Is economic policy uncertainty rearing its head again globally?
The Global Economic Policy Uncertainty Index spiked to 172.56 in May, the highest level seen so far in this calendar year
Policy uncertainty is rearing its head again. The Global Economic Policy Uncertainty Index spiked to 172.56 in May, the highest level seen so far in this calendar year. This came ahead of several global events in June.
This index constructed by three US-based economists—Scott Ross Baker, Nick Bloom and Steven J. Davis—tracks the general state of the economy as it relates to businesses. It can include broad economy-wide conditions or specific economic conditions of a particular industry.
Among the important events that led to a rise in the index was the meeting between US President Donald Trump and North Korea’s Kim Jong-un. According to some economists, while many things were agreed upon at that meeting, how much of it translates into action remains to be seen.
That said, the threat of a global trade war between the US and other economies still looms.
The focus has now shifted to three important central banks. The US Federal Reserve’s two-day policy meeting is under way and an interest rate hike is widely anticipated. The European Central Bank, which meets on Thursday, is expected to halt its bond buying programme. That will be followed by Bank of Japan’s policy meet on Friday.
Meanwhile, political concerns in Italy have receded to a certain extent. But the risk of the country exiting the European Union may not be completely out of the way, cautioned economists.
Back home, India’s Economic Policy Uncertainty Index has come off its recent high seen in February 2018. However, factors such as weakness in the rupee and elevated crude oil prices cannot be overlooked.
Higher crude oil prices will have a bearing on the country’s current account deficit and inflation.
In that regard, the forthcoming meeting between the Organization of the Petroleum Exporting Countries (Opec) and non-Opec oil producers on 22 June on whether to increase output or maintain supply as it is, becomes crucial.
In May, retail inflation inched up to a four-month high of 4.87%. This came just a week after the Reserve Bank of India (RBI) increased benchmark interest rates. It should be noted that this rate hike was the first in four years.
While food inflation may ease thanks to a normal monsoon forecast, predicting crude oil prices is difficult. To keep inflation under check, some economists foresee another rate hike by RBI in the coming months.
Apart from that, the slew of forthcoming state elections could add to near-term political uncertainty in India.
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