Politics and the economy are inextricably linked: every high-profile decision by state leaders, every political scandal or international conflict has an immediate impact on financial markets and business sentiment. U.S. elections, trade wars, sanctions, or even rumors of tax changes — all of these can cause stocks to crash, capital outflows, or, on the contrary, an economic boom. That is why analysts closely monitor the index of economic political uncertainty – a kind of “barometer” of global stability, which helps to understand whether to prepare for new crises or, on the contrary, to expect a period of economic growth.
Global economic uncertainty at its peak: what’s going on?
Currently, global economic policy has entered a phase of significant uncertainty – its level has reached a maximum since 2020. One of the main reasons for this is the escalation of trade disputes, primarily due to the customs policy of Donald Trump, who is once again making protectionism and trade restrictions key elements of his economic strategy.
New tariffs that the US plans to impose on imported goods could cause major changes in global supply chains. Business is forced to adapt: manufacturers are looking for alternative sales markets, investors are reviewing their risks, and states are preparing for possible economic shocks.
This uncertainty is already having tangible effects, with stock markets showing increased volatility and major companies revising their investment strategies. For example, in response to trade barriers, Chinese companies are investing more actively in production facilities in Mexico in order to maintain access to the American market by avoiding tariffs.
In addition to US trade policy, other factors affect global economic stability: tensions between China and Taiwan, fluctuating energy markets and fears of a recession in major economies such as Germany. All this creates additional challenges for businesses and governments around the world.
Infographic: IA “FACT”
Consequences of raising customs duties
As the publication notes Visual Capitalist, the trade war is heating up: Trump strikes again with tariffs on Canada, the EU, Mexico and China.
In turn, the European Union responds with a 50% tariff on American whiskey, and Trump in response threatens 200% tariffs on alcohol from Europe. Brussels, in turn, is considering additional measures against American exports of steel, aluminum, beef and nuts.
German automakers, already under pressure, are increasingly seeking new markets outside the US, their biggest market.
Canada is also preparing to hit back after 25% tariffs on steel and aluminum. As the largest supplier of these metals to the U.S. — with total exports of $16.5 billion in 2024 — Ottawa plans to impose a 25% tariff on American tools, computers and sports equipment that would hit $28.9 billion in U.S. exports.
According to some estimates, if the tariff war continues and the US imposes 25% tariffs on Canada and Mexico, the cost of SUVs assembled in North America could increase by $9,000.
How is the index calculated?
The EPU index is based on the analysis of news texts in the leading mass media of 21 countries. It counts the frequency of articles that simultaneously mention terms related to the economy (economy), politics (policy) and uncertainty (uncertainty). The resulting data are then weighted according to each country’s share of global GDP to provide a global scale index.
The more news about the instability of economic policy, the higher the index. At the same time, if the economic situation is stable and political decisions are predictable, the level of the index decreases.
The idea of creating such an instrument arose after the 2008 financial crisis, when it became clear that instability in policy decisions could have a serious impact on markets and economic activity. The authors of the index sought to find a way to quantify this uncertainty so that economists and policymakers could predict its consequences.
Studies have subsequently confirmed that high EPU levels are correlated with lower investment levels, slower economic growth, and fluctuations in financial markets. Today, this index is used by analysts, central banks and governments to assess the risks associated with policy decisions.
For example, in 2016 the index jumped sharply after the Brexit referendum, and in 2020 it reached an all-time high due to the COVID-19 pandemic. Currently, it is on the rise again due to US trade policy, which indicates an increase in global economic risks.
What countries does the index cover?
The Economic Policy Uncertainty Index (EPU) covers 21 countries. It is believed that such a set of states is sufficient for a representative analysis of the world economy.
Why exactly 21? First of all, in view of the share in the world GDP. The index takes into account the countries that have the greatest influence on the global economy. They cover more than 80% of world GDP, which makes the calculation of the index relevant for assessing global trends. It is also important that the index covers different types of markets. We are talking about both economically developed countries (USA, Germany, Great Britain, France, Japan) and large developing economies (China, India, Brazil, Mexico). As the calculation of the index is based on media analysis, it is important to have access to a large number of news articles in each country. The authors of the index selected countries with reliable news archives with a sufficient number of publications.
In addition, the calculation takes into account countries whose political decisions may have global economic consequences. For example, the US shapes trade policies that affect the entire world, and China plays a key role in production chains.
In general, a set of 21 countries makes it possible to create the most accurate and balanced index that reflects global trends in economic uncertainty.
What upheavals of the past years caused the EPU to rise sharply?
Asian Financial Crisis (1998).
It is a chain reaction of stock market crashes, bankruptcies and currency crashes that started in Thailand and spread throughout Southeast Asia. The world saw how quickly a globalized economy can turn a regional storm into a global storm.
Dot-Com Bubble (2001)
The dotcom bubble is a financial bubble in the market of Internet companies that arose in the late 1990s and early 2000s, when the rapid growth of the popularity of the Internet provoked a massive influx of investments in so-called dotcoms – companies that worked exclusively on the Internet and had the domain name “.com”. Investors poured money into any Internet-related startup, hoping for a rapid increase in profits. Many companies went public (IPO) with neither a business model nor real revenues – just a big name and a website.
In the period from 1995 to 2000, the Nasdaq index, where technology stocks were concentrated, grew several times. But already in 2000-2001 it became clear that the majority of such companies would never become profitable. A massive collapse of shares began – the bubble burst.
The Internet boom turned into a resounding crash: companies that yesterday seemed like the future burst like soap bubbles. The stock market experienced a hard landing, showing that even technological progress does not save from financial illusions.
Global Financial Crisis (2008)
The collapse of Lehman Brothers on September 15, 2008 was one of the key events of the 2007–2008 financial crisis that hit the world economy. Lehman Brothers — one of the largest investment banking companies in the United States, which existed for more than 150 years, declared bankruptcy due to the inability to fulfill its financial obligations. The bankruptcy of Lehman Brothers became a symbol of financial excessive risk-taking, greed and insufficient control of credit markets, leading to the deepest economic crisis since the Great Depression of the 1930s. Governments and central banks have been forced to take unprecedented measures to support the financial system, including large bailouts of banks and other companies.
Trump’s Victory (2016)
Trump stormed into the White House and shook the markets. His protectionism, promises of trade wars and a sharp shift in policy have fueled a wave of uncertainty, forcing businesses to take risks and allies to rethink their strategies.
COVID-19 (2020)
The world froze. The borders were closed, the economy stopped, the stock markets panicked. What seemed like the plot of a fantasy film became a reality that turned global financial processes upside down.
Although the EPU is not a classic indicator for predicting recessions, it helps analysts, businesses and governments assess risks and prepare them for potential economic shocks. Its sharp rise is a signal of increased economic turbulence, which can affect financial markets, investments and central bank policies.
