The U.S.-China trade war and Brexit have generated quantifiable uncertainty in the marketplace, but the impact of those events is being eclipsed by the uncertainty generated by the global pandemic.
Taking an Economic Pulse
If you search the Internet for the term “economic uncertainty” or close variations, you’d find what you already know just living through the current times. It’s the default word to describe the uptick in political and trade tensions and in the precarious health of the national economy as well as our personal economic lives.
Even prior to COVID-19, the U.S.-China trade war and Brexit — to tick off current major stressors — Stanford economist Nicholas Bloom, along with his colleagues Scott Baker from Northwestern University and Steven Davis of the Booth School of Business at the University of Chicago, sought to quantify the impact of uncertainty and its impact on business, consumer and policy decisions and vice versa.
Rising levels of political and policy uncertainty are perceived to have a dampening effect on commercial investments, hiring, and economic growth, and appear to be reflected in stock market volatility. Policy uncertainty – including uncertainty in trade policies – doesn’t only manifest as risk aversion by companies, it may effectively raise the cost of capital for investing. Companies may freeze hiring and begin to rely on attrition to thin their employment ranks or begin layoffs in anticipation of slower growth. This behavior in turn may diminish the returns from government stimulus spending, itself designed to induce firm investments by offsetting some of their risk. Stimulus works better if policy and economic uncertainties are reduced.