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

2. 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

3. 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.

4. 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.

5. 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.

6. 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.

7. 3. The Four Scenarios - compared

8. 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.

9. 4. The Forecasts

10. 4. The Forecasts

11. 5. Central Sectoral Forecast for Scotland (%)
GVA
Manf
Const
Services
2009 is year of trough – job loss concentrated in 2010

12. 5. Central sectoral forecast for Scotland

13. 5. Central sectoral forecast for Scotland

14. 5. Sustained Recession for Scotland

15. 5. Jobs Forecast for Scotland Compared