Global Economy Watch

Each month PwC's Macroeconomics team presents the Global Economy Watch, a short publication that looks at the trends and issues that are affecting the global economy and details our latest economic projections for the leading economies of the world.

How does uncertainty impact economic activity?

Since the financial crisis, uncertainty has been a theme that has kept most businesses busy. CEOs have responded in different ways; from buying insurance such as cyber insurance to mitigate the costs of a potential cyber attack, to stress testing their operations and finances under alternative economic scenarios.

Statistics that measure the levels of uncertainty in an economy corroborate these views. For example, the Economic Uncertainty Index (EPU), which tracks policy-related uncertainty, peaked at an all-time high at the beginning of this year, at a level which was significantly higher compared to the financial crisis in 2008. Similarly, Figure 4 shows that the variation in forecasts of UK economic growth has been gradually increasing over time, making it increasingly difficult for businesses there to plan ahead with confidence. Given the recent UK election result and subsequent hung parliament, UK-based businesses will also have to deal with additional political uncertainty as this situation develops.

In this edition, we have therefore looked in more detail at the ramifications of uncertainty for economic growth. Over time, we find that uncertainty has a negative impact on three particular areas:

• Consumers, who usually cut back on spending and save more;

• Businesses, which usually cut back on production, investment and employee compensation; and

• Financial markets, which are typically more volatile with higher risk premia.

One factor that seems more predictable, however, at least in the short term, is US monetary policy. This month the Federal Reserve is expected to hike its policy rate again, continuing its very gradual unwinding of post-crisis monetary loosening.

A key factor underpinning the pace of future US rate rises will be the development of the labour market and wage growth. We have therefore taken a closer look at the state of the US jobs market and find that, if current trends continue, then the so-called U-6 rate (which includes discouraged workers as well as those who are working part-time for economic reasons) could hit its pre-crisis rate at the start of 2018.

Looking beyond the US, a hung parliament in the UK may have important implications for Brexit negotiations. More generally, this could be an added source of uncertainty for UK-based businesses, so we will be monitoring developments there closely.

How does uncertainty impact economic activity?

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Editions

A turnround for the G7?

A turnaround for the G7? This month’s GEW explores the reasons behind the recent uptick in economic activity of the G7 economies and analyses whether this trend will continue in the future. It highlights the importance of productivity growth for long-term growth and discusses how to revive productivity in the G7. It also discusses the business implications of a more protectionist US, in light of President Trump’s campaign pledges for a border tax and tariffs.

 

 

 

 

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