Many,
not to say most decisions made by households, companies, governments or central
bankers are to some degree influenced by uncertainty. Extensive data gathering
and rigorous analysis of historical relationships between economic variables
can be helpful to reduce this uncertainty, but the reality is that it won’t
disappear. This applies very much to the environment we are in following the
outcome of the British referendum on EU-membership. Uncertainty has increased
and is bound to remain high for a long time. There are several reasons for
this. Firstly, because of the many questions concerning the negotiations
between the UK and the EU: start date, likely length and outcome. Secondly, we
already see the economic consequences of the ‘leave’ campaign’s victory. In the
UK economy confidence has dropped. As expected, financial markets have reacted
strongly and swiftly, leading to considerable declines in some equity markets
and in government bond yields, following a jump in risk aversion. High market
volatility is a manifestation of uncertainty. Finally, although the comments of
and expected actions by central banks are to be welcomed, it will take time
before they influence spending and investment decisions. Fortunately, growth in
the Eurozone was sufficiently strong so that the direct and indirect effects
should only cause a slowdown bringing back growth to its trend rate.
Uncertainty has gone up, but growth should continue.
On Eco
TV July, William De Vijlder discusses uncertainty:
