Uncertainty increasingly hitting workers and businesses in time of change

25 July 2017 Consultancy.uk

Policy uncertainty has risen to levels above that of the depth of the financial crisis as the US and the UK and Europe find themselves in somewhat unexpected situations. This uncertainty is felt most acutely by employees further down the corporate food-chain in the US, who remain in weak uncertain positions with low wages, with a similar outlook for that group in the Brexit-era UK.

To better understand key current trends faced by CEOs across the globe, PwC have released their ‘Global EconomyWatch’ report. The latest edition finds increased uncertainty among top level decision makers, with challenges stemming from a range of domains, from cybersecurity to economic conditions. Employment and Brexit – particularly following the hung parliament – create additional areas of uncertainty in Europe. However, while the high-pressure lifestyle of top executives is the most visible sign of panic in international markets, the effects of uncertainty are felt most acutely by workers furthest down business pecking orders.

The latest report into uncertainty levels* shows a steady rise in uncertainty between 2016 and 2017. The spike is significantly above levels seen even during the financial crisis and the wider effects of the crisis across Europe. Uncertainties stem from a range of factors, from Trump’s ascendency to Brexit and changes in US monitory policy.

Uncertainty levels hit all time high

The high level of uncertainty has multiple knock on effects that affect businesses, with consumers becoming less confident whereby they tend to save more; businesses cut back on investment, production and compensation; and financial markets tend to increase the cost of money.

In the US

The research notes that the US labour market has continued its tightening trend, hitting unemployment of around 4.3%. While unemployment is down, the research notes that many remain underemployed relative to earlier periods – the supposedly positive figures do not distinguish between gainful employment and those working fewer hours than they would wish, or even those whom have left the labour market due to the untenable conditions such employment practices place them in.

US unemployment levels and low wage growth

The research further finds that new jobs are of poor quality, usually employing low-skills, for low-pay – a sector likely to come under increasing threat from automation anyway – or are out of sync with the skillset of those employed. People are often also in unsecure jobs, finding themselves in ‘gig economy’ jobs, or other forms of temporary labour. Furthermore, bargaining power for workers has decreased, resulting in a trend of continued poor wage growth.

Wage growth, the research finds, remains well below that of pre-crisis levels, even while employment figures are comparable. Technology is increasingly implicated in diminishing the role of labour and strengthen the power of capital – with potentially disastrous, and certainly uncertain, long-term consequences.

In the UK

The UK too continues to find itself in deepening uncertainty. Theresa May’s failed bid to secure a larger mandate in a snap election which saw her government lose its Parliamentary majority, the resolve of Europe regarding the likely difficulty of getting ‘a good deal’ from a government subsequently in chaos, and increased questions about the Brexit referendum itself, mean that businesses, the public and governments across the region are increasingly mired in policy-related uncertainty.

Forecast of UK GDP growth

One of the effects of this kind of uncertainty is that there is a correlation with increased variation in economic forecasts. The most recent aggregation and standard deviation of UK GDP projections from major sources is now at almost 0.4%, well above referendum and general election results – where there were also periods of uncertainty.

The study notes that uncertainty will likely begin to trickle down into the wider economy as consumers hold back on spending – which is of particular concern in the UK due to the low pound and rising inflation. For businesses, big ticket investments become increasingly risks, while cash hording also tends to increase. For investors, finally, increased uncertainty tends to indicate increased risks, which correspondingly sees money moved from risky investment classes to safer ones. The firm’s research also notes that gold has begun to tick up in recent months, suggesting an oncoming period of economic crisis, while the Emerging Market Index has continued a slow long-term downward trend – even while recent business trends have remained optimistic.

Reversal of flows from riskier to safer

Barret Kupelian, a Senior Economist at PwC, said, “Businesses that have invested resources in such areas are likely to be better prepared for a future that remains highly uncertain. According to our CEO Pulse Survey, 30% of business leaders expect at least one crisis to hit their business within the next year.”

* The index is developed from three metrics, the first “quantifies newspaper coverage of policy-related economic uncertainty. The second reflects the number of federal tax code provisions set to expire in future years. The third uses disagreement among economic forecasters as a proxy for uncertainty.”

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