As an analytical tool designed to replicate the operation of the global or individual country’s economy, a macro model examines the dynamics of important economic indicators like output, inflation and unemployment. We will now illustrate how to extract and utilise insights from macro model.
Understanding how to utilise insights from a macro model is crucial for anticipating the consequences of big macroeconomic events.
Case Study: The EU'S Brexit Uncertainty Calls for Scenario Analysis
*Please note forecasts are updated on a regular basis. This case study reflects the most up-to-date information available on date of publication.
Brexit uncertainty calls for scenario analysis, as the UK is about to exit the EU following the June 2016 referendum, which is an unprecedented step for a member state. The impact of Brexit means implications for businesses across industries.
Let’s say a baseline forecast, which presents the most likely outlook, is that the EU and the UK conclude a temporary deal by March 2019 and continue to negotiate a final trade deal during a transition period until the end of 2020.
Using the macroeconomic model, we can set the baseline forecast for key economic indicators, like real GDP growth or inflation, and evaluate how the UK business conditions are anticipated to evolve. For instance, Euromonitor International’s Macro Model sees UK annual real GDP growth around 1-2% in 2019-2020 under the delayed final trade deal scenario.
However, this baseline forecast is just one of several possible scenarios for the UK, with other possibilities including everything between a no-deal Brexit to no Brexit at all. Hence, to quantify the uncertainty around the Brexit impact, a range of possible Brexit scenarios should be considered.
One of the dreaded outcomes is a no-deal Brexit, which sees the UK leave the EU in March 2019 without a new trade deal. Without a free movement of goods and services, trade and foreign investment would decline in the UK. Using a macroeconomic model, we can estimate the impact of such pessimistic scenario.
Euromonitor International’s "Brexit Tool" macro model shows that UK real GDP growth could range from -1.5% to 1.5% in 2019, and from -0.5% to 1.5% in 2020, depending on chaos surrounding a sudden exit of the UK from the EU, without a transition period.
From scenario analysis to contingency planning
Knowing the potential harm of a no-deal Brexit, UK businesses are increasingly concerned about the likelihood of such a scenario. To mitigate the risks, companies are attempting to address potential disruptions to their supply chains in advance.
Packaged food companies Mars, Mondelez and Nestlé confirmed in Autumn 2018 that they had started implementing contingency plans in case of a No-Deal Brexit by stockpiling ingredients and finished products. Some manufacturing companies have also chosen to move part of their production lines. Heineken had moved some production from the Netherlands to the UK and Kopparberg plans to produce cider in the UK over fears of supply chain disruption.
Meanwhile, service providers have started reviewing their terms. Ryanair, for example, will be inserting a Brexit clause to all bookings for flights post “Brexit day”, indicating that their tickets may not be valid in the event of a no-deal Brexit.
Analyse the potential impact on industries, consumers and the economy through multiple macroeconomic scenarios with the Brexit Scenarios Tool.
By testing out different macroeconomic shock scenarios and understanding where the economy could be hit the hardest, a macroeconomic model can help businesses better understand the economic risks in key target markets. This enables them to mitigate the risks and prepare an effective response strategy.
Learn more about why a macroeconomic model and business dynamics insights matter for business strategy or access the latest revisions in GDP growth, inflation and interest rate forecasts.