Alternative Scenarios

Meet regulatory requirements, evaluate the impact of shocks, expose vulnerabilities, and develop strategic business plans.

Moody’s Analytics approach to forecasting future conditions is anchored on a scenario-driven approach. Our baseline forecast is our “most likely outcome,” based on current conditions and our view of where the economy is headed. We also produce alternative scenarios, some with economic conditions worse than the baseline, and some with economic conditions better than the baseline.

Baseline    Most Likely Scenario Through the Current Business Cycle
Scenario 1 Stronger Recovery in 2010
Scenario 2 Mild Second Recession
Scenario 3 Deeper Second Recession
Scenario 4 Complete Collapse, Depression
Scenario 5 Aborted Recovery, Below-Trend Long-Term Growth
Scenario 6 Fiscal Crisis, Dollar Crashes, Inflation

We develop the basic outlines of these alternative scenarios by running multiple simulations to develop a probability distribution of economic outcomes. We then produce fully-fledged economic scenarios that align with this probability distribution. Some of these scenarios are cyclical—that is, they extend only through the current business cycle, with the no change in the economy’s long-run growth rate. Others are longer term, with different long-run growth rates compared to the baseline. For each alternative scenario we provide an economic story, explaining what would cause the change in the outlook relative to the baseline. That story changes over time as underlying economic conditions change.
For some of the largest countries we produce alternative scenarios as a standard product, allowing risk and business managers to very quickly assess outcomes under differing assumptions about economic conditions. These alternative scenarios are produced every month, using the latest economic data, and go out 30 years for the United States and 10 years for other nations. They include all of the series in our baseline forecasts, including GDP and its components, retail sales, employment and wages, central bank policy rates, other interest rates, price indices, and public finances.
Moody’s Analytics produces alternative scenarios every month for all of our U.S. forecast products, including states, metro areas, and consumers. These alternative forecasts are prepared by running the U.S. alternative scenarios through the appropriate model, so they reflect the impact of national-level events.
Beyond our standard alternative scenarios, we often work with clients in specifying their own custom scenarios. We can either develop a complete scenario around certain key client-provided series, or work together with the client to specify a scenario that reflects the client’s views or needs. We have the ability to run custom U.S. scenarios down to all states and metro areas, so that local conditions reflect the client’s take on the national economy.
Market demand for forecasting and stress testing drives our work in alternative scenarios. Our clients—corporations, governments and regulators—use these scenarios to:

• Leverage a highly regarded and independent view on expected economic conditions and associated alternative/stressed scenarios.
• Understand the impact of potential economic outcomes on the performance of portfolios.
• Expose possible vulnerabilities to better manage risk.
• Test internal models to validate results and assumptions.
• Meet regulatory requirements with fully documented and transparent models and methodologies from an independent source.