Huge spike in uncertainty as EU referendum vote nears

22 June 2016

  • UK Uncertainty Index climbs rapidly in June ahead of EU vote
  • Uncertainty measured since 2005 shows sudden surge 
  • If the UK votes to leave the index could rise even higher
  • Big drop in sterling seems to have sparked uncertainty

Research measuring political and economic uncertainty in the UK has found a huge spike in uncertainty as the country nears Thursday’s EU referendum.

In ongoing research Ilias Filippou, of Warwick Business School, has found the closer the UK moves to Thursday’s EU referendum so his measure of uncertainty, using Google Trends, has increased rapidly.

Filippou is using 180 words from the Harvard IV-4 Dictionary to measure political and economic uncertainty in the UK from 2005 through Google Trends, which aggregates the volume of searches for those words and then averages them.

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He has been astounded at the sudden rise in his uncertainty index in June as voters near decision day.

Filippou, Assistant Professor of Financial Economics, said: “It is interesting because there was a huge spike in the volatility of the pound in March after Boris Johnson announced he was joining the leave campaign, but this was not reflected in our measurement of the UK’s general political and economic uncertainty.

UK Uncertainty Index
High riser: The Uncertainty Index shows a steep rise in June

“But now, as we get closer to the vote, the uncertainty is rising sharply. The huge drop in sterling was reflected by a big rise in searches for ‘uncertainty terms’ in the UK.

”In general the uncertainty index has not risen above 0.5 since 2005 but the EU referendum has seen a massive surge in uncertainty politically and economically, with the index spiking well above 1.5 this June – so we now have the sort of environment that business despises.

“These are preliminary findings, and still need fine tuning, which will take some time, but they illustrate a stark rise in political and economic uncertainty in the UK this June.”

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Filippou believes if the country votes for Brexit the uncertainty index will increase again as the pound is predicted to fall and David Cameron’s future as Prime Minister will reportedly be under threat, which some commentators are predicting could even see an early general election.

“This environment is quite unstable and uncertain for the UK,” says Filippou.

“Clearly, there is a huge spike this month indicating the uncertainty of households due to the possibility of a Brexit.

“The uncertainty will be higher after a potential Brexit creating higher volatility of the British pound and greater economic uncertainty along with political uncertainty as the UK re-negotiates its trade deals and its relationship with the EU.

“The depreciation of the pound could be beneficial in an economy with a large current account deficit and a negative net international investment position, as in theory the depreciation of the pound will increase the cost of importing and boost exports.

“However, the latter is not certain as the huge depreciation of the British pound in 2008-2009 did not affect the export growth of the UK within the EU much at all or its current account deficit.”

Related article: Why facts aren't needed for the EU referendum

Filippou added: “The increase in trade tariffs likely with a Brexit could also put pressure on export demand. It is very unlikely that the depreciation of the sterling will boost exports to the extent that it will offset the cost of a Brexit because one might need to consider trade barriers after the Brexit as well as the content and timing of the new trade agreements.

“The economic uncertainty will increase, putting more pressure on the economy if it takes years for this agreement to be finalised.”

 

 

 

 

 

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