The economic outlook is “uncertain”

Uncertainty was the theme in the latest Global Economy Watch from accountants PWC.

Almost a third of business leaders say they expect at least one crisis within the next three years, and uncertain economic growth is perceived to be the biggest threat to business.

Uncertainty over Brexit could dampen business investment and push up household savings rates, further dampening consumer spending growth.

A hung parliament following the UK election could also add to business uncertainty.

Barret Kupelian, senior economist at PwC, commented: “Since the financial crisis, uncertainty has been a theme that has kept most businesses around the world busy.

“CEOs have responded in different ways, from buying cyber insurance to mitigate the costs of a potential cyber-attack, to stress testing their operations and finances under alternative economic scenarios.

“Businesses that have invested resources in these areas are likely to be better prepared for a future that remains highly uncertain due to factors such as the Brexit negotiations and continued rapid technological change disrupting markets.”

As well as businesses, uncertainty also affects households and financial markets.

The report suggests uncertainty could cause a reduction in household spending as consumers strive to safeguard against the potential future falls in income. This is also typically associated with an increase in precautionary household savings.

If this happens in the UK over the next few years as the Brexit process continues, it could dampen consumer spending growth significantly, adding to the recent squeeze on real spending power from higher inflation.

In financial markets, investors tend to require a higher rate of return on their capital to compensate for uncertainty through higher risk premia. This means that the cost of credit could increase even when central banks keep their policy rates very low, while capital also tends to flow from riskier to safer asset classes.

Barret Kupelian said: “Policymakers can influence levels of economic uncertainty. Transparency is key by ensuring that future changes to the monetary, fiscal and regulatory environment are as gradual and predictable as possible in non-crisis periods, while retaining the flexibility to act quickly if a major crisis does strike.”

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