Part one: A new toolkit to predict soft-landings, stagflation and recessions

Summary

In this first part of a series of reports, we introduce a new toolkit to predict the probability of soft-landing, stagflation and recessionary episodes.

Bernanke (2024) reviewed the Bank of England’s forecasting process for monetary policymaking, concentrating on the Bank’s forecasting and decision-making during times of significant uncertainty. Bernanke outlined some recommendations to design effective policy decisions, placing emphasis on accurately identifying and quantifying risks to the outlook.

We believe our proposed new framework would help decision makers effectively quantify potential risks to the economic outlook by moving away from the traditional approach of just forecasting recession probability and/or GDP growth rate predictions for the near future.

The recent monetary policy path has been different from both the recession and the soft-landing projections of 2023, emphasizing the importance of not just concentrating on recession and soft-landing scenarios to forecast policy decisions.

The toolkit helps analysts identify (a) whether the next phase is a soft-landing, (b) if stagflation is in the near-term picture and (c) whether a recession is coming.

This report sets the stage by showing why the three economic outlook scenarios are important for monetary policy decisions, particularly in gauging the potential pace of the upcoming easing cycle.

In the next installment of this series, we quantify historical episodes of soft-landings, stagflation and recessions.

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