Monday, January 16, 2017

15/1/17: 2016 was a year of records-breaking policy uncertainty in Europe

When it comes to economic policy uncertainty, 2016 was a bad year for the Big 4 European states, except for one: Italy.

Consider the above chart showing indices of Economic Policy Uncertainty across Europe's Big Four states, as represented by period averages across four main periods, plus 2016.

German economic policy uncertainty rose from 87.9 average for the period of 2002-2007 to 144.5 for the period of 2008-2011 and 152.1 over 2012-2015. In 2016, the index averaged 230.5. While not in itself indicative of a crisis, the trajectory is consistent with systemic rise in uncertainty, especially since 2016 was not a political outlier year (there were no major elections or external shocks, other than shocks related to German policy itself, such as the refugees crisis). That German index increase took place during one of the strongest years for growth and employment is, in itself, quite revealing.

Like Germany, France also experienced increases in uncertainty index over the recent years, with index rising from 109.7 in 2002-2007 period to 189.2 average over the period of 2008-2011 and to 235.6 over the years 2012-2015. In 2016, the index averaged 309.6. Once again, as in the Germany's case, there were no external or political catalysts to this, other than the dynamics of internal / domestic policies. And, as in the German case, economic cycles cannot explain this rise either. Thus, it is quite reasonable to conclude that systemic uncertainty is rising within the French society at large.

Perhaps surprisingly - given the outrun of the Italian Constitutional Referendum and the dire state of the Italian economy - Italy's Economic Policy Uncertainty Index has managed to eek out a small (statistically insignificant) reduction in 2016, falling to 129.3 in 2016 from 2012-2015 average of 130.9. However, December 2016 referendum is not fully factored in the 2016 average, yet (there are lags in Index adjustments and revisions that are yet to show up in the data), and both 2016 average and 2012-2015 average are well above 2008-2011 average of 113.7 and 2002-2007 average of 94.3.

Perhaps the only European country where index readings in 2016 can be clearly linked to internal structural shocks is the UK, where 2016 average index reading reached 528.8, compared to 2012-2015 average of 228.5. Chart below clearly shows that the increase in uncertainty started around the date of the Brexit referendum.

Overall, taken over longer term horizon, and smoothing out some occasionally impressive volatility, index averages across all four European economies shows structural increases in uncertainty relating to economic policy since the start of the Global Financial Crisis. These structural increases are not abating since the onset of economic recoveries and, as the result, suggest that the improvement in the European economies sustained since 2011 onward is not seen as being well anchored (or structurally sustainable) on the ground and amongst the newsmakers.

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