Uncertainty measures tell a nuanced growth story

US President Donald Trump’s ongoing tariff negotiations are, to some extent, validating our pre-‘liberation day’ scenarios, which looked at possible paths of persistently elevated trade policy uncertainty (TPU). But at first glance, business investment doesn’t appear to be affected to the degree we predicted, and uncertainty might not actually be that high. The truth is, different uncertainty measures tell a nuanced story, which can be differentiated across regions.

What you will learn:

• Trade policy uncertainty (TPU): Soon after President Trump’s re-election, we provided empirical estimates of how much tariff uncertainty would affect investment, predicting that the uncertainty shock would be significantly larger than during his first term. While such estimates always have large error bands, two things in our analysis stood out: 1) It takes around two quarters for the impact on investment to fully unfold. 2) The impact on investment is substantially smaller outside the US.
• Economic policy uncertainty (EPU): EPU broadly confirms that current tariff uncertainty is less of an issue in the EU and the UK than in the US. In China, EPU recently shot up because of a coincidence of the trade war with a range of quickly deepening domestic problems.
• Broader macroeconomic uncertainty: Broad macro uncertainty jumped around ‘liberation day’, confirming that EPU moved in the right direction.
• GDP and sales growth uncertainty: In contrast to elevated policy uncertainty, future GDP and sales growth uncertainty has receded. We argue that this fits a nuanced story: higher tariff uncertainty leading to lower investment has resulted in growth expectations converging around lower values.