A reflection on some of the issues raised by Brexit day.
One of the many data issues raised in recent years has been the problem of uncertainty when seeking to forecast our economic future. So, as part of UKPLC’s review of the first twenty years of this ‘new’ century we have re-examined “Macroeconomic uncertainty: what is it, how can we measure it and why does it matter” as published by the Bank of England in its Quarterly Bulletin (Q2 2013). The basis for the paper was some tough questions asked of 4 key BoE members, concerning macroeconomic uncertainty:
• What is it?
• How can we measure it; and
• Why does it matter?
At that time, just 5 years on from the onset of the global financial crisis of 2008, the landscape for UK and external economic growth appeared not only weaker but also more uncertain. Elevated levels of anxiety over investment, spending and savings decisions brought consideration of factors such as risk appetite, response to policy shocks and even emotional/psychological issues. All factors that tend to shape rather than drive outcomes.
So – what is macroeconomic uncertainty from the layperson perspective? No one can predict exactly what will happen in the future. But in order to make everyday decisions (e.g. work, family, personal, education) people acting as individuals, parts of families, decision makers of businesses or charities use the information around them to form judgements. Shocks (war, commodity price inflation, environmental disaster, major health crisis or equity market realignment) are seen to work their way across society in five substantive channels as outlined in the diagram below.
The diagram also provides a shorthand explanation as to who they impact (households, business or both) and how they work their way to decisions about spending (for example postponement of consumption, refocus on productivity or credit squeeze).
|Households||Savings||Postpone consumption, insure against temporary shocks of income loss or expenditure impact. Consumption wary.|
|Firms||Wait and See||Postpone production or investment given uncertainty as to future sales or profitability margins. Spending tap.|
|Firms||Entry and Exit||Postpone entry to new markets, restrict export activity. Productivity focus.|
|Firms||Labour Market||Households stick to current jobs, firms unwilling to take on new or fresh labour inputs. Status quo stability.|
|All Sectors||Financial||Lack of confidence as to future asset prices, fear of risk premium rising, cost of credit rises for households and firms.
Credit crunch flowing across sectors.
Take for example the big ticket items of a car, a home or even a new kitchen. Households in periods of uncertainty following a major big shock, such as the global financial crisis, were tempted to act with caution. Defer is better than deny. Putting off the purchase until the very last possible moment (regardless of quantitative easing and retail market discounting) was a sensible response to modest risk appetites.
This is not new – over more than twenty years the UK has weathered a number of big shocks: the recessions of 1990 and 2008, September 11 attack and the Iraq War, Brexit and its unwinding resolution to 31 January this year.
Analysis suggests that uncertainty arising from shocks can fall into two broad models – the one period (short sharp) version or the persistent elevated risk kind (where there is a new threshold of risk profile). It has been calculated that one period shocks can dissipate as an influencer within 4 and 10 quarters whereas persistent shocks can last upwards of 18 quarters (the new normal).
Measures of macroeconomic impact can be as modest as zero GDP reduction to drops of 0.8 percent over 3 full years for some defining events.
The post war Keynesian spend/tax cycles seem a quaint history lesson in certainty. Constraints on how households, firms, governments and charities spend, invest and save appear to be less data driven efficiency and relatively more emotional sentiment influenced. In some ways understanding the UK economy from both a right and left brain perspective is at the heart of the Campaign for Better Business Statistics.
Not everything you can measure is worth it. Everything that impacts on how you perceive your choices of action (driven by economic, social, technological and political culture wars) deserves to be recognised.
UKPLC is vitally interested in this debate and making progress in this space. What is sure is that the 31st January will still be a shock to some people – but not to everyone!
– by Noel Hadjmichael, CMR Group
Abigail Haddow, Chris Hale, John Hooley and Tamarah Shakir, Macroeconomic uncertainty: what is it, how can we measure it and why does it matter? BoE Quarterly Bulletin Q2 2013.