The economic consequences of the Russia-Ukraine war have brought the importance of sharp changes in commodity prices, such as oil, to centre stage. While many have focused on understanding the impact of these developments on the central projection for the macroeconomic outlook, this post investigates the balance of risks arising from oil-supply shocks, asking: could these lead to more severe or persistent changes in output growth and inflation, in rare events? Through the lens of a simple statistical model of Inflation- and GDP-at-Risk, we quantify the macroeconomic risks to inflation and GDP growth associated with (exogenous) changes in oil supply, showing that these shocks have more pronounced effects on the upper tail of the inflation distribution than at the centre.
Nikoleta Anesti, Marco Garofalo, Simon Lloyd, Edward Manuel and Julian Reynolds
Understanding and quantifying risks to the economic outlook is essential for effective monetary policymaking. In this post, we describe an ‘Inflation-at-Risk’ model, which helps us assess the uncertainty and balance of risks around the outlook for UK inflation, and understand how this uncertainty relates to underlying economic conditions. Using this data-driven approach, we find that higher inflation expectations are particularly important for driving upside risks to inflation, while a widening in economic slack is important for downside risks. Our model highlights that rising tail-risks can become visible before a turning point, making the approach a useful addition to economists’ forecasting toolkit.
Ivan Yotzov, Nick Bloom, Philip Bunn, Paul Mizen, Pawel Smietanka and Greg Thwaites
Text data is often raw and unstructured, and yet it is the key means of human communication. Textual analysis techniques are increasingly being used in economic and financial research in a variety of different ways. In this post we apply these techniques to a new setting: the text comments left by respondents to the Decision Maker Panel (DMP) Survey, a UK-wide monthly business survey. Using over 20,000 comments, we show that: (i) these comments are a rich and unexplored data source, (ii) Brexit has been the dominant topic of comments since 2016, (iii) text-based indices match existing uncertainty measures from the DMP at both the aggregate and firm level, and (iii) sentiment among UK firms has been declining since 2016.
The right stance for monetary policy is highly uncertain, and so it is no surprise that members of monetary policy committees – like the Bank of England’s Monetary Policy Committee (MPC) – regularly disagree about the best course of action. Asking a committee to decide allows different opinions to be aired and challenged, with a majority vote needed to determine policy. But how should we expect those disagreements and votes to change in periods of higher uncertainty? Should we expect more 9–0 unanimous votes? Or more 5–4 close contests? We address these questions in this post and find that the degree of disagreement is little changed in periods of high uncertainty, and nor are dissenting votes. There is, however, some difference in how voting decisions are formed when uncertain, with both individual and committee-wide views having less explanatory power for votes.
Ed Manuel, Alice Pugh, Anina Thiel, Tugrul Vehbi and Seb Vismara
Average tariffs on goods traded between the US and China increased by 15 percentage points from early 2018 to 2019. By making it more costly to buy goods from abroad, higher tariffs have reduced global trade flows and spending by households and businesses. But ‘direct’ effects of tariffs are not the only ways in which trade-related issues can affect global growth. Trade-related uncertainty has risen sharply since the escalation of trade tensions in 2018, which may have caused businesses to postpone costly investment decisions and financial conditions to tighten. In this post we investigate the size of these ‘indirect’ channels.
Dave Altig, Scott Baker, Jose Maria Barrero, Nick Bloom, Philip Bunn, Scarlet Chen, Steven J. Davis, Julia Leather, Brent Meyer, Emil Mihaylov, Paul Mizen, Nick Parker, Thomas Renault, Pawel Smietanka and Greg Thwaites.
The unprecedented scale and nature of the COVID-19 crisis has generated an extraordinary surge in economic uncertainty. In a recent paper we review what has happened to different indicators of uncertainty in the US and UK before and during the COVID-19 pandemic. Three results emerge. All of the indicators that we consider show huge jumps in uncertainty in reaction to the pandemic and its economic fallout. Most indicators reach their highest values on record, although the extent of the increases differ. The 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.
Policymaking is invariably uncertain. I created a new index of ‘policymaker’s uncertainty’ based on a textual search of the minutes of the MPC meetings since 1997. The index is constructed by simply calculating the number of references to the word ‘uncertainty’ (and its derivatives, including ‘not certain’ and ‘far from certain’) as a share of the total word count. To avoid double-counting, it also excludes the Monetary Policy Summary that was introduced in 2015. One caveat of this approach is that it doesn’t distinguish instances of low or falling uncertainty from those where uncertainty was high. That aside, this measure can offer a new insight into uncertainty compared to indicators based on media references or business surveys.
Tamara Li, Nicola Shadbolt, Thomas Stratton and Gregory Thwaites
Consumption growth remained fairly steady in the immediate aftermath of the UK vote to leave the European Union in June 2016. But how did consumer expectations evolve in the first months after the referendum? We show with the Bank’s in-house household survey that ‘Leavers’ became more positive about the economy and their own financial situation after the referendum, with the opposite true for ‘Remainers’, and that this was reflected in spending by the two groups. But the size of the effect was small.
Uncertainty is in the spotlight again. And the MPC believe it is an important factor influencing the slowdown in domestic demand (August 2017 Inflation Report). Previous work by Haddow et al. (2013) has found a composite aggregate indicator of uncertainty combining several different variables that does appear to have explanatory power for GDP growth; but as Kristin Forbes notes these measures correlate better with consumption than investment. So in this blog post, we look at firm-level data to explore measures of uncertainty that matter for how firms invest in the United Kingdom. Our aggregate measure of uncertainty has a better forecast performance for investment than the composite aggregate indicator does.
Ambrogio Cesa-Bianchi , Chris Redl, Andrej Sokol and Gregory Thwaites
Volatile economic data or political events can lead to heightened uncertainty. This can then weigh on households’ and firms’ spending and investment decisions. We revisit the question of how uncertainty affects the UK economy, by constructing new measures of uncertainty and quantifying their effects on economic activity. We find that UK uncertainty depresses domestic activity only insofar as it is driven by developments overseas, and that other changes in uncertainty about the UK real economy have very little effect.