VoxEU: The global economy hit by higher uncertainty

11 May 2019

The latest IMF projections, which show a drop of 0.3% in the global economy partly due to rising uncertainty, are in line with the latest reading of the World Uncertainty Index, which shows a sharp increase in the first quarter of 2019 that could knock up to 0.5% of global growth this year.

The global economy is now projected to grow at 3.3% in 2019, down from 3.6% in 2018, according to the April 2019 edition of the IMF’s World Economic Outlook (IMF 2019). The IMF points out several developments that have prompted the downward revision of the global economy. This includes the escalation of US–China trade tensions, the need for credit tightening in China, economic stress in countries such as Argentina and Turkey, and disruptions to the auto sector in Germany caused by the introduction of new emissions standards. 

Behind all the different reasons for the downward revision of global growth, there is one thing in common: rising uncertainty. Chapter 1 of the World Economic Outlook – which focuses on the prospects and policies for the global economy – mentions the word “uncertain” and its variants 36 times. Some of the references discuss the impact of uncertainty on global economic growth. For instance, the report notes that “amid high policy uncertainty and weakening prospects for global demand, industrial production decelerated… The slowdown was broad based, notably across advanced economies”. The report also points out that political uncertainties “add downside risk to global investment and growth. These include policy uncertainty about the agenda of new administrations or surrounding elections, geo-political conflict in the Middle East, and tensions in east Asia”. On the impact of uncertainty and trade tensions, the report notes that “higher trade policy uncertainty and concerns of escalation and retaliation would reduce business investment, disrupt supply chains, and slow productivity growth”.

Similarly, the IMF’s report also discusses the impact of uncertainty on economic growth for specific countries. For instance, the report points out that a downward revision for growth in the UK partly reflects the “negative effect of prolonged uncertainty about the Brexit outcome”. And for South Africa, the downward revision for growth reflects “continued policy uncertainty”. [...]

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