Economics

How to Assess True Macroeconomic Risk

Models and forecasts can be seductive, but it’s time for executives to reclaim their economic judgment.

by

Philipp Carlsson-Szlezak

and

Paul Swartz

by

Philipp Carlsson-Szlezak

and

Paul Swartz

From the Magazine (July–August 2024) · Long read

Photographer: Aaron Tilley; set designer: Kyle Bean

Summary.

In this article, adapted from the forthcoming book Shocks, Crises, and False Alarms, the authors explain how economic analysis works in the real world. They lay out three principles for navigating the rising number of economic risks: (1) Don’t put too much stock in any one economic model. (2) Ignore the doomsayers in the financial press. (3) Cultivate rational optimism and an eclectic form of judgment that draws on multiple sources. That involves identifying the critical drivers of potential risk, building a narrative, and pressure-testing it from multiple perspectives.

The “dismal science” of economics and our clickbait culture of public discourse are a perfect match to fuel simplistic narratives of doom. To avoid false alarms and achieve a true assessment of macroeconomic risks, the authors write, leaders should look past both to reclaim their own judgment.

Idea in Brief

The Situation

After decades of relative calm, macroeconomic shocks and crises are dominating headlines and complicating corporate strategy. Unfortunately, the field of macroeconomics is of little help. If anything, it has contributed to the problem, by inviting knee-jerk and too-confident reactions to volatile dataflow.

Why It Persists

No economic model succeeded in predicting the shocks of the past five years while avoiding the false alarms. Models and their forecasts are least reliable when they are most needed: in times of crisis. But when the economy is in free fall, executives are understandably desperate for guidance as to what might happen next.

The Solution

In this article the authors outline how leaders can cultivate their judgment—and use it to see past negative headlines, to draw on diverse sources, to identify key causal narratives, and ultimately to make better calls.

Over the past five years corporate leaders and investors have had to digest a rapid succession of macroeconomic shocks, crises—and false alarms. In 2020, when the pandemic delivered an intense recession, leaders were told it would be worse than 2008 and potentially as bad as the Great Depression. Instead a fast and strong recovery unfolded. In 2021, when supply bottlenecks and strong demand sent prices soaring, a common view was that runaway inflation would take us back to the ugly 1970s. Instead inflation fell from 9.1% to just above 3% in a year. In 2022, when U.S. interest rates climbed, a cascade of emerging-market defaults were predicted—but they didn’t materialize. Also in 2022, and again in 2023, public discourse cast an imminent recession as “inevitable.” Instead a resilient U.S. economy not only defied the doomsayers but delivered strong growth.

A version of this article appeared in the July–August 2024 issue of Harvard Business Review.

Philipp Carlsson-Szlezak is a managing director and partner in BCG’s New York office and the firm’s global chief economist. He is a coauthor of Shocks, Crises, and False Alarms: How to Assess True Macroeconomic Risk (Harvard Business Review Press, 2024).
Paul Swartz is an executive director and senior economist in the BCG Henderson Institute, based in BCG’s New York office. He is a coauthor of Shocks, Crises, and False Alarms: How to Assess True Macroeconomic Risk (Harvard Business Review Press, 2024).

How to Assess True Macroeconomic Risk

Idea in Brief

The Situation

Why It Persists

The Solution

Partner Center

Explore HBR

HBR Store

About HBR

Manage My Account

Follow HBR