Julia Irvine 13 Jun 2017 02:12pm

UK GDP at risk over uncertainty, warns PwC

Uncertainty levels have reached an unprecedented high this year, well above those during the financial crisis, and are currently concerning global chief executives more than anything else, research by PwC has revealed

The CEOs consider uncertain economic growth to be the biggest threat to business, bearing in mind the International Monetary Fund (IMF) estimates that one standard deviation increase in uncertainty is associated with a 0.4-1.3 percentage point decrease in output growth.

CEOs in the UK are particularly concerned because the increasing lack of consensus between forecasts of UK economic growth means that they cannot plan ahead with any degree of certainty. Add to that, the question of Brexit plus the outcome of last week’s general election with its hung parliament, and they face even more political uncertainty.

Last year, 30% of business leaders told the Big Four firm that they expected at least one crisis to hit their businesses within the next three years.

According to PwC’s latest Global Economy Watch report, uncertainty impacts on all sectors of the economy because it affects the spending patterns of households, businesses and financial markets.

Businesses, for example, are likely to cut back on production, investment (especially in large capital projects) and employee pay. This last has an impact on consumer spending as households batten down the hatches against future falls in income.

As far as financial markets are concerned, investors tend to look for higher rates of return on capital in uncertain times through higher risk premia. This could mean the cost of credit begins to rise. Investors are also likely to move their capital from riskier assets into safer investments.

PwC’s senior economist Barret Kupelian says that dealing with uncertainty has kept most businesses around the world busy since the financial crisis.

“CEOs have responded in different ways, from buying cyber insurance to mitigate the costs of a potential cyber attack, to stress testing their operations and finances under alternative economic scenarios.

“Businesses that have invested resources in these areas are likely to be better prepared for a future that remains highly uncertain due to factors such as the Brexit negotiations and continued rapid technological change disrupting markets.”

He called on policymakers to reduce levels of uncertainty by making sure that any future changes to the monetary, fiscal and regulatory environment are implemented in a way that is as transparent, gradual and predictable as possible.

But he warned that, at the same time, they would need to retain the flexibility to respond quickly if a major crisis did occur.