Global policy uncertainty is averaging higher now than during the 2008-09 financial crisis, adding another headwind to world struggling to revive growth.
That’s the surprising result of new index that helps economists draw the line between the uncertainty created by politicians and its effects on economies.
“The elevated levels of global policy uncertainty in the past five years compared even to the crisis years of 2008-09 are remarkable,” said University of Chicago economist Steven Davis. “They have contributed to the disappointing performance of the global economy in recent years.”
Capitalizing on his previous work with Scott Baker and Nick Bloom showing policy uncertainty for a series of individual economies, Mr. Davis constructed a new index that measures ambiguity about economic policies across the globe.
Uncertainty is higher now, Mr. Davis says, because of the confluence of difficulties hitting the global economy at the same time. The rancorous, polarized U.S. political elections have investors on edge over the future of U.S. policy. Europe is only just beginning to grapple with the potential exit of Britain from the European Union and an immigration crisis, and populist right-wing parties are gaining traction in France and Germany. China is on the verge of another leadership reshuffle.
“It’s an extraordinarily intense time,” he says. “Three of the major economic centers of the world have had their own particular difficulties and policy concerns.”
The echoes of financial crisis are sounding through the political process, too. Recent studies find a “systemic tendency towards more votes for extreme left and especially extreme right-wing parties in the wake of major financial crisis,” Mr. Davis says.
There is growing evidence that, rather than uncertainty simply reflecting negative factors in the economy, it is also a drag on growth, he says. Industry-specific data shows a link between a rise in uncertainty and a fall in investment and employment.
If anxiety about the future of policy rises, businesses tend to hold off capital expenditures, which can erode overall demand. And the smaller resulting stock of capital in the economy will reduce the potential for future growth.
The impact on growth purely from an increase in uncertainty may be modest, Mr. Davis says. “But it isn’t trivial.”
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from Real Time Economics http://ift.tt/2e0rWmp
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