17/1/17: Russian Economic Policy Uncertainty 2016

In the previous post (link here), I covered 2016 full year spike in economic policy uncertainty in Europe on foot of amplification of systemic risks. Here is the analysis of Russian index.

As shown in the chart above, 2016 continued the trend for downward correction in Russian economic policy uncertainty that took the index from its all-time high in 2014 (at 180.4) to 160 in 2015 and 142.5 in 2016. All data is rebased to 1994 - the first year for which Russian data is available. However, at 142.5, the index is still well above its historical average of 94.1 and stands at the fifth highest reading in history.

Much of the reduction in economic policy uncertainty over 2016 came over the fist seven months of the year, with index readings rising into the second half of 2016 and peaking at 251.1 in December.

In simple terms, while the peak of 2014 crisis has now passed, questions about economic policies in Russia remain, in line with concerns about the sustainability of the nascent economic recovery. Moderation in economic policy uncertainty over the course of 2016 appears to be closely aligned with:

1. Variations in oil prices outlook; and
2. External geopolitical shocks (including the election of Donald Trump, with raw index data spiking in August and September 2016 and November and December 2016, while falling in October, in line with Mr. Trump's electoral prospect).

In other words, relative moderation in the index appears to reflect mostly exogenous factors, rather than internal structural reforms or policies changes.

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.

4/9/16: Some Points on Russian & European Policy Uncertainty Trends

With some positive (albeit very weak still) changes in the Russian macroeconomic news in recent months, it is worth looking at the evolution of trends in Russian policy uncertainty, as measured by the http://www.policyuncertainty.com/ data.

Here is an updated (through August 2016) chart comparing news-based indices of policy uncertainty in Russia and the EU

Note, series above are rebased to the same starting point for the EU and Russia (to 1994 annual average) to make them compatible.

Things of note:

• Russian policy uncertainty continues to trend below that of the EU
• The above conclusion is also confirmed in raw data 3mo averages and 3mo exponential moving averages
• This is nothing new, as general policy uncertainty has been systemically lower in Russia than in Europe since the peak of the Russian Default crisis of the late 1990s, with exception for two episodes: brief period in 2006-2007 - the starting point of Russian-Georgian trade and migration pressures; and 2014-2015 period - marked by first economic slowdown in the early 2014, followed by the Russian-Ukrainian conflict and the Ruble crisis
• Generally, the EU continues to show growing trend divergence with Russia when it comes to policy uncertainty, despite the more moderation in the underlying series since the end of the latest spike caused by the Greek crisis earlier this year (IMF participation and Tranche 2 disbursement)

It is worth noting that, despite a rise in the U.S. uncertainty index due to the ongoing election cycle, the U.S. comparatives are similar to those of Russia, as opposed to the EU. 

17/6/15: European Policy Uncertainty: May 2015

The latest reading for the European Policy Uncertainty Index (measuring economic policy uncertainty as reflected in the media sources) has continued to trend within the range of the crisis period averages in April-May 2015. This range has been now sustained since September 2014 when the index reversed local decline to below-average levels over the sub-period of March 2014 - August 2014.

Over time, we continue to trend within the post-crisis regime associated with above-historical average levels of policy uncertainty. The trend toward uncertainty decline in the post-crisis period has now slowed down and showing signs of potential reversal despite the media overwhelmingly tending toward a positive news reporting selection bias.