Billet du 7 août 2019
First, the level of political uncertainty must be measured
This is done through the media: economists Scott R. Baker, Nick Bloom and Steven J. Davis recently proposed a new way to measure political uncertainty (http://www.policyuncertainty.com/). Their idea is quite simple: counting in the newspapers the proportion of articles published that mention political uncertainty; that is, that contain both these three terms "Economy" and "Politics" and "Uncertainty". This method can be applied to a large number of countries, for very different periods of time and even allows for day-to-day monitoring.
Second, the effect of this uncertainty on the economy must be measured
Measuring an effect means being able to establish a causal relationship between uncertainty and the economy. However, the economic situation naturally also has an effect on uncertainty: a deterioration in the economic environment is often accompanied by an increase in uncertainty about the economic policy that will be pursued in response. Faced with this interdependence of economic phenomena, different strategies can be used to disentangle the causal relationships at stake.
Ideally, changes in uncertainty should be strictly independent of the economic situation. Since such changes are rare, statistical methods make it possible to identify these types of events based on the observation that they instantly affect certain financial variables, such as the exchange rate or stock prices, but not production and investment behaviours, which are more inert by nature and therefore react with a delay of at least one month.
A significant but not catastrophic cost
In short, we exploit the differences in reaction speed between the different actors in the economy. A counterfactual experiment can then be conducted: quantifying the effects of uncertainty by comparing the trajectory with the one it would have followed in the absence of these changes in uncertainty. What lessons can be learned about Brexit?
The British economy grew at a rate of 1.9% per year between 2016 and 2018. In the absence of these changes in uncertainty, growth would have been higher, at around 2.3% per year, representing a loss of 0.4 percentage points of annual growth over these three years. In terms of gross domestic product (GDP), this represents an average loss of -0.8% per year, the lowest value being -1.3%. Given that Britain's average annual GDP is around £2 trillion, the economic cost of uncertainty has risen to £16 billion per year since 2016, or £307 million per week; roughly what Boris Johnson's election buses promised to recover from the European Union through Brexit (£350 million).
These figures indicate that the economic cost of uncertainty is certainly significant, but does not mean that it is likely to plunge the British economy into a deep recession, as it did between 2007 and 2009 when its annual growth rate fell by several points from +3% to -6%.
These orders of magnitude (1% of GDP, half a point of growth) invite us first of all to avoid any catastrophism in these situations of political change - the Brexit, but also the election of Donald Trump who was also supposed to push the American economy into chaos. However, even if political uncertainty does not trigger severe recessions, its impact on the economy is significant enough for policy-makers to take it into account by implementing policies to support activity to mitigate its economic cost.
Original article (in French): Le Monde
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