustained Recession for Scotland

5. Jobs Forecast for Scotland Compared