Why tariffs are not the world’s biggest problem right now

The real threat facing the US and global economic outlook is not the Trump administration’s trade policies — though these will cause significant economic damage — but rather the elevated levels of uncertainty being generated by the daily torrent of social media statements, policy reversals, threats and retreats. 

US President Donald Trump’s erratic economic policy stance is just one of the factors contributing to the unusually vast array of scenarios that the world is facing, from the impact of AI, increasingly extreme weather conditions, ongoing wars in Europe and the Middle East, to the gathering global trade war and the erosion of the US’s central role in the global financial system. 

Even the IMF noted in its April 2025 World Economic Outlook: “The global economic system under which most countries have operated for the last 80 years is being reset, pushing the world into a new era. Existing rules are challenged while new ones are yet to emerge.” 

Bloomberg Opinion columnist Justin Fox succinctly summed up the situation in the title of his recent column: “Economic uncertainty has never felt so uncertain”. Though one could argue that the title of the 2022 movie Everything Everywhere All at Once provides an equally compelling description. 

Trump’s erratic trade policies have already begun to exact an economic cost on US and world economies. However, there is some debate about whether the brewing global trade war alone would be enough to tip the US economy into recession, with the Budget Lab at Yale estimating in mid-April the economic cost of prevailing trade tariffs at 1.1% of US GDP in 2025 alone. 

However, the general disarray created by US trade policy, along with the chaotic efforts to cut federal spending and Trump’s threats to the independence of the Federal Reserve, is surely taking a greater toll on economic activity in the US. JPMorgan recently noted that in the (unlikely) event that “current policies do not change, then the probability of a US recession in 2025 is 90%.” 

Unsurprisingly, quantifying the economic impact of uncertainty is much harder than estimating the cost of tariffs. Nonetheless, a measure of the prevailing level of economic policy uncertainty seems to be a good starting point. 

One attempt to measure the effect of uncertainty was initiated in the aftermath of the global financial crisis (mid-2007 to early 2009) when the US Fed was experimenting with unprecedented monetary policy measures, such as lowering interest rates to near zero and providing banks with $7.7-trillion in emergency loans through a policy known as quantitative easing. The Obama administration was simultaneously pushing through banking regulation and health-care reform, among other legislative measures.

Business leaders at the time complained that the resulting policy uncertainty was making it difficult for them to plan and invest. That prompted a group of economists to set about testing whether policy uncertainty did in fact result in an actual economic burden.

In a paper released in 2013, economists Scott Baker, Nicholas Bloom and Steven Davis found that constructing indices based on the frequency with which words such as “uncertainty” appeared alongside words such as “deficit”, “regulation” or “White House” revealed that increases in such “uncertainty indices” preceded declines in investment, output and employment.

The three economists noted that their index “spikes near tight presidential elections, after the Gulf wars, the 9/11 attack, the Lehman bankruptcy and during the 2011 debt ceiling debate”. They suggested that the index may offer “a good proxy for movements in policy-related economic uncertainty over time”. 

However, they were not convinced that the relation was causal, as policymakers are often more active during periods of economic crisis.

The world uncertainty index (WUI), a collaboration between IMF and Stanford University economists, is another such measure. In this case the index is calculated by counting the percentage frequency of the word “uncertain” (or its variant) in the Economist Intelligence Unit country reports.

According to the WUI, global uncertainty soared to a record high in the first quarter of 2025 — exceeding the previous high recorded at the height of the pandemic. 

Global economic policy uncertainty has spiked several times before but in each case was typically associated with a financial crisis, recession or other negative global development. The current surge is unique not only in its magnitude but also the cause — this is the first one that has been entirely self-inflicted. 

According to Stanford economist Steven Davis, uncertainty is far worse than a high but definitive tariff. Companies and consumers are able to plan for, and adapt to, a clear policy — even if there is an associated economic cost. However, when rules themselves are unclear, the resultant uncertainty is harmful to business activity — beyond the actual impact of the policies themselves. 

At times of heightened uncertainty, major decisions by consumers and businesses alike are paused — as they are often expensive and/or difficult to reverse. For companies, this would include investment, research & development or hiring decisions, while for households, it may include buying a home or major durable goods such as a car. At a time of heightened unpredictability, the safest course of action for households and businesses is inaction. 

In this way, uncertainty acts as a tax, distorting decisions and making the economy as a whole less efficient.

The IMF’s April 2025 World Economic Outlook revealed an attempt to measure the economic cost of both the deepening global trade war and the elevated policy uncertainty caused by the current US administration.

Global growth forecasts were substantially downgraded from the IMF’s own forecasts published just three months ago. The world economy is now expected to grow by 2.8% in 2025, down by 0.5 percentage points (pp) from the forecast at the start of the year. US growth forecasts were particularly hard hit, with the 2025 growth rate reduced by 0.9pp to 1.8% and by 0.4pp to 1.7% in 2026. 

No country is considered immune, with South Africa’s growth prospects cut by 0.5pp to just 1% in 2025 and by 0.3pp to just 1.3% in 2026 — signalling a continuation of its long-running low-growth trap.

South Africa has exacerbated its own situation when, against an already fraught global economic backdrop, political partners in the GNU embarked on an extended power struggle over the now abandoned VAT hike — raising doubts as to the coalition government’s future and adding an additional layer of uncertainty. 

The resultant political turmoil, coupled with the initial proposal of a 2% hike in VAT and the gathering global trade war, resulted in a slump in local consumer confidence, with the FNB/BER consumer confidence index (CCI) plunging to a reading of -20 in the first quarter of 2025. This effectively reversed the recovery in confidence during the second half of last year after the formation of the GNU and the end of load-shedding.

Somewhat disturbingly, none of these confidence or uncertainty measures reflects the full impact of Trump’s tariff “liberation day” and the subsequent turmoil in global trade and financial markets.

On a more positive note, there are encouraging signs that financial markets may have sufficient power to contain Trump — as bouts of turmoil, particularly in the bond market, have forced him to back down on some proposed tariffs and his threats to the independence of the Fed.

It is also possible that the steady decline in Trump’s approval ratings during his first three months in the job, to the point where more than half of the country now disapproves of his performance, may ultimately force him to change tack. Even if he does, that would not guarantee a reduction in uncertainty, as he has proved to be inherently unpredictable.

The longer that current levels of uncertainty continue, the greater the risk of an entirely unnecessary recession.