The financial crisis seemed to mark a step change towards higher levels of uncertainty and slower growth rates. A less certain world meant less risk taking and fewer big purchases. Companies and households battened down hatches, focusing on reducing their costs and building up savings.
Ten years on from the crisis we have become more accustomed, though not immune, to uncertainty. The cliché is that the only certainty is uncertainty.
2016 was a year of high uncertainty. Stanford University’s news-based measure of uncertainty reached multi-year peaks in several major economies in the course of the year. The UK’s Brexit vote last June pushed the index above levels seen in the financial crisis. In the US uncertainty soared on the back of the change in administration. In China fears of an economic crash had a similar effect. In the euro area the culprits were the spectre of deflation and the rise of right wing political parties.
It’s a different story today. The Stanford uncertainty indices for the UK, US, China and the euro area are well below their recent peaks. This doesn’t prove that the world is more stable – but it does show that journalists aren’t writing as much about uncertainty.
It’s a similar story in financial markets. The VIX index, a measure of equity volatility which is used to gauge financial risk, is running close to the lowest level in 25 years.
What's going on?
The fall in the Stanford indices seems to reflect a perceived decline in a number of specific risks. Fears of a hard landing for China’s economy and of electoral break-throughs for Europe’s right wing parties have abated (the latter admittedly somewhat tempered by the AfD’s strong showing in Germany’s elections). In the US President Trump has been constrained by Congress and the courts. UK growth has slowed since last year’s Brexit vote, not gone into free-fall as some predicted and many feared.
Perceptions of risk have probably also been dampening by the upturn in the global economy. It has come a little faster than expected, with Japan and the euro area outperforming expectations, and growth has been spread between emerging and developed nations.
Financial markets seem to have bought into the idea of continued recovery. Riskier assets, such as emerging market equities and currencies, have been in demand.
This is not to say that the happy days are here again. The Stanford and VIX measures are partial and imperfect measures of uncertainty. At best they approximate to a snapshot of current perceptions of risks among some participants. Those perceptions change quickly, and they are not always right (they weren’t, for instance, in 2006 just ahead of financial crisis). Far from being reassured by the low level of the VIX, some commentators see it as a worrying sign of financial market complacency. Uncertainty could surge just as quickly as it dropped from last year’s highs.
Despite these caveats I think there are conclusions to be drawn. Not all risks materialise and we forget those that don’t – we just move on to worrying about today’s risks. At least through the lens of uncertainty news flow the world looks less risky than a year ago. And though I could – and at some stage will – write a briefing on everything that might go wrong, global growth is moving up. Sitting in a slowing UK economy, and with all eyes on Brexit, it’s worth bearing all of this in mind.