Uncertainty causes 20 per cent of market fluctuations says the ECB

Jasper Jolly
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Mario Draghi Holds Final Press Conference In Old ECB Building
ECB president Mario Draghi previously said "uncertainty prevails everywhere" (Source: Getty)

Uncertainty about the future has a measurable economic effect – and could account for as much as 20 per cent of fluctuations in the economy, according to a report by the European Central Bank (ECB).

The ECB report said: “Macroeconomic uncertainty is estimated to have contributed significantly to real GDP growth fluctuations in the euro area,” with only the actual lagged effect of GDP changes having a bigger contribution.

The report notes that uncertainty rarely has an upward effect on an economy, but finds uncertainty has a negative impact.

Read more: Brexit negotiations uncertainty to lead UK business investment down

“Increases in uncertainty adversely affect activity in the short term,” the report says.

The findings came as part of the bank’s investigations into the creation of an indicator of economic uncertainty in the Eurozone – which would be welcomed by policymakers who otherwise have to rely on unreliable indicators – such as newspaper articles.

The paper also said that uncertainty “could also make the economy less sensitive to changes in business conditions,” implying that its effects are greater than its direct hit on the economy.

Uncertainty has been the watchword for businesses, investors and policymakers over the past year, with big political shocks blamed by businesses delaying investments – and by businesses seeking to explain why they were not to blame for poor results.

The big increase in perceptions of uncertainty has drawn the attention of monetary policymakers from around the world.

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

Kristin Forbes, a member of the Bank of England’s Monetary Policy Committee, last month warned of the difficulty of measuring uncertainty with any accuracy.

“Measuring uncertainty is hard,” she said. “Measuring the impact of uncertainty on the economy is even harder.”

The report’s findings were pre-empted by ECB president Mario Draghi. After extending quantitative easing at the start of the month Mario Draghi said that “uncertainty prevails everywhere” as part of his justification for historically accommodative monetary policy.

Meanwhile, the economic effects of uncertainty were a major part of the rationale given by Bank of England governor Mark Carney for a rate cut after the Brexit referendum result.

“Uncertainty over the pace, breadth and scale of these changes could weigh on our economic prospects for some time,” said the BoE governor in June.

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