These notes were contributed by Erick Mokaya
Deal with uncertainty by assessing, planning and communicating
When uncertainty is high, policymakers should have three objectives. First, conduct a sober, objective assessment of the outlook and the risks to it. Second, develop and communicate a plan to reduce those risks and to seize new opportunities. And third, do no harm, by minimising any possible confusion about the commitment to core macroeconomic policy frameworks themselves.
The UK economy is resilient even though some major changes are unavoidable
The UK can handle change. It has one of the most flexible economies in the world and benefits from a deep reservoir of human capital, world-class infrastructure and the rule of law. Its people are admired the world over for their strength under adversity. The question is not whether the UK will adjust but rather how quickly and how well. Nonetheless, the decision to leave the European Union marks a major regime shift. In the coming years, the UK will redefine its openness to the movement of goods, services, people and capital. In tandem, a potentially broad range of regulations might change. Uncertainty over the pace, breadth and scale of these changes could weigh on our economic prospects for some time. While some of the necessary adjustments may prove difficult and many will take time, the transition from the initial shock to the restructuring and then building of the UK economy will be much easier because of our solid policy frameworks.
People are worried in these uncertain times
At times of great uncertainty, households, businesses and investors ask basic economic questions. Will inflation remain under control? Will the financial system do its job? Will I keep mine? Such issues are why monetary and financial stability are fundamental pre-requisites for effective economic adjustment and sustained prosperity.
The households and businesses are experiencing stress
All this uncertainty has contributed to a form of economic post-traumatic stress disorder amongst households and businesses, as well as in financial markets – that is, a heightened sensitivity to downside tail risks, a growing caution about the future, and an aversion to assets or irreversible decisions that may be exposed to future ‘disaster risk’.
The effects of the stress are palpable
Research has shown that people who have experienced low returns throughout their lives, like the ‘Depression Babies’ of the 1930s, report lower willingness to take financial risk, are less likely to participate in the stock market, invest a lower fraction of their assets in equities, and are more pessimistic about future returns. Today, uncertainty has meant an inchoate sense of economic insecurity for many people despite generalised economic prosperity. Across the advanced economies, employment appears less secure, wages more subdued, and inequality more pronounced.