Uncertainty around trade will have a major impact on global growth, reducing business investment in the EU and the UK by 2% this year, Oxford Economics finds.
Businesses across major economies including the EU are expected to cut back on investment plans due to increased uncertainty.
In particular, this climate has been created by the trade policies of the Trump administration in the US, which currently affect third-country imports as a broader trade war is shaping up.
According to the latest report from Oxford Economics, trade policy uncertainty alone is predicted to dramatically cost the global economy, mainly due to a drop in investments.
The report examines four possible scenarios to see what impact trade policy uncertainty could have on investment and consequently on the global economy.
“Investment is markedly weaker this year, with an undershoot of about 4% in the US and China, and about 2% in the Eurozone and UK,” Senior Economic Advisor Michael Saunders and Lead Economist Dr Daniel Harenberg wrote in the report.
In 2023, business investment came to levels equal to 22% of GDP in China, 15% in the US, 12% in the Eurozone, and 10% in the UK. The predicted undershoots would produce a significant but not devastating effect on GDP growth.
The report said that the effects of uncertainty are in addition to the direct effects of higher tariffs, which themselves are likely to lower growth while lifting inflation.
Escalating trade tensions further, US President Donald Trump has also proposed a 200% tariff on EU alcohol imports, a threat he said would remain until the EU removed a 50% duty on US-made whiskey. The European Commission is threatening countermeasures on up to €26bn worth of US goods.
Meanwhile, the White House is closely watching the EU’s application of its digital competition laws. The US could hit back if the bloc decides to fine one of the major American tech companies like Apple or Meta.
Why does trade policy uncertainty impact business investments?
According to a previous study by Oxford Economics published at the beginning of March, the uncertainty around trade alone could hit the eurozone’s GDP by 0.2% over the next 12 months, with a drop in investment driving the decline. Oxford Economics found that small countries, which are more open to trade, are going to be hit the hardest, including Luxembourg, Slovakia, and Bulgaria. GDP could decline by around 0.8%-1% within two years in these member states.
In terms of larger EU economies, Belgium and Italy will be among the most severely impacted nations, according to the study.
Exporters to and from the US will be more cautious, noted the current report, adding that “even if high US tariffs encourage import substitution in the US, firms in these sectors might be reluctant to invest and expand capacity”, pointing to the quickly changing policies.
Uncertainty in such a key market for EU exporters, particularly carmakers, will induce a cautious business approach. Firms are holding back on investment decisions that are difficult and costly, including hiring, spending on research and development, and new market entry.
Meanwhile, consumers may also delay plans to purchase a house or major durable goods.
In turn, the lack of spending from businesses and consumers leads to fewer services and goods being sold. Lower demand contributes to lower business confidence, and the combined effect results in the economy contracting, sparking a vicious circle of declining employment and further deteriorating demand.
What are the possible outcomes of the current uncertainty?
According to Oxford Economics, trade uncertainty has four different possible outcomes on private business investment and global growth.
In the case of a rapid decline in uncertainty, which fully disappears by the end of the year, investments are expected to recover next year. This could happen if, for instance, the ongoing tariff threats and negotiations simply result in a one-off reset to a new higher tariff level, with no further changes on the cards. In this case, the currently forecasted drop in investments across the US, China, the UK and the EU would recover in 2026 and later years.
If, on the other hand, a near-term rise in tariffs is followed by an extended period of uncertainty, declining only by 2028, “it will cause greater economic harm beyond this year,” the authors said.
Investment could collapse by about 10% in the US and China, 6% in the Eurozone, and 4%-5% in the UK.
The third and fourth scenarios in the report look at the effects of trade policy uncertainty gradually falling to a still relatively high level or not falling at all, with uncertainty remaining at its current level until the end of 2029.
If it remains at its heightened levels over the next few years, “it would create a sizeable drag on global investment, reducing it by 10%-20% across major economies over several years,” said the report.
According to Oxford Economics, the worst-case scenario would result in a 20% drop in investments in China, 14% in the US, 10% in the Eurozone, and 7% in the UK by 2029.
“In this case, either a course correction – to reduce trade policy uncertainty – or major support from monetary and/or fiscal policies would probably be likely to avoid prolonged weak global growth,” said the report.
