Draft:Global Economic Prospects

• This box sheds light on the role of uncertainty in the recent slowdown of global investment and trade.
• Over the past year the global economy has transitioned from a robust and synchronised expansion to a widespread slowdown.
• Global growth has weakened on the back of soft investment, which was also a key driver of the sharp fall in global trade growth in the first half of 2019 (see Chart A)[2].
• Against this backdrop, this box assesses the role of uncertainty in the recent slowdown of global investment and trade.

• Economic uncertainty can stem from different sources and is characterised by a situation in which agents cannot contemplate all the possible states of nature or characterise their probability distributions.
• define economic uncertainty as the conditional volatility of a disturbance that is unforecastable from the perspective of economic agents[6], with an increase in uncertainty generally being associated with a growing difficulty of predicting future economic outcomes.
• [7] Applying the same approach to a large selection of country trade indicators, we also derived a measure of global trade uncertainty[8].
• The estimation results suggest that while global economic uncertainty has increased gradually over the past year, global trade uncertainty has surgedmore rapidly.
• Trade-related uncertainty has risen by some two standard deviations over the past year; more than twice the increase observed in economic uncertainty (see Chart B).
• Chart B Global economic and trade uncertainty (standard deviation from mean)

• Following the global financial crisis, policy debates have increasingly focused on the macroeconomic consequences of heightened uncertainty.
• Recent ECB analysis suggests that rising uncertainty had negative effects on euro area investment during the global financial and euro area sovereign debt crises.
• [9] An often-cited channel linking uncertainty to real activity is the irreversibility of investment.
• [10] Moreover, the interplay between uncertainty shocks and financial frictions can have powerful effects on economic activity.
• [12] Economic uncertainty also appears to play an important role at the current juncture.
• Our analysis also suggests that uncertainty has been a drag on global investment and trade growth over the past year, accounting for a third of the decline in investment and for 40% of the decline in global imports (see Chart D).

Chart D Decomposition of world investment growth and world imports growth (excluding the euro area) (quarterly average percentage change between 2017Q2-2018Q2 and 2018Q2-2019Q2, deviation from trend)