Huge Spike In Uncertainty Index As Vote Nears

A huge spike in the uncertainty index has been registered a day before Brits go to the polls.

Research from Warwick Business School measuring political and economic uncertainty in the UK has revealed uncertainty has increased rapidly.

Ilias Filippou, Assistant Professor of Financial Economics, said: “It is interesting because there was a huge spike in the volatility of the pound in March after Boris Johnson announced he was joining the leave campaign, but this was not reflected in our measurement of the UK’s general political and economic uncertainty.

“But now, as we get closer to the vote, the uncertainty is rising sharply. The huge drop in sterling was reflected by a big rise in searches for ‘uncertainty terms’ in the UK.

”In general the uncertainty index has not risen above 0.5 since 2005 but the EU referendum has seen a massive surge in uncertainty politically and economically, with the index spiking well above 1.5 this June – so we now have the sort of environment that business despises.

“These are preliminary findings, and still need fine tuning, which will take some time, but they illustrate a stark rise in political and economic uncertainty in the UK this June.”

Filippou is using 180 words from the Harvard IV-4 Dictionary to measure political and economic uncertainty in the UK from 2005 through Google Trends, which aggregates the volume of searches for those words and then averages them.

He has been astounded at the sudden rise in his uncertainty index in June as voters near decision day. Filippou believes if the country votes for Brexit the uncertainty index will increase again as the pound is predicted to fall and David Cameron’s future as Prime Minister will reportedly be under threat, which some commentators are predicting could even see an early general election.

“This environment is quite unstable and uncertain for the UK,” says Filippou.

“Clearly, there is a huge spike this month indicating the uncertainty of households due to the possibility of a Brexit.

“The uncertainty will be higher after a potential Brexit creating higher volatility of the British pound and greater economic uncertainty along with political uncertainty as the UK re-negotiates its trade deals and its relationship with the EU.

“The depreciation of the pound could be beneficial in an economy with a large current account deficit and a negative net international investment position, as in theory the depreciation of the pound will increase the cost of importing and boost exports.

“However, the latter is not certain as the huge depreciation of the British pound in 2008-2009 did not affect the export growth of the UK within the EU much at all or its current account deficit.”

Filippou added: “The increase in trade tariffs likely with a Brexit could also put pressure on export demand. It is very unlikely that the depreciation of the sterling will boost exports to the extent that it will offset the cost of a Brexit because one might need to consider trade barriers after the Brexit as well as the content and timing of the new trade agreements.

“The economic uncertainty will increase, putting more pressure on the economy if it takes years for this agreement to be finalised.”

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2 Responses

  1. paul harkin

    can someone explain to me that we are presently trading at a £68 billiion defecit with the EU, Tarriff free. Yet the Remain Campaign state that should we Leave then Import Tarriffs will apply to all our Exports surely this would be reciprocated by us. Meaning that if similar Tarrifs are applied by us the Trade Defecit will diminish. Or am I missing something?

    1. HT

      Yes. Basic economics.

      A deficit means that the UK buys more than it sells to the EU. This is regardless of tarriffs. The lack of tarriffs only serves to makes goods cheaper to purchase.

      Tarriffs if imposed would make goods made in the UK more expensive in the EU and vice versa, thus reducing the attractiveness of UK made goods to the EU, and the same for EU goods to the UK. Should both sides impose tariffs on each other, goods from other economic areas might become more attractive as they now become relatively cheaper. This means that potentially there will be less trade between the EU and the UK, which would force UK exporters to look for other places to sell their products.

      If they can’t this would mean layoffs or shuttering of businesses who export for a living.

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