Uncertainty about the economy and economic policy in Australia and the United States has intensified since the global financial crisis, with Australia’s high turnover in prime ministers and US political battles over the budget and debt ceiling resulting in increased episodes of policy uncertainty.

With recent advances in the measurement of economic policy uncertainty – which has enabled researchers to quantify its effects on the economy new research released today by the United States Studies Centre at the University of Sydney (USSC) examines the effect of this uncertainty on cross-border trade and investment.

"Increased economic policy uncertainty has been shown to have negative effects on economic activity, employment, trade and investment, while partisan political conflict in the United States has been shown to have negative effects on economy-wide and firm-level investment spending," says director of the USSC's Trade and Investment Program and report author Dr Stephen Kirchner.

"Australian policy uncertainty is more volatile than for the United States and globally. This is consistent with Australia’s status as a small, open economy more exposed to foreign shocks than a large and relatively closed economy like the United States."

Key points

  • Australian economic policy uncertainty is more strongly correlated with policy uncertainty in the United States than in China or the rest of the world.
  • Given the elevated levels of US economic policy uncertainty (including trade policy), and increased partisan political conflict associated with the Trump administration, US and global trade and investment can be expected to be weaker than if the administration followed a more predictable economic policy path at home and abroad.
  • By supporting a rules-based political and economic order both at home and abroad, Australian policymakers can mitigate the negative economic implications of foreign and domestic policy uncertainty shocks.

View report

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