A perfect storm is brewing

A rise in uncertainty also has knock-on effects in depressing productivity growth. Most productivity growth comes from creative destruction; productive firms expanding and unproductive firms shrinking. Of course if every firm in the economy pauses this creative destruction temporarily freezes; productive firms do not grow and unproductive firms do not contract. This leads to a stalling productivity growth.

Similar damaging effects also happen on the consumers side, when uncertainty is high people abstain from buying consumer durables like cars, fridges and TVs. The housing market will also be hit hard, uncertainty makes consumers cautious about up-scaling their housing.

One reassuring fact is that global policymaking is in safe hands. This damaging effect of uncertainty shocks is well known to Ben Bernanke, chairman of the US Federal Reserve. His 1981 MIT PhD thesis was on the negative effects of uncertainty shocks. One of the main papers from this, published when Bernanke was a professor at Stanford University, was called: Irreversibility, Uncertainty and Cyclical Investment. This was pioneering in its ability to formalise the negative effects of uncertainty in causing recessions, noting that: "events whose long-run implications are uncertain can create an investment cycle by temporarily increasing the returns to waiting for information".

So what is stopping Bernanke acting to counteract this rise in uncertainty and forestall the recession? Well, as Bernanke knows, the same uncertainty forces that lead to a recession also render policymakers relatively powerless to prevent it. When uncertainty is high, firms become cautious, so they react much less readily to monetary and fiscal policy shocks. Recent research on UK firms suggests uncertainty shocks typically reduce the responsiveness of firms by more than half, leaving monetary and fiscal policymakers relatively powerless.

So the current situation is a perfect storm; a huge surge in uncertainty that is generating a rapid slowdown in activity and limiting the impact of standard monetary and fiscal policy to react to this. Of course policymakers are doing the best they can, making huge cuts in interest rates, dishing out tax rebates and aggressively pouring liquidity into the financial markets. But will this be enough? History suggests not. A recession looks likely.

Nicholas Bloom is professor of economics at Stanford University and a fellow at the centre for economic performance at the London School of Economics