Economic cyclicality
Should medium-term economic forecasts be taken into account given their high level of uncertainty? Should default probabilities be taken as some form of average over a full economic cycle? The case for taking these forecasts into account is that this gives a common base case. In the event of the economic environment showing signs of being weaker than expected this provides a reason for reassessing default probabilities across the board.
It is not uncommon to overhear discussions between line managers and house economists where the former has been demanding GDP forecasts for the next five years. A typical economist response is that it’s hard enough to make forecasts for the next six months with any real confidence given current uncertainties. Five years? Dream on. The line manager patiently explains that she understands this but needs the numbers for her business plan.