Quantifying The Impact of Economic Events: US Automakers Opting For Domestic Investments
In an increasingly fast-paced and uncertain world, regularly updated macroeconomic forecasts allow business to stay ahead of risks and opportunities as they emerge. When looking to enter a new market or assessing current markets, organisations can use this type of information to understand how to plan ahead of major economic events.
Macro Model Methodology at a Glance
Euromonitor International’s Macro Model is a unique tool allowing you to examine historic data, forecasts and “what-if” scenarios for core macro variables. It helps organisations predict how major economic events might affect the economic environment for governments, consumers and businesses, enabling you to plan ahead for potential economic shocks. The interactive model generates quarterly forecast restatements and scenario analysis allowing you to stress-test business plans and pick the right markets for growth.
Our baseline macroeconomic forecasts are produced from a global macroeconomic model that uses data from multiple sources on real GDP growth, inflation, interest rates, exchange rates and unemployment rates to forecast different variables. In addition to this, adjustments are made to reflect other information that is not taken into account by the pure model forecast such as credit markets or confidence measures, the views of policy institutions and other private sector forecasters.
Then, every macro scenario is assigned a range of probabilities including country and global scenarios. We use historically-observed shock sizes to map out the most likely pessimistic / optimistic scenarios and their corresponding probabilities. For global scenarios, we use the statistical distribution of real GDP growth rates to determine reasonable impact of such hypothetical shocks and their corresponding probability.
Case Study: US Automakers Opting for Domestic Investments
Globalisation is facing one of the biggest political tests in decades. The surge in anti-trade and anti-immigrant rhetoric around the world is being accompanied by a rise in proposals for protectionist measures by the world’s leading advanced economies.
In 2017, President Donald Trump signed an executive order removing the USA from the Trans-Pacific Partnership (TPP) and launched North American Free Trade Agreement (NAFTA) renegotiations. He has also threatened to impose import tariffs of 35.0% on Mexico and 45.0% on China. In Mexico, the rise in trade barriers to the USA would cause a loss of confidence and a spike in risk premium. Banco de Mexico would respond to the resulting currency devaluation and higher inflation through interest rate increases. Rising costs of borrowing, combined with lower private sector confidence, cause a sharp contraction in consumer spending and business investment. As a result, Mexico would enter a recession, with real GDP falling by 10.0% below the baseline forecast. Under pressure from President Trump’s anti-trade rhetoric, several US carmakers have decided to revisit their previous investment plans. For instance, Ford Motor Company has scrapped plans to build a US$1.6 billion car factory in Mexico and instead decided to invest US$1.2 billion in three new plants in Michigan, USA.
By testing out different macroeconomic shock scenarios and understanding which markets could be hit hardest, businesses can better understand the economic risks for doing business in key target markets. This enables businesses to prepare the most effective response strategy. To learn more about why this is critical for your strategy, download our report: Why Economies Analytics Matter for Business Strategy.