How does uncertainty affect economic growth?
Uncertainty can affect economic growth in a number of ways. Households who feel unsure about their future income often decide to save more and therefore consume less, while firms that feel uncertain about the future may postpone investments until they have more information. Moreover, uncertainty regarding the profitability of individual firms may lead banks to charge higher risk premiums when lending to businesses, which can affect investment growth.
Uncertainty in Europe
The analysis uses three measures of uncertainty. Detailed information on how these measures are constructed can be found in the background document.
The first measure shows how uncertain households are about the future of the macro-economy. Widely varying responses from households indicate a high level of uncertainty. The second measure shows the volatility in individual households' financial situations. High volatility implies that households are more uncertain about their future financial situations. The third measure shows the volatility in individual firms' production. Higher volatility implies that firms are more uncertain about their future.
The chart shows the three types of uncertainty. Uncertainty among households about their future financial situations increased before each of the three most recent recessions in the euro area.
Figure 1: Uncertainty in Europe