The Third Scenario – The End of Goldilocks

Christian Hawkesby

In our view, the market is currently underestimating the chances of a third scenario, which is a combination of both stronger inflation pressures and softer economic growth.

One of the few certainties when putting together economic or market forecasts is that your central projection is unlikely to be exactly right. This is what motivates a focus on alternative scenarios, to gain a better appreciation of the range of possible outcomes and the balance of risks.

At any time, there are a host of different things that could push the economy off its path. In the current environment, the list might include the threat of global trade wars disrupting economies and markets, the risk of a disorderly slowdown in the Chinese economy, the possibility of fiscal stimulus overheating the US economy and the chance of inflation finally re-emerging in Europe after a period of hibernation.

In the Monetary Policy Statements in both August and November, the RBNZ has used the same two alternative scenarios.