Uncertainty

“Morecombe and Wise”, “Bonnie and Clyde”, “Brexit and Uncertainty” – is there an attempt to make the last coupling as inseparable in our minds as the others? It took us just moments to find these examples:

“…uncertainty in the UK over Brexit … makes our clients a little bit nervous and hesitant to invest. …Uncertainty is the enemy of growth.” Sir Martin Sorrell, CEO of WPP.

British manufacturing is still struggling, and now faces real uncertainty following the vote to leave the EU.” Frances O’Grady, TUC General Secretary, in the Guardian.

Businesses will have to live with Brexit uncertainty” Headline in The Telegraph.

Brexit Briefing: Economic cost of uncertainty” Headline in the Financial Times.

Brexit uncertainty is a headache for Renault” Headline in CNBC website.

Does the Telegraph know someone who doesn’t “have to live with Brexit uncertainty”? Do they mean more than “Businesses will have to live with Brexit”? Perhaps they should tell us what ‘uncertainty’ adds.

Perhaps Frances O’Grady gives us the needed clue with “real uncertainty”; she may be comparing a lot of uncertainty with not so much uncertainty, or more with less. Still, we are left with the impression from each of these examples, and uncountable others, that uncertainty is a bad thing and should be contrasted with – well, with what?

uncertainty-1Do we need to grasp at certainty in difficult, unsettled times? The first thing to point out is that certainty is hard to find, because it doesn’t exist – outside mathematics. The rest is uncertainty, particularly in politics, economics and all things social.

Efrem Castelnuovo, Principal Research Fellow at the Melbourne Institute of Applied Economic and Social Research, reports in The Conversation (01/11/2016) on some work done in the US and Melbourne to try to measure uncertainty as it affects businesses and countries:

https://theconversation.com/why-brexit-and-the-spectre-of-president-trump-arent-hurting-australias-economy-67779?

The author starts with a refreshing application of logic. uncertainty-3

Uncertainty about future policy decisions is often identified as major drag on a country’s economy. … But how relevant is uncertainty, really? Economists need measures of uncertainty to quantify its impact on the business cycle of a country.

He outlines how the measures were created.

To create the index, they [the US researchers] select country-specific newspapers and perform a search for keywords that are associated with the economy, policy decisions, and uncertainty surrounding such decisions.

This raises questions about the validity and reliability of the index. A couple of decades of the measure for Australia are plotted, with some uncertainty-generating events matched to spikes in measured uncertainty:

uncertainty_index

The vertical scale is not defined and we wonder if the chart tells us more than that two Australian newspapers used the word ‘uncertainty’ more often near some major international events, including Brexit. As with much that is charted, the precision may be more imagined than real.

Intuitively, a reduction in confidence (which is akin to an increase in uncertainty) is likely to more severely affect households and entrepreneurs when a slowdown in economic activity is already underway.

Are they “akin” or should we in fact replace ‘uncertainty’ with ‘confidence’, equating a rise in one with a fall in the other. He goes on to draw some conclusions that should interest policy makers (and should interest commentators).

And countries facing near zero or negative interest rates are likely to experience more severe effects of an uncertainty shock due to the inability of the central bank to lower borrowing costs enough to sustain the economy.” (For example, Britain, Brexit and the devaluation of the pound. What would have been the effect of uncertainty had we also been in the eurozone?)

It is not uncertainty that is the problem but high, or rising, levels of it compared with ‘normal’ circumstances, when those circumstances include low growth and interest rates near zero. But such a clarification dissolves the pejorative tone that ‘uncertainty’ carries into events with which it is juxtaposed, including Brexit.

uncertainty-4

We’ll close with an alternative, and more realistic take, on uncertainty, while avoiding the deadly word:

In fact, we will always have a dynamic relationship with our European neighbours, so we will have to learn to live with a fluid and ever-changing situation.”

From Richard North’s blog http://www.eureferendum.com

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