Continuing from yesterday...(see here)
Rising uncertainties
In the past one year, global economic uncertainties have intensified, contributing to a marked slowdown in growth projections—from around 3.2% in 2024 to 2.3–3.0% in 2025—amid persistent disruptions that have eroded investor confidence and trade flows. This volatility stems from a confluence of interconnected factors, including policy unpredictability, deteriorating fiscal positions worldwide, and escalating geopolitical tensions, which collectively amplify risks of financial instability and reduced productivity.
Economic policy uncertainty
Economic policy uncertainty (EPU) in the US has surged to levels roughly double its long-term average since 2008, exacerbated by the 2024 presidential election and subsequent shifts toward looser regulation, tax cuts, and aggressive tariffs. These US-centric changes have spiked trade policy uncertainty to record highs in early 2025, prompting front-loaded imports and market volatility, while hindering global investment as firms adopt a "wait-and-see" stance.
Globally, this unpredictability—compounded by inflation divergence and abrupt financial tightening—has led to capital outflows from emerging markets and a broader erosion of business confidence.
Worsening fiscal imbalances globally
Fiscal strains have deepened across both advanced and developing economies, driven by post-pandemic debt accumulation, demographic pressures from aging populations, and reduced fiscal buffers amid tepid growth.
In the US, expected fiscal expansion alongside tariffs has fueled concerns over sustainability, while in emerging markets, declining export revenues and aid flows heighten debt distress risks. Least developed countries face particular vulnerability, with growth slowing to 4.1% in 2025 and fiscal space shrinking due to high interest rates and social unrest from cost-of-living crises. These imbalances threaten medium-term growth, necessitating urgent buffer rebuilding and structural reforms.
Widening Geopolitical Conflicts
Ongoing conflicts in Ukraine, the Middle East, and heightened US-China tensions have fragmented global supply chains, elevated energy and food prices, and introduced unpredictable shocks, ranking state-based armed conflict as the third-highest global risk for 2025.
Geopolitical risks, including cyber espionage, have spiked, disrupting trade (projected to halve to 1.6% growth in 2025), and adding risk premiums to commodities. This fragmentation fosters rival economic blocs, reduces supply capacity, and amplifies inflation, with escalation scenarios potentially driving oil prices 30% above baselines.
Overall, these dynamics signal a shift toward a more shock-prone, low-growth world, underscoring the need for multilateral cooperation to mitigate downside risks and foster resilience. Which unfortunately is not happening. In fact, recent events have highlighted that the global leadership might be progressing in the reverse direction.
The following are some of the noteworthy events giving rise to global uncertainties: Saudi Arab-Pakistan strategic agreement, Israel attacking targets in Qatar; the US demanding possession of Bagram airbase in Afghanistan; Russian jets and drones transgressing into neighboring countries; the US intensifying sanctions on India (penal tariff of 25%, extraordinary fee on H1B petitions; threat to leave Chabahar port in Iran); Iran and threatening other trade partners with sanctions over buying Russian oil; widespread civil unrest in several European countries against immigration policies
Conclusion
· Uncertainty remains elevated globally, though there is some modest easing in financial / macro uncertainty, but not enough to suggest a return to stable, low-uncertainty conditions.
· Inflation expectations are creeping up in the short to medium term, especially over 5-year horizons, though not exploding. Uncertainty about inflation is somewhat contained short-term but more diffuse long term.
· Fiscal deficits (especially in the US) are large and projected to remain so; that is feeding into risk premia and possibly inflation expectations.
· Market interest rates are sensitive to fiscal imbalance: higher debt projections / deficit forecasts are already pushing up yields / forward rates somewhat.
· Global asset prices might be diverging, a little too far, from the economic realities, and therefore, remain susceptible to a sudden and sharp correction.
Also read
Dark clouds gathering on the horizon - 1
