The European Central Bank published an ECB Blog post explaining how it has been upgrading its staff macroeconomic projections by complementing baseline forecasts with scenario, risk and sensitivity analyses to address heightened uncertainty and potential structural changes following recent crises. The post distinguishes sensitivity analysis (changing one assumption such as energy prices or exchange rates to gauge impacts on activity and inflation) from risk analysis (assessing the balance and asymmetry of risks around the baseline using predictive distributions) and scenario analysis (examining more holistic “what if” events, from wars and financial crises to tariffs or housing adjustments, that can shift multiple factors and the economy’s propagation mechanisms). It describes scenarios as combining additional shocks over the projection horizon with possible changes in how the economy reacts, and notes that a small number of scenarios can approximate forecast distributions while providing narratives for specific risk events. The ECB cites the COVID-19 pandemic as a turning point in using multiple scenarios and points to more recent work on geopolitical risks, including Ukraine-war and energy-price scenarios that highlighted the risk of much higher inflation than baseline projections conditional on futures, with a March 2022 scenario already envisaging 7% inflation in 2022 and around 8% in later projection rounds; it also notes that “Black Swan” events are generally not assigned probabilities in projections and questions their value for monetary policy outside periods of extreme uncertainty. The post notes that the views expressed are those of the authors and not necessarily those of the European Central Bank and the Eurosystem.
European Central Bank 2025-01-15
European Central Bank outlines expanded use of scenario, risk and sensitivity analysis in staff macroeconomic projections
The European Central Bank has improved its macroeconomic projections by incorporating scenario, risk, and sensitivity analyses to address uncertainty and structural changes post-crises. The ECB Blog post explains these analyses, citing the COVID-19 pandemic and geopolitical risks as reasons for adopting multiple scenarios, including energy-price scenarios predicting inflation spikes. It clarifies that "Black Swan" events are usually excluded from probability assignments in projections.