Economic uncertainty

Name(s):

Uncertain economic patterns

Unpredictability of key economic variables

Background

Historical analysis of international, national and sectoral economies indicates regularities and irregularities of behaviour. The regularities can be expressed by two models, the linear and the curvilinear, the linear indicates the straight path of sustained economic growth, or decline. The curvilinear, closed such as in a circle or open in rising and falling waves, indicates economic cyclicity. Both types of behaviour proceed for relatively short periods as regular phenomena. They are interrupted by unpredictable transitions and major dislocations which are argued by some to be the causes of economic conditions and by others to be the effects of accumulated economic forces. Economic prediction works very well retrospectively, with authors proving their economic philosophies by well-chosen examples, but no economic methodology has emerged that can deal prospectively with the variables in an open, world system. Recent experiences with the most advanced forecasting techniques known indicate that governments and industries cannot make an accurate comprehensive forecast five years ahead, although high correlations may be obtained in some areas. There remains, however, an excessive reliance on forecasting in economic as well as in social policy determinations.

Incidence

Economic turbulence and uncertainty persist at the end of the 1980s, although since 1983 governments industrial countries have managed to reduce inflation and maintain a positive rate of growth. But the problems that persist include: high real interest rates, declining investment rates, volatile exchange rates, growing current account imbalances, rising protectionism and high unemployment. These problems are mainly the legacy of past inflationary policies and structural rigidities, but they are also the consequence of the mismatch of macroeconomic national policies and of the combination of loose fiscal policy and tight monetary policy, especially in the USA. These have led to slowed growth of production and trade with the consequence that the world economy faces continuing risks.

In the case of Germany in 1997, the traditional certainties of pride in institutions that worked, of a social contract that offered good jobs, salaries and benefits, as well as a real sense of identity, were severely challenged. The loss of these certainities was seen as difficult to resolve by conventional remedies.

Broader

Narrower

Cyclic business recessions

Paralyzing boom/bust mentality

International economic recession