Why global uncertainty is declining

Hites Ahir, Nicholas Bloom, Davide Furceri 18 May 2021

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The IMF’s latest World Economic Outlook projects a stronger recovery for the global economy compared to last year. Economic growth is now projected to be 6% in 2021 and 4.4% in 2022 compared to an estimated historic contraction of -3.3% in 2020 (IMF 2021). The World Bank is also projecting a positive growth for the global economy for 2021 (World Bank 2021), as well the OECD (OECD 2021). 

In parallel to the favourable prospects for the global economy, on average, uncertainty across the globe is declining. The latest update of the World Uncertainty Index – a quarterly measure of global economic and policy uncertainty covering 143 countries (Ahir et al. 2018) – shows that uncertainty has fallen back to its long-run average from the peak observed at the onset of the COVID-19 pandemic in the first quarter of 2020 (Figure 1). 

Figure 1 World Uncertainty Index (GDP weighted average)

Note: The World Uncertainty Index (WUI) is computed by counting the percent of word “uncertain” (or its variant) in the Economist Intelligence Unit country reports. The WUI is then rescaled by multiplying by 1,000,000. For example, an index of 200 corresponds to the word uncertainty accounting for 0.02% of all words, which-given the EIU reports are on average about 10,000 words long-means about two words per report. A higher number means higher uncertainty and vice versa. 

This decline is largely driven by a drop in two key drivers of global uncertainty over the last five years:

  • Uncertainty related to United States-China trade tensions and US foreign policy. Figure 2 shows uncertainty spillovers from the US to the rest of the world by text mining the Economist Intelligence Unit (EIU) country report. Specifically, for each country and quarter, we search the EIU country reports for the words “uncertain,” “uncertainty,” and “uncertainties” appearing near words related to the United States. The country-specific words for the US include country’s name, name of presidents, name of the central bank, and name of central bank governors. To make the measure comparable across countries, we scale the raw counts by the total number of words in each report. An increase in the index indicates that uncertainty is rising, and vice versa. 

Figure 2 Ratio of uncertainty related to the US to overall uncertainty

Note: This figure plots the ratio of uncertainty related to the United States to overall uncertainty (Figure 1). Uncertainty related to the United States is computed by counting the percent of word “uncertain” (or its variant) that appear near a word related to the United States in the Economist Intelligence Unit country reports. Words related to the United States include the following: Alan Greenspan, America, Barack Obama, Ben Bernanke, Bill Clinton, Donald Trump, Federal Reserve, George H. W. Bush, George W. Bush, Janet Yellen, Jerome Powell, NAFTA, North America, and the United States.

The index reveals that uncertainty related to US foreign policy and trade negotiations—including with Mexico, Canada and China—has been key a key source of uncertainty around the world since the fourth quarter of 2016, contributing to about 20 percent of the increase in global uncertainty from historical mean since 2016. This rise in trade tensions and its implication is well documented (Ahir et al 2019, Berthou et al 2019, and Bown 2021). But recently global spillovers from this source of uncertainty have become close to zero.     

  • Brexit negotiations. Figure 3 shows an index that measures the extent of uncertainty spillovers from the UK to the rest of world—the index is similar to the way uncertainty spillovers from the US is constructed (see above). The figure reveals that uncertainty related to Brexit negotiations also had significant global spillovers contributing to about 10 percent in the rise in global uncertainty since the third quarter of 2016. The impact of Brexit uncertainty is well documented (Crowley et al. 2019 and Graziano et al. 2021). However, the latest reading of the index shows that uncertainty spillovers related to Brexit have declined since the agreement reached between UK and the EU. 

Figure 3 Ratio of uncertainty related to the United Kingdom to overall uncertainty

Note: This figure plots the ratio of uncertainty related to the United Kingdom to overall uncertainty (Figure 1). Uncertainty related to the United Kingdom is computed by counting the percent of word “uncertain” (or its variant) that appear near a word related to the United Kingdom in the Economist Intelligence Unit country reports. Words related to the United Kingdom include the following: Andrew Bailey, Bank of England, Boris Johnson, Brexit, Britain, David Cameron, Edward George, Gordon Brown, John Major, Mark Carney, Mervin King, Theresa May, Tony Blair, and the United Kingdom.

