Browsing through newspaper headlines, one gets the feeling that ‘uncertainty’ will be the buzzword of 2017. The term was used 123 times in the Bank of England’s Monetary Policy Committee minutes. Deutsche Welle described the US President-elect’s absence from the World Economic Forum’s Davos meeting as The Great Uncertainty, while Harvard Kennedy School Professor Carmen Reinhart recently described economic uncertainty as the biggest challenge for policymakers this year.
Policy uncertainty is growing in prominence among academics and researchers, as it has been shown to have significant macroeconomic implications. Baker, Bloom and Davis demonstrate that a decline in economic agents’ capacity to use past information as an accurate indicator of future outcomes tends to lead to increases in stock price volatility as well as overall declines in investment, output, and employment.
In December 2016, the ECB added to global uncertainty with its surprise decision to scale back asset purchases, from €80bn to €60bn. By going against the previous objective of inflation targeting, the institution achieves two things: first, introducing significant uncertainty in how future guidance should be interpreted; second, to remind policy-makers that current risks across the single currency are being increasingly associated with policies put in place to provide stability.
Across the Atlantic, potential upcoming changes to the US policy platform is also increasing uncertainty, as mixed signals are making markets more and more nervous over possible financial market volatility. On the one hand, prospects of pro-growth fiscal policy are being viewed positively, but fears associated with potential disruption of cross-border supply chains due to a protectionist backlash are creeping in.
The Main Issues
On a global scale, as stressed by experts from the Center for Social and Economic Research, the recent resurgence of economic uncertainty relates to issues such as the Trump presidency, the rise of populism in Europe, mixed monetary policy guidance by the ECB, and the discussions surrounding Brexit. These events have substantiated the rise of global economic policy uncertainty to its highest level since the beginning of the 21st century, as measured by Baker, Bloom, and Davis.
However, by explaining the past year’s upward trend of uncertainty strictly in terms of policy expectations, one applies a first-order solution to a second-order issue, understating the persistence of the observed trend. That is to say, the recent resurgence of uncertainty, captured by the Global Economic Policy Uncertainty Index, can be linked to institutional volatility, as policies that threaten the established fabric of institutions are increasingly on the rise.
The Impact on the Real Economy
The reason for highlighting the expectations of persistent uncertainty engendered by institutional volatility is their potential pronounced impact on the real economy: as expectations linked to uncertain future outcomes increasingly guide investment decisions, demand for safe assets rises while spending on capital and labour is retarded. This dampens economic activity today, leading to future actual output growth undershooting its potential level.
Consequently, this underscores a necessity for policy to become more transparent and articulated with forward consistency guidance, in order to avoid a dampening of the current recovery path set out by the EU and the US.
If the continued stagnation of growth in Europe says anything, it is that uncertainty can exacerbate an already sluggish investment environment. This may end up trapping the economy in a sub-optimal equilibrium, with more uncertainty bearing further on potential economic growth.
Breakfast Briefing: Space Race, Google in China and Zuckerberg
Google to Open in Beijing
Alphabet announced that it will open an AI research facility in the Chinese capital yesterday.
Editor’s Remarks: Under CEO Sundar Pichai, Google has been recommitting itself to China after it had most of its services blocked in 2010 when it refused to censor search content. In recent months, the tech giant has been marketing its new TensorFlow AI tools to the Chinese market, which aligns with the state’s ambitions to become a world leader in AI by 2030. Google’s new facility will consist of a small number of AI researchers, supported by hundreds of Chinese engineers. Google expects to face stiff competition for talent given how local tech giants, Baidu and Tencent, are ramping up their own AI efforts.
Telegram Is Not for Sale
Telegram’s elusive founder, Pavel Durov, insists that his messaging service will remain non-profit.
Editor’s Remarks: Durov and his brother Nikolai founded VK, Russia’s answer to Facebook, before they were forced to sell their stakes to a Kremlin-friendly oligarch. The pair has since relocated and built Telegram, an encrypted messaging service that they insist will never be sold. A libertarian – having enabled Telegram users to even send messages that will self-destruct – Durov and his product have gained popularity among cryptocurrency enthusiasts. Durov himself is bullish about the prospects of cryptocurrencies and owns at least 2,000 bitcoins. Pundits, meanwhile, reckon that Telegram is worth in the region of $5bn.
