Global Economic Uncertainty

 Global Economic Uncertainty

What is Global Economic Uncertainty?

Global Economic Uncertainty refers to the unpredictable and unstable conditions in the world economy caused by factors like geopolitical tensions, inflation, wars, trade disruptions, pandemics, and policy changes. This uncertainty affects investment, employment, currency value, and economic growth. It can lead to market volatility, reduced consumer confidence, and slower development in both developed and developing countries. Governments and businesses often respond by adjusting strategies, increasing reserves, or adopting cautious financial policies to manage risks.

Economic uncertainty refers to a situation in which the future economic environment is difficult to predict, and there is a high degree of risk or unknowns involved.  

This can be caused by a variety of factors, including political instability, changes in government policies, natural disasters, and market fluctuations.  


Examples of economic uncertainty include:  Volatility in financial markets: When stock prices or exchange rates fluctuate significantly, it can create uncertainty for investors and businesses. This was shown during the Global Financial Crisis and also during and after the COVID-19 pandemic. Many countries have volatile exchange rates, which increase the risks for businesses and overseas investors. 

  • Changes in macroeconomic policies: For example, if a government announces plans to change direct and indirect tax rates or regulations, it can create uncertainty for businesses and consumers. Likewise, uncertainty can be created when a central bank changes the direction of its monetary policy and starts changing interest rates. 
  • Natural disasters: Events like earthquakes, hurricanes, and other natural disasters can disrupt supply chains and disrupt economic activity, creating uncertainty. Many countries including numerous lower-income nations have an economy highly susceptible to the consequences of climate change. 
  • Political instability: Unrest or instability in a country can create uncertainty for businesses and investors. 

Uncertainty can affect behaviour in some ways.  

For example, it can cause businesses to hold off on making investments or hiring new employees, as they are unsure about the future economic environment.  

Consumers may also become more cautious about spending money, as they are uncertain about their own financial situation. This can lead to an increase in precautionary saving and a rise in the marginal propensity to consume.  

When uncertainty is high, there is an increased risk of an economic recession as agents hold back on consumption and investment decisions.  

Overall, economic uncertainty can lead to a decrease in economic activity, as people and businesses become more risk-averse.  

Many events have caused economic uncertainty in the past. Some examples include:  

  • The COVID-19 pandemic: The outbreak of COVID-19 and the measures taken to contain it have caused significant economic uncertainty around the world. The pandemic has disrupted supply chains, caused widespread job losses, and led to a sharp contraction in economic activity. 
  • The global financial crisis: The global financial crisis of 2007-2008 was triggered by the collapse of the housing market in the United States, which spread to other countries and led to a global recession. The crisis caused widespread uncertainty in financial markets and led to a sharp contraction in economic activity. 
  • Brexit: The decision by the United Kingdom to leave the European Union in December 2020 has caused economic uncertainty, particularly for UK businesses that trade with the EU. There are concerns about the impact on trade and investment, as well as the possibility of increased regulation and tariffs. 
  • The trade war between the United States and China: The ongoing trade dispute between the United States and China has caused economic uncertainty for businesses and investors, as it has led to increased tariffs and the threat of further economic restrictions.

Fertility Theory

(Un)employment Trends

Economic uncertainty has also been studied by examining the effects of unemployment trends on the TFR. Findings consistently showed a negative association: the higher the unemployment, the lower the quantum of fertility (Macunovich, 1996) or the higher the postponement, which was found for first and second births (Adserà, 2010, 2011).  Adopting a complementary approach, other studies focus on the relationship between female labor force participation (LFP) and TFR, showing that in OECD countries, this association has changed from negative (where countries with higher LFP had lower TFR) to positive during the 1980s (Pampel, 2001; Ahn and Mira, 2002). It is, however, challenging to assess whether this implies a change in the causal relationship between the two variables. Mishra et al. (2010), engaging in a macro-econometric analysis aimed at ruling out endogeneity to unravel causation, find that causality runs from changes in fertility (TFR) to changes in LFP.  Another approach to the effects of economic trends has been developed by Easterlin (1961, 1968). According to Easterlin, cyclical changes in fertility are mainly due to fluctuations in birth rates and cohort size. Members of larger cohorts face more competition and thereby reduced economic opportunities, leading to lower fertility.

Global And Regional Outlooks

Global 

Global growth is slowing following a sharp rise in trade barriers and heightened policy uncertainty. Growth is expected to weaken to 2.3 percent in 2025—a significant downgrade from previous forecasts—with only a tepid recovery expected in 2026-27. Growth could be lower if trade restrictions escalate or if policy uncertainty persists. Other downside risks include weaker-than-expected growth in major economies, worsening conflicts, and extreme weather events. Multilateral policy efforts are needed to foster a more predictable and transparent environment for resolving trade tensions. Policy makers need to keep inflation contained and strengthen fiscal positions, while also undertaking reforms that enhance institutional quality, stimulate private investment, and improve human capital and labor market functioning.

IMF World Economic Outlook: Economic Uncertainty Is Now Higher Than It Ever Was During COVID

The International Monetary Fund (IMF) has just published its World Economic Outlook, and it does not take an expert to deduce that, even among some of the world’s top economic minds, confident predictions are currently hard to come by.  Every spring, the IMF and World Bank hold their Spring Meetings in Washington, DC: a week of seminars, briefings, and press conferences focusing on the global economy, international development, and world financial markets. At both the Spring Meetings and the Annual Meeting, held each autumn, the IMF publishes its global economic growth forecasts.  For its 2025 Spring Meeting, the IMF has published a baseline forecast, as well as an addendum analysing the tariff events that took place between 9 and 14 April. According to the Fund’s report, world GDP will grow by 2.8% in 2025 and 3.0% in 2026. For the euro area, growth will be 0.8% and 1.2% for 2025 and 2026, respectively.  These forecasts represent a substantial downward revision from IMF figures published just three months ago. Globally, growth in 2025 is down by 0.5% compared to the Fund’s January update, with a reduction of 0.2% for the euro area.  One major shift is key to understanding the most recent IMF report and its pessimistic predictions: we live in a much more uncertain world than we did three months ago.

Uncertainty Is Off The Charts 

The IMF’s world trade uncertainty index is currently 7 times higher than it was in October 2024, much higher than in the pandemic.  As far as the economy is concerned, this uncertainty is far worse than a high but definitive tariff. With a tariff, companies can at least reorganise their production chain, and consumers can look for alternative products. There is a cost, but at least businesses and consumers can plan for it.  However, nobody can calculate these costs today because nobody knows how tariffs will evolve. An American company may decide today to buy a particular product from the EU thinking that the tariff will be 10%, but upon the product’s arrival in the US it turns out the tariff has risen to 100% because a presidential advisor said it would be good for the US economy to raise tariffs on that product.  Unbelievable though it may sound, this appears to be how the tariffs are being decided and enacted. According to one account, the US Treasury and Commerce Secretaries were only able to persuade Trump to freeze recent tariff hikes because Peter Navarro, the president’s economic advisor and tariff ideologue, was in another room at the time.  The end result of this unpredictability is that the best course of action, for consumers and businesses alike, is inaction.



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