The calm after the storm


Unsurprisingly, the covid-19 pandemic created a wave of economic uncertainty around the world in 2020. But at the start of this year, even as infections mounted globally, a sense of confidence appeared to be returning. Such is the signal recorded by the World Uncertainty Index, a quarterly measure of global economic and political turmoil. It hit a record high in the first quarter of 2020, but fell sharply in the three months to the end of March this year, touching a 14-year low.

Unlike some alternative measures of uncertainty, such as stockmarket volatility, the index draws on a broad set of information about 143 countries. It is also timelier than analysing the volatility of GDP growth (some countries have still not reported GDP for 2020). To construct the index, Hites Ahir and Davide Furceri of the IMF and Nick Bloom of Stanford University count instances of the words “uncertain”, “uncertainty” and “uncertainties” (although not their synonyms) in country reports published by the Economist Intelligence Unit, a sister company of The Economist. Over the past three decades these terms appeared a little over one and a half times per 10,000 words, on average. The count is then weighted by the total number of words in each report. An increase in the relative mentions of “uncertain” and its derivatives suggests that uncertainty is rising, and vice versa.

By this measure the outlook was murky even before covid. Mr Ahir and his colleagues reckon that two previous events—Britain’s chaotic exit from the EU and the American presidency of Donald Trump—may have increased uncertainty from its 1996-2010 average by as much as 10% and 20%, respectively. The pandemic pushed it higher still. By the first quarter of 2020 uncertainty had surpassed levels reached during the 9/11 attacks and the euro-zone sovereign-debt crisis.

But by the time Mr Trump was voted out of office in November, and Britain had struck a Brexit deal with the EU in the final days of 2020, the uncertainty index had already begun to fall. That decline may have been helped, too, by the first announcement of an effective vaccine by Pfizer-BioNTech on November 9th. As rich countries rolled out inoculation programmes in short order in the first quarter of this year, it tumbled below its long-run average.

The decline in uncertainty may be surprising given the woeful state of the pandemic. There were nearly 1m official covid-19 deaths in the first quarter of this year, the highest quarterly total since the pandemic began. But the index is adjusted for GDP, lending rich countries, whose vaccination programmes are more advanced, more weight. The latest update covers only the first quarter and so it does not yet reflect India’s horrific second wave nor the threat posed by the B.1.617 variant first discovered there.

Even so, the creators of the index do not expect India’s covid-19 crisis to lead to a big jump in their gauge. That is partly because the countries that are most vulnerable to uncertainty “spillovers” make up a small share of global GDP. Meanwhile, in the rich world there are growing signs, from the labour market and consumer prices, that the economic recovery is well under way. The World Uncertainty Index offers corroborating evidence for that optimism.

This article is from our Graphic detail section.