Mobeen - evaluating the Eurozone Economic forecasts

Over the last five years or so that I have been teaching Business and Economics, data for key economic performance indicators have been rather dull. Inflation, unemployment and interest rates have each been low and steady, and we have seen little of the ‘boom and bust’ cycle that appears in all the textbooks. It has been difficult to see any realistic economic forecasts actually making that much difference to businesses’ plans.

And so it is with the predictions for Eurozone (you did notice that they are for the Eurozone, didn’t you?) in the AQA Unit 2/3 case study on ‘Mobeen’ for Summer 2008. If these forecasts came to pass, none of them would have that great an influence on the plans for Mobeen.

However - there are a couple of evaluative points that spring to mind. If you actually look at what is going on currently with the UK Pound/Euro exchange rate and with inflation in the costs of meat and wheat, you will see that in reality, Mobeen could be facing some more challenging issues. Of course, the case study will have been written some months back, but you will do yourself no harm if you have a handle on what is really happening.

Currency movements

The case study starts with £1 forecast to buy 1.5 Euros, rising to 1.7 in 2009 and then tailing back off to 1.6 in 2010.

Now, let’s say that the cost of the establishing the restaurants in Paris, Barcelona and Amsterdam were calculated at Euro 1.2 million. This might include refurbishment costs, purchase of equipment, local advertising etc and I am assuming that all of this is bought from local suppliers and contractors, in Euros.

At a rate of 1.5 Euros to the Pound, this would cost Mobeen £800,000. They might produce a business plan based on this figure, and either raise funds from selling extra share capital or arrange bank lending. OK? Well, maybe not…..

The current Euro exchange rate is 1.276 to the Pound (source Yahoo Finance, 8 May 2008). The cost of this investment would now be £939,000 - an increase of 17% in real costs to Mobeen, just because of the actual movement in exchange rates that has happened since the case study was written. This goes to show how predictions can get it badly wrong, and how it can throw business plans into difficulties.

My second point relates to the projected Eurozone inflation rate. In the case study, we see a rate of between 2.0% and 2.1% - remember you non-economists that this is simplly indicating a prediction for the annual rise in general prices. Now, whenever we see a general indicator like this, remember that it will not apply equally to all parts of the market. We know that for several years, the prices of food and clothes had actually been falling, making up for rising prices in other products and services, such as fuel, utilities and insurance premiums.

Well, some of you might have noticed that the price of food is now increasing at above the rate of inflation. In particular, the price of meat and of wheat ..... the two key food ingredients of a Mobeen burger. According to the National Farmers’ Union, world beef prices rose from $5,000 per tonne to $8,000 per tonne over a 8 to 12 week period to February 2008. That’s a 60% rise! Meanwhile, wheat prices have risen from just under $5 per bushel to nearly $12 per bushel over the 12 months to February 2008 - source BBC.

So, if we actually step outside the case study itself and use some of our own knowledge of current affairs, we can see that the forecast economic indicators for the Eurozone are far from certain - even based on events of the last few months. These recent events serve to illustrate that all forecasts are just that, and whilst they are useful, it is important to consider them carefully and critically.