How has trade policy uncertainty affected the world economy?

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Published on 10 September 2019
The recent slowdown in global growth has coincided with an escalation in trade tensions. This has had a knock-on effect on sentiment.

In the August Inflation Report, the MPC revised down its forecast for global GDP slightly, and noted that global activity remains soft. Disappointing global growth has been a common theme over the past 18 months, with growth slowing from almost 4% in 2017 Q3, to around 3% in 2019 Q2 (Chart A). 

Chart A

Recent world GDP growth has been disappointing

Chart A - How has trade policy uncertainty affected the world economy?
  • Sources: IMF WEO and Bank calculations.

    Constructed using real GDP growth rates of 181 countries weighted according to their shares in world GDP using the IMF’s purchasing power parity (PPP) weights.

    A version of this chart was previously published in the August 2019 Inflation Report.

Growth has slowed in both advanced and emerging economies. For 2019 as a whole, world GDP is expected to grow by around 3%, the slowest growth since 2009. 

The slowdown in world GDP growth reflects a range of factors. But it has coincided with an escalation in trade tensions. For example, since 2018 the US has gradually raised tariff rates on key trading partners, most notably China. At the time of the August IR US tariff rates on Chinese exports were around five times higher than they were in 2017, with Chinese tariff rates on US exports around 2½ times higher. 

The direct impact of these measures on the world economy is likely to be relatively small. As laid out in the August Inflation Report, the tariffs that have been introduced to date are projected to reduce world GDP by around ¼% over the forecast, via their direct effects on the real economy, for example through reduced trade flows and higher imports costs. 

But indirect effects, such as the impact of trade tensions on sentiment, are likely to be important as well. For example, firms may be less likely to increase investment if they are uncertain about future trading relationships.

Reflecting concerns around rising trade tensions, measures of uncertainty about economic policy have risen sharply. The Bloom measure of global economic policy uncertainty increased over 2018, and reached record highs in June (Chart B).

Chart B

Measures of policy uncertainty

Chart B - How has trade policy uncertainty affected the world economy?
  • Source: 'Measuring Economic Policy Uncertainty' by Scott Baker, Nicholas Bloom and Steven J. Davis at www.PolicyUncertainty.com.

    This measure of uncertainty is constructed using media citations of terms related to economic policy uncertainty, based on data from 20 countries. Increases in this measure have been found to coincide with falls in GDP. See 'Measuring Economic Policy Uncertainty' by Scott Baker, Nicholas Bloom and Steven J. Davis at www.PolicyUncertainty.com.

    A chart showing global policy uncertainty was previously published in the August 2019 Inflation Report.

Across the G7, the growth rate of business investment has halved since its peak in late 2017. This weakening investment in advanced economies, alongside sharp falls in measures of business sentiment, suggests that the rise in uncertainty may already have had some effect on the world economy, and may be a driver of slowing global growth.

This post has been prepared with the help of Tom Wise and Kenny Turnbull.

This analysis was presented to the MPC in July 2019.

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