Editor's notes: The uncertain art of measuring the UK’s economic uncertainty

Christian May
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Markets Stabilise After Turbulence Last Week
Disputes over the accuracy of economic forecasts rage on (Source: Getty)

You may not have seen it on the News at Ten but Bank of England Monetary Policy Committee member Kristin Forbes delivered a fascinating speech last week on the nature of economic uncertainty and how best it can be measured. As Donald Trump said when he delivered his victory speech, “it’s a complicated business, folks”.

So complicated in fact, that disputes over the accuracy and validity of forecasts factoring in economic uncertainty now rage between the economics profession and top Tory MPs who are sick and tired of hearing gloomy post-Brexit predictions.

In her speech, Forbes drew on Voltaire who said “uncertainty is an uncomfortable position, but certainty is an absurd one”. The problem with many of the economic predictions made before the referendum was that the lurid claims about mass lay-offs and an overnight recession were made with such certainty that – armageddon having failed to materialise – those making the claims do indeed now appear absurd. This isn’t to write off the economics profession. As the OBR’s Robert Chote said in defence of forecasting, “the thing about uncertainty is that it’s uncertain”. He’s no Voltaire but his point stands.

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So how is uncertainty measured? A bit of digging reveals the Bank of England’s methodology. They consult FTSE option-implied volatility, the CBI’s “uncertainty limiting investment” score and the GfK unemployment expectations balance, among other data sets. All perfectly sensible. Perhaps more bizarrely, they also draw on the number of times the phrase “economic uncertainty” appears in press articles. Even more digging reveals that just four papers are studied to achieve a score here: The FT, the Guardian, the Indy and the Times. All of these outlets backed Remain in the referendum and often repeated the most dire economic claims. Some still do. Maybe the Bank should broaden its reading material? Just for balance.

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City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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