The Impact of Uncertainty on the Economy
A stable economic environment benefits lending, investment and consumption. Stability, however, is not easily quantified and depends heavily on how it is subjectively perceived. But what about instability and uncertainty? Credit Suisse has analyzed the conditions for uncertainty and its role in the market.
The Global Economic Policy Uncertainty index represents an objective measure for assessing stability. To create this index, a group of economists counts the number of articles published each month in a country's major media outlets where the terms "uncertainty"/"uncertain" and "economic"/"economy" appear in combination with at least one term from a political context, such as "initiative," "congress," "parliament" or "national bank."
Using this same logic, Credit Suisse has prepared an economic policy uncertainty index for the German- and French-speaking media in Switzerland (see upper chart). Two things can be observed here. First, the number of reports on economic policy uncertainty published each month has increased drastically over the last five years. Second, political events triggering uncertainty have occurred almost every year since 2011. The last three major events of this type, namely the approval of the Mass Immigration Initiative (MEI), the Swiss National Bank's removal of the exchange rate floor and the Brexit referendum in the UK, served to unleash veritable floods of articles addressing uncertainty and the Swiss economy.
Sentiment among financial analysts, consumers and companies reflects these uncertainties. The lower chart shows the forecast for Switzerland's economy in the short term as seen by financial analysts. As the chart makes clear, confidence was weighed down considerably by the adoption of MEI. It was unclear just how the initiative would be implemented when it was approved.
The mood among companies is also affected by events with no direct connection to the Swiss economy or ones with largely ambiguous impacts on the Swiss economy. This is evidenced by the peak in the KOF Business Situation Indicator prepared by the Swiss Institute for Business Cycle Research in Zurich following the Brexit vote in the UK.
The lower chart also depicts private households' expectations for the future. These expectations are collected only quarterly in the State Secretariat for Economic Affairs (SECO) consumer sentiment survey, yet this is not the sole reason for the smaller fluctuations in confidence. Consumer mood is simply rooted less in the assessment of a future economic situation than in personal job security.
We can see that uncertainty in an economic policy context heavily influences the mood in boardrooms and in the markets. The actual effects of major uncertainty, however, can only be seen in the financial markets. The Brexit decision, for instance, caused a temporary drop in Swiss stock prices.
In the case of many decisions affecting real economic situations, other effects are the more significant ones. One example is corporate investment. Despite major uncertainty in relation to the implementation of MEI, there was no collapse in investment. Similarly, despite the gloomy mood, households did not forego making major purchases in 2015, even buying more cars thanks to the strong Swiss franc. In summary, when it comes to the economy, hard facts are still more important than "perceived uncertainty."