Bank of England staff working paper No 876 published in June 2020 on ‘Economic uncertainty before and during the Covid-19 pandemic’ has the preamble’ We consider several economic uncertainty indicators for the US and UK before and during the Covid-19 pandemic: implied stock market volatility, newspaper-based economic policy uncertainty, twitter chatter about economic uncertainty, subjective uncertainty about future business growth, and disagreement among professional forecasters about future GDP growth”. Simply brilliant and a very good scholarly article. This scholarly study will spearhead us to understand the present economy during this Pandemic which has so far run an uninterrupted flow to wreck the whole world.
15 brilliant economic scholars contributed their brains to this impeccable study which has no parallel in the last 100 years since this Pandemic has made the world a standstill, closed all travels, kept the shops on unscheduled working and made both the parents and their kids confined to their sweet home, however boring it may be.
Now, the study.
Fed Chairman Jerome Powell aptly summarized the level of uncertainty in his May 21st speech noting “We are now experiencing a whole new level of uncertainty, as questions only the virus can answer complicate the outlook”.
Indeed, there is massive uncertainty about almost every aspect of the COVID-19 crisis, including
I do not think we may add more uncertainties on account of Pandemic.
The scholars examined several measures of economic uncertainty, obviously, before and during the COVID-19, and adopted forward-looking uncertainties that were available in near real-time or with modest delays that could be measured in days or weeks.
Why did they assume this approach? Why not draw on past economic disasters which could actually give the then actual economic factors for comparison? Three simple reasons had been offered.
Or for a common man, let us not think about the dead snake in the past but start to worry about the current one kicking and alive.
During the study, the scholars narrated the mind-shattering disastrous economic indicators.(U.S.A.)
How do these figures with encircling gloom, compare with the most dangerous earlier’ Spanish flu’ as it was Christened?
Spanish Flu killed about 40 million people worldwide or about 2.1 percent of the world’s population. Worldwide deaths attributed to COVID-19 as of 1 June 2020 are about 366,000 on a global population base of 7.7 billion, yielding a global mortality rate of less than 0.05 percent.
The Spanish Flu also unfolded in a very different social, political, and economic context than the current pandemic. Agriculture and Manufacturing accounted for 61 percent of employment then, as compared to 10 percent now. The first wave of the Spanish Flu in Spring 1918 occurred during the last stages of World War I, and the deadlier second wave from September 1918 to February 1919 overlapped with the end of the war and the demobilization of troops.
These contemporaneous developments complicate efforts to assess the economic effects of the Spanish Flu. Virtually comparing events held nearly, a century years ago.
To summarize, the economic response to the COVID-19 pandemic is unprecedented in at least two respects:
First, the suddenness and enormity of the economic shock, most visibly represented in the massive job losses and, second, the severity of the economic contraction relative to the size of the mortality shock.
Expectedly, the US stock market has also reacted with much greater force and volatility to COVID-19 than any other pandemic in the past 120 years.
In all three of these respects, there is no close historic parallel to the COVID-19 contraction. But our scholars proceeded with forward-looking uncertainty measures like:
Table 1: Measures of Uncertainty for the United States for the COVID-19 Crisis
|Measure||Average Value in January 2020||Percentage Jump Jan 2020 to Peak||Date of Peak Value During COVID|
|VIX 1-Month implied volatility, US||13.3||497||March 16|
|VIX 24-Month implied volatility, US||16.2||108||March 18|
|Economic Policy Uncertainty, US||110.1||683||May 26|
|Twitter Economic Uncertainty, US||139.8||594||April 22-28|
|Subjective Sales Growth Uncertainty, US||2.7||154||April 2020|
|Subjective Sales Growth Uncertainty, UK||4.3||91||April 2020|
|Forecaster disagreement, US||0.3||755||2020q2|
|Forecaster disagreement, UK||0.5||1960||2020q2|
The study yielded the following tables or charts for comparison and study purposes:
Valuable results arrived at by the scholars are given below:
“We have examined a variety of forward-looking indicators of economic uncertainty,” said the scholars.
Three results emerge.
First, all indicators show huge uncertainty jumps in reaction to the pandemic and its economic fallout. Indeed, most indicators reach their highest values on record.
Second, peak amplitudes differ greatly – from a rise of around 100% (relative to January 2020) in two-year implied volatility on the S&P 500 and subjective uncertainty around year-ahead sales for UK firms to a 20-fold rise in forecaster disagreement about UK growth.
Third, time paths also differ: Implied stock market volatility rose rapidly from late February, peaked in mid-March, and fell back by late March as stock prices partly recovered.
In contrast, broader measures peaked later, as job losses continued to mount, and they plateaued or continued rising after March.
Can we raise enough evidence to prove that the COVID-19 pandemic and its economic fallout lack close historic parallels in at least two respects?
The reply of the scholars is quite revealing. “First, the suddenness and enormity of the massive job losses and, second, the severity of the economic contraction relative to the size of the mortality shock. The unprecedented scale and nature of the COVID-19 crisis help explain why it has generated such an extraordinary surge in economic uncertainty.”
The report with its raised queries as well as projected answers explains the narration for a common man.
I shall give each one of them to raise our understanding the desired levels.
1. “For example, the subjective uncertainty measures are particularly apt for theories that stress the role of firm-level risks in economic fluctuations.
2. The VIX measures are obviously more apt for theories that link asset-pricing behavior to economic fluctuations.
3. The EPU measures are highly relevant for theories that link asset-pricing to political decision-making in reaction to macroeconomic developments (e.g., Pastor and Veronesi, 2012).
4. The newspaper-based and Twitter-based measures are perhaps more closely aligned with the perceptions of households.
5. All of the uncertainty measures we consider are potentially useful in testing and implementing theories about investment and consumption under uncertainty.
6. Indeed, many of them have been used to that end in previous studies.”
Let me agree with their actual feelings on the basis of their detailed research. “We should point out that these continuing high-levels of uncertainty do not bode well for a rapid economic recovery. Elevated uncertainty generally makes firms and consumers cautious, retarding investment, hiring and expenditures on consumer durables.
I do not visualize a gloomy picture for our future since India being a young country with the population mostly restless due to their high energy levels and also with the possibility of achieving higher economic growth. The recovery will be quicker and much faster than the projection of experts. Yes, comparable results with their absence also help us to recover faster results, more towards prosperity.