Most people would instinctively feel that when the world is full of strange and unpredictable events, it's not the time to be making big investment or spending plans.
That's how political turbulence can turn into weaker economic performance. The trouble is estimating, even in retrospect, how much.
New analysis by Bank of England economist Lucia Quaglietti however tries to do just that, in a BOE staff blog post, for the euro-area economy.
She looks at a range of measures like stock-market and exchange-rate volatility, variation in economists' forecasts for the economy or company earnings, as well as media searches, household or corporate surveys, and indexes of macroeconomic surprises.
That paints a complicated picture:
Taken together, these measures “can provide a useful steer on the degree of uncertainty in the economy,” Quaglietti writes. These insights are then used to distinguish uncertainty shocks from other types of shocks that hit as the financial crisis turned into the sovereign-debt turmoil. Once that's done, it's possible to estimate what the effect on output was.
QuickTake Here's the lowdown on the euro
Quaglietti's final analysis is quite simple. Uncertainty damped euro-area gross domestic product by 0.5 percentage points annually, between the third quarter of 2008 and 2011, she says. With elections due in Germany, France and the Netherlands in the coming months, that's something she thinks her European colleagues should be paying attention to.
“Heightened economic uncertainty has been an important driver of euro-area GDP during the financial and sovereign crises,” Quaglietti said. “Uncertainty could increase further. Policy makers need to watch this closely as any further rise could have a material impact on activity.”
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