Japanese Space Startup Raises $90m
Ispace Inc raised $90m from Japan’s largest corporates in a bid to reach orbit by 2019.
Editor’s Remarks: Ispace is backed by Japan Airlines, Tokyo Broadcasting System Holdings and also government-backed Innovation Network Corp. of Japan. The company plans to sell advertising space on its spacecraft, which will then feature prominently in distributed images. However, Ispace also envisages the use of rovers that will offer a “projection mapping service”, which will essentially produce a tiny billboard on the surface of the moon. This is the latest announcement in what is rapidly shaping up to be a wider commercialisation of space exploration. Elsewhere, SpaceX and Blue Origin are developing reusable rockets, while Planetary Resources intends to mine asteroids.
Roy Moore Loses Alabama
Moore, who was backed by Trump, narrowly lost to Doug Jones, a largely unknown Democrat.
Editor’s Remarks: Moore’s election efforts appeared to have succumbed to allegations of child abuse that were made against him last week. Newcomer Jones won 49.9% of the vote against Moore’s 48.4% in deeply conservative Alabama, marking the Democrats’ first Senate victory in the state since 1992. Moore is a household name in Alabama but the accusations recently levelled against him have ruined his once impeccable reputation. Reluctant to concede defeat in his home state, Moore has said that Alabama must “wait on God and let the process play out”. Meanwhile, Democrats are jubilant that they have managed to reduce the Republican majority in the Senate to 51-49, which could impact Trump’s tax reform.
Zuckerberg Backs VR Firm
Dreamscape Immersive, a virtual reality (VR) company, is backed by 21st Century Fox, Warner Bros. and Mark Zuckerberg.
Editor’s Remarks: Dreamscape is developing new VR arcades for shopping centres and has just closed a $30m Series B funding round – 50% more than planned. Among its initial backers were Steven Spielberg, 21st Century Fox and Warner Bros. The company has now added to that impressive list the likes of Mark Zuckerberg and Nickelodeon. Dreamscape is capitalising on Hollywood’s interest in VR, which the film industry reckons will draw in greater numbers of viewers and provide an opportunity to raise margins. Dreamscape intends to open seven VR centres in locations across North America and the UK.
Google to Open Artificial Intelligence Centre in China
Google will be opening its first artificial intelligence (AI) research centre in China, despite many of its services being blocked there.
Fei-Fei Li, Chief Scientist of Google Cloud, said:
“I believe AI and its benefits have no borders. Whether a breakthrough occurs in Silicon Valley, Beijing or anywhere else, it has the potential to make everyone’s life better for the entire world. As an AI first company, this is an important part of our collective mission. And we want to work with the best AI talent, wherever that talent is, to achieve it.”
The research centre will focus on basic AI research, and will consist of a team in Beijing, who will be supported by Google China’s engineering teams.
Google’s search engine and its Gmail are banned in China. However, the country has 730 million internet users, making the market too large to ignore.
Google is not the only tech giant facing restrictions in China. Facebook is also banned, while Apple’ App Store has been subject to censorship. In order to comply with government requests, Apple removed many popular messaging and virtual private network (VPN) apps from its App Store in China earlier on this year.
China has recently announced plans to develop artificial intelligence, and wants to catch up with the US. However, human rights groups are concerned by China’s use of artificial intelligence to monitor its own citizens.
Europe Warns Trump on Tax
Finance ministers from Europe’s largest economies have said that Trump’s tax plans breach global agreements.
Europe’s leading finance ministers, including UK chancellor Philip Hammond, penned a letter to the White House in which they raised the possibility of retaliation if the Republicans push on with their tax reforms. Europe is worried that Trump’s “America First” doctrine will undermine global trade patterns and escalate ongoing tensions between the US and its key allies. With the UK looking to its closest ally for support post-Brexit, it is unlikely that Hammond’s latest move will sweeten any future US-UK trade deal. Meanwhile, Trump is unlikely to care about shaking up current trading arrangements, given that he ran for office on the platform of making the US more competitive.
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