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Impact of Macroeconomic Uncertainty

AS, A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 2 Jul 2020

The macroeconomic outlook is extremely uncertain for many countries and depends critically on the future path of Covid-19.

In this short video we look at how uncertainty is affecting the decisions taken by households and businesses which – in aggregate – can have a big impact on macroeconomic objectives such as growth and employment.

Impact of Macroeconomic Uncertainty

What do we mean by uncertainty?

Uncertainty is "the lack of certainty, a state of limited knowledge where it is impossible to exactly describe the existing state, a future outcome, or more than one possible outcome."

The scale of the shock which has hit the UK economy is illustrated by data which shows that per capita incomes have dropped to such an extent that GDP per head expressed in real terms is now back to the level it was at twenty years ago.

Uncertainties for households /families

  • Job insecurity especially in sectors hit hardest by the pandemic and lockdown
  • Prospect of pay cuts
  • Real value of savings
  • Access to credit
  • Future for house prices

Uncertainties for businesses / corporations

  • Highly uncertain revenue streams – will demand / sales recover?
  • Uncertain access to finance from banks and investors
  • Supply chain disruptions e.g. reliability of supply of raw materials
  • Uncertain costs of future covid-19 compliance as lockdown eases
  • Future extent of government financial support for business

Uncertainties for government

  • Path of the virus and possible recurrences in UK and other countries impacting on NHS spending and free movement across borders
  • Impact of the recession on unemployment and tax revenues
  • Highly uncertain scale of government borrowing in 2020 & beyond
  • Uncertainties over negotiations over final Brexit arrangements
Uncertainty among households leads to higher saving and a drop in consumer spending on goods and services
Many businesses respond to uncertain demand and revenues by cutting costs and seeking to raise extra debt and equity finance.

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