Financial forecast is good and critical to prosper an organization, yet very few SMEs have done any budgeting nor financial projections in their decision-making processes.
Let me illustrate how important forecast is by comparing the differences between the central bankers and the investment bankers in respect to the current "high" inflation and the "appropriate" policy actions in resolving the issue:
At the time of writing, European Central Bank (ECB) has taken a dovish stand on interest rate hike as a remedy to current inflation which was 4.1%, much higher than the mid-term target of 2%. ECB, however, insisted that the current inflation is "transitory" and would fall below 2% in 2022. Isabel Schnabel, an Executive Board Member of ECB, at a meeting with an international investment bank on 17 November 2021, had strongly defended ECB's forecast with charts and figures because ECB was unwilling to hike the current sub-zero rate. Indeed, she proposed not to end the "Quantitative Easing" soon so that the market would not make unnecessary speculation of a rate hike. (You may click here for details of her speech.)
On the other hand, investment bankers had assumed that inflation for EU countries would not subside in the short term but would extend well into 2022. At the same time, they also forecasted that U.S. Federal Reserve (Fed) would hike its rate twice in 2022 - July and December in face of high inflation level. With such assumptions, they had adjusted the yield curves and arrived at a better net present value (NPV) for USD yield while the real value after inflation for EUR would be much lower than what they had previously forecasted.
Both parties are using the same economic and financial data for their forecast. While both ECB and the Fed insisted that inflation was transitory, the forex market begged to differ. Because of their differences, it had tremendous implications to the manufacturers, consumers and indeed all Europeans and those who trade with them.
Who will come out correct? In fact, it may not be as important for each party had its own targets and issues to solve. While ECB might worry that a higher interest rate would risk the economic recovery and increased the burden of interest payments for itself, and all EU member states. In fact, the Fed was facing similar problems, yet it had so far successfully convinced the market that it would take serious actions against inflation when it went haywire. The investment bankers were ready to play god in pushing the central bankers to address the "immanent prolong high" inflation or even stagflation with their forecast.
Economic and financial forecast should be based on the latest and most relevant data that are available to us. However, users of the data may pick and choose their preferred set of figures, though conflicting they may appear in their analysis, for instance sets of figures that may most appropriately define "full employment". In addition, forecasters are solving different issues such that they will prefer one form of interpretation over the others, e.g. the burden of higher interest rate may cause havoc to the national governments. Even the Fed chair may not be given the second term if he "misbehaves".
Hence, economic and financial forecast is both a science and an art which makes the job even more interesting. Don't you think so? Whether you want to sell your business, open another outlet or expand into the region, you may want to have a good financial forecast and scenario analysis to maximize your chance of success! Text us for an appointment at (65) 8825 6627 NOW!
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