The decline in uncertainty we observe from its peak in 2020 is also due to a reduction in COVID-19 uncertainty—the major source of global uncertainty since last year. Figure 4 shows a global measure of uncertainty related to pandemics. To quantify uncertainty related to the coronavirus crisis and compare it with previous pandemics and epidemics, we developed the World Pandemic Uncertainty Index (WPUI)—a sub-index of the World Uncertainty Index—for 143 countries starting in 1996. To construct the index, we tally the number of times “uncertainty” is mentioned near a word related to pandemics or epidemics in the Economist Intelligence Unit (EIU) country reports. To make the WPUI index comparable across countries, we scale the raw counts by the total number of words in each report.

Figure 4 World Pandemics Uncertainty Index (simple average)

Note: The World Pandemic Uncertainty Index (WPUI) is computed by the number of times “uncertainty” is mentioned near a word related to pandemics or epidemics in the Economist Intelligence Unit (EIU) country reports. A higher number means higher uncertainty and vice versa. 

The level of uncertainty related to the coronavirus is unprecedented. In the third quarter of 2020, it was about five times the size of the uncertainty during the 2002–03 Severe Acute Respiratory Syndrome (SARS) epidemic and about 40 times the size during the Ebola outbreak. COVID-19 related uncertainty is, however, starting to decline owing to significant action taken by policymakers around the world to tackle the COVID-19 crisis, acceleration in vaccines rollout and prospect for a strong recovery for the global economy (IMF 2019).  As shown in Figure 5, the magnitude of the decline in uncertainty varies, however, between developed and developing countries. This is because of more limited progress in vaccine rollouts in developing economies and because spillovers from trade and Brexit tensions impacted developed countries more. 

Figure 5 World Uncertainty Index for each income group (GDP weighted average)

Note: The World Uncertainty Index (WUI) is computed by counting the percent of word “uncertain” (or its variant) in the Economist Intelligence Unit country reports. The WUI is then rescaled by multiplying by 1,000,000. A higher number means higher uncertainty and vice versa.

Looking ahead we see global uncertainty likely to continue to subside around the world. After one of the most turbulent periods of global growth and politics in many years, we hope to return to a period of greater certainty and stability during the rest of the 2020s.

Authors’ note: The views expressed in this column are those of the authors and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

References

Ahir, H, N Bloom, and D Furceri (2019), “Caution: Trade uncertainty is rising and can harm the global economy”, VoxEU.org, 4 July.

Ahir, H, N Bloom, and D Furceri (2018), “Global uncertainty is rising, and that is a bad omen for growth”, VoxEU.org, 29 November.

Berthou, A, C Jardet, D Siena, and U Szczerbowicz (2019), “The macroeconomic implications of a global trade war”, VoxEU.org, 8 February.

Bown, C (2021), “Making sense of the US-China trade war”, VoxEU.org, 30 April.

Crowley, M, O Exton, and L Han (2019), “The Impact of Brexit Uncertainty on UK exports”, VoxEU.org, 21 January.

Graziano, A, K Handley, and N Limao (2021), “Brexit uncertainty and trade disintegration in Europe and beyond”, VoxEU.org, 26 January.

IMF (2021), World Economic Outlook: Managing Divergent Recoveries, International Monetary Fund, April. 

OECD (2021), Economic Outlook: Strengthening the recovery: The need for speed, Organisation for Economic Co-operation and Development, March.

World Bank (2021), Global Economic Prospects: Subdued Global Economic Recovery, World Bank, January.

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Topics:  Covid-19 Global economy International trade

Tags:  global uncertainty, Brexit, COVID-19, US-China trade war

Senior Research Officer, IMF

Professor of Economics at Stanford University

Deputy Division Chief in the Research Department, IMF

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