Measuring macroeconomic uncertainty in the euro area
Over the past four years, European economies have been hit by a series of shocks as unexpected as they were exceptional, notably the Covid-19 pandemic and the recent energy crisis. As a result, uncertainty has increased considerably, making economic forecasting more difficult.
In a new article for the Economic Review, the authors develop a measure of macroeconomic uncertainty in the euro area. The latter is closely linked to the unpredictability of trends in economic activity, interest rates and prices. The methodology is based on the idea that the more difficult it is to predict the development of economic indicators, the greater the uncertainty.
Macroeconomic uncertainty peaked during the pandemic and the energy crisis
Macroeconomic uncertainty in the euro area hit new heights when the Covid-19 pandemic took hold and during the energy crisis. Over the course of these two events, measured uncertainty rose considerably and surpassed the peak seen during the 2007-2008 financial crisis. While the Covid-19 pandemic caused a high degree of unpredictability in economic activity, the energy crisis had a relatively greater impact on consumer and producer price uncertainty.
The article also notes that the increase in macroeconomic uncertainty in the euro area during the latter crisis was associated with price fluctuations in commodity markets. The findings suggest that recent inflation forecast errors in the projections produced by Eurosystem central banks could be partly attributable to this factor.
Lastly, the authors observe that price uncertainty in Belgium is closely linked to price uncertainty in the euro area, especially in times of crisis. Furthermore, in December 2023, price uncertainty in Belgium and the euro area remained high, underlining the ongoing challenge of forecasting inflation dynamics.