Uncertainty & Recession
The past few weeks have seen a vicious equity market sell off which now seems to have paused, huge swings in the European peripheral bond market and major falls in commodity markets (outside of gold) all accompanied by rising volatility.
It seems fair to conclude that uncertainty has risen and that this will probably impact on firms’ investment decisions and consumers’ spending patterns.
Drawing on work by Ben Bernanke (from a long forgotten 1983 paper) Nicolas Bloom (assistant professor of economics at Stanford) has a succinct and highly recommended post up at Vox, which aims to forecast how this increase in uncertainty will impact the economy.
Based on my research, I predict another short, sharp contraction in late 2011 of about 1%, with a rebound in spring 2012. This research looks at the average impact of the previous 16 uncertainty shocks to predict the impact of future shocks. Typically these leads to reductions of growth of about 2% immediately after the shock, with a recovery about six months later once uncertainty subsides.
(With a hat-tip to regular commentator Luis Enrique)