Despite ‘Liberation Day’ announcements, we expect uncertainty to remain high over the coming months. Heightened trade policy uncertainty could potentially lower global GDP by c.1.0-1.5%. Most of this drop would reflect a decline in US output and that of other major economies. The impact on interest rates and exchange rates is insignificant and reflects other factors at play, Standard Chartered's economist Madhur Jha reports.
No ‘liberation’ from uncertainty
"Trade policy uncertainty (TPU) has risen significantly in recent months and we expect this to persist even after 2 April as countries try to negotiate better deals with the US. The negative impact of tariffs has been well documented. However, it is worth considering the impact of heightened TPU for most economies."
"Academic studies suggest three main channels of lower global growth from heightened uncertainty: a fall in trade and capital flows; a fall in business investment; and lower consumer confidence. The recent sharp rise in TPU could potentially reduce global GDP growth by 1.5ppts. However, the impact is likely to be smaller as countries take offsetting measures."
"We also use two-country structural vector autoregressive (SVAR) analysis to estimate the impact on selected EM economies of rising uncertainty related to US economic policy. The impulse response functions suggest a drop in output and CPI but these are small and short-lived. There is no significant impact on short-term interest rates. Currencies for some economies like Mexico and Indonesia weaken in response to heightened TPU, suggesting other factors, such as central bank credibility, are at play."
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