Recently, I wrote about how a pandemic might be a useful scenario to have for scenario analysis. As I thought about how I might design such a scenario I considered: should I assume a global recession for the pandemic scenario?
A pandemic, by definition, is an outbreak of a disease that affects people around the globe. Therefore, it is reasonable to think that it would slow the flow of goods and services through the world. Repercussions would be felt everywhere – from businesses reliant on tourism and travel to companies dependent on products manufactured in countries hit the hardest.
For an initial pass, using a recession seems sensible. However, I believe this “shortcut” omits a key trait needed for scenario development: creativity.
The best scenarios, I find, come from brainstorming sessions. These sessions allow challenges to be made to status quo and preconceptions. They also help identify risk and opportunity.
To immediately consider a recession scenario as “the pandemic scenario,” then, might not be advantageous in the long run.
As an exercise, I challenged myself to come up with questions that aren’t immediately answered when assuming a generic recession. Some that I asked were:
- How do customers use my business? Do they need to be physically present to purchase my goods or use my services?
- How will my business be impacted if my employees are not able to come into work?
- What will happen to my business if there is a temporary shortage of a product I need? What will happen if there is a drawn-out shortage?
- How dependent is my business on goods and services provided by other countries? Do these countries have processes in place to contain or slow down the spread of the disease?
- Does my business reside in a region of the country that makes it more susceptible to the impact of a pandemic (e.g., ports, major airports, large manufacturing)?
- How are my products and services used by other countries?
- How can my company use technology to mitigate the impacts of a pandemic?
- Is there a difference in the impact to my company if the pandemic is slow moving versus fast moving?
These are just a few of the many questions to consider for this analysis. Ultimately, the choice of whether to use a recession or not rests with the scenario development committee. To make the most informed decision, I would urge the committee to make questions like these a part of the discussion rather than taking the “shortcut” approach.
Jonathan Leonardelli, FRM, Director of Business Analytics for FRG, leads the group responsible for model development, data science, documentation, testing, and training. He has over 15 years’ experience in the area of financial risk.