Can you feel it? The weight of doubt. That pinch of fear?
No, you're not imagining it.
![Illustration: Jim Pavlidis](/web/20170205144349im_/http://www.theage.com.au/content/dam/images/g/u/5/z/d/v/image.related.articleLeadwide.620x349.gu5olm.png/1486303508170.jpg)
The world is as uncertain a place as it's been for the past century. And yes, tellingly, that includes the Great Depression and both World Wars.
Economists have spent a lot of time lately trying to measure uncertainty about policy outcomes and to prove whether it hurts economies.
![Worse than a terrorist attack? Economists have measured the likely impact of a period of prolonged uncertainty a Trump ...](/web/20170205144349im_/http://www.theage.com.au/content/dam/images/g/u/5/g/8/d/image.related.articleLeadwide.620x349.gu5olm.png/1486303508170.jpg)
The consensus is that yes, it does.
For companies, if an investment is likely to be costly to reverse, or if the future benefits are particularly hard to foresee, a rise in uncertainty will lead them to defer investment plans.
They will also hire fewer workers, hurting jobs and output growth.
Consumers, too, hate uncertainty.
In response to uncertainty, households increase their savings. And because consumer spending drives about two-thirds of economic activity, the economy suffers as a direct result.
Uncertainty can also lead to a higher perception of risk, which can drive up borrowing costs, particularly for small businesses, although the Reserve Bank will do its best to overcome this by lowering the official cash rate.
All told, economists have concluded that economic policy uncertainty is deeply corrosive for economies.
This is concerning, because the world has for the past decade been living through a period of unusually elevated uncertainty.
The phenomenon has been captured in a fascinating new index of "Economic Policy Uncertainty" produced by three American economists, Scott Baker, Nicholas Bloom and Steven Davis.
Of course, the future is inherently uncertain. But the world does pass through moments where the future course of events seems particularly unknowable.
Hello Donald Trump.
When this happens, history shows share prices become more volatile, policymakers mention uncertainty more often in their public statements and economic forecasts diverge.
And, of course, journalists like me start peppering their articles with the word "uncertainty" – not to mention a host of more colourful ones, like "crisis", "falling off a cliff", "on the precipice" etc. (don't get me started).
Using newspaper archives from 1900 to 2014 for the US and Britain, the three economists, and an army of researchers, began meticulously coding articles to identify the proportion that mention a trifecta of terms: "economic" or "economy", "uncertain" or "uncertainty" and a host of policy words including "regulation", "deficit", "federal reserve", "white house", "congress", and "legislation".
What did they find?
The biggest period of uncertainty was not a World War or the Great Depression, but the 2011 debate about lifting the US debt ceiling. In second place was the period of policy instability following the Great Depression, which included increased protectionism and Roosevelt's "New Deal". In third place came September 11 and then the 2008 collapse of investment bank Lehman Brothers.
Not surprisingly, the two World Wars had a bigger impact on uncertainty in Britain.
But what about Trump? While the economists have not updated their historical data, they have started a new index of uncertainty, which includes not only newspaper mentions, but other measures of uncertainty, including, for the US, the number of tax codes set to expire and disagreement between economic forecasters – the wider the range the more the uncertainty.
On this measure, which goes back to 1985, the spike in uncertainty around Trump's election is on par with the debt ceiling dispute and September 11. Yes, Trump is causing as much policy uncertainty in the US as a terrorist attack.
We are faring a little better in Australia, but the Trump impact is felt here too.
For the two decades of data available for Australia, the highest period of uncertainty remains in 2011 when the US debt ceiling debate erupted, coinciding with the end of our mining boom, the mining tax debate and the eurozone crisis.
The second most uncertain period in recent Australian history, interestingly, was last year's federal election – nearly on par with the 2011 spike.
Not only was the 2016 election a close one, it was also fought on genuine policy differences on business tax cuts, education spending, super tax changes, multinational tax avoidance and Labor's negative gearing tax changes.
Interestingly, the final term of the Howard government, which coincided with the mining boom, emerges as the most stable and certain period in recent Australian history. How relaxed and comfortable we were.
The election of Tony Abbott also coincided with a period of lower uncertainty, although that's not necessarily a cause for celebration.
Knowing we are certainly pursuing the wrong economic policies – like letting personal income taxes creep up, the budget fall further into deficit and failing to act on climate change – also bodes ill for the economy.
Nonetheless, the Turnbull coup of September 2015 did lead to a spike in uncertainty.
On the latest data for January this year, uncertainty in Australia in the wake of Trump's election is still only half the level it reached in last year's election.
What is clear is that Trump-induced policy uncertainty is a new economic challenge not just for America, but for Australia too.
In a paper released last year, Reserve Bank economist Angus Moore unveiled a similar Australian index of uncertainty, including newspaper mentions, stockmarket volatility and dispersion in economist's growth forecasts.
He also lined such changes up against changes in the real economy.
Moore confirmed increasing uncertainty in Australia weighs on employment growth, reduces machinery and equipment investment growth and raises the household saving ratio.
Importantly, Moore also found the cash rate is about a quarter of a percentage point lower a year after an uncertainty shock.
It's still early days for the Trump administration. But if the new President ushers in a prolonged period of economic policy uncertainty, that will have real world effects in the US, and Australia.
According to Moore's data, such foreign uncertainty shocks drive about a third of Australia's variance in local uncertainty. Trump matters, but he's not the only factor.
Never has a period of stable and strong domestic government been more important for the Australian economy.
History proves that periods of prime ministerial leadership instability – such as under the Rudd-Gillard-Rudd government and the Abbott-Turnbull government only add to that. Nervous backbench MPs considering a change of leader – or the resurrection of an old one – should take note.
Not that that's ever stopped them before.
The only certain thing in 2017 is uncertainty.
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