Four Major Issues Explain the Current Turmoil in the Global Economy

“The greatest danger in times of turbulence is not the turbulence itself, but to act with yesterday’s logic.” With these words, Peter Drucker, the father of modern management, summarizes the essence of the challenge we are experiencing today.

In the first quarter of 2025, the World Uncertainty Index, issued by the Economic Intelligence Unit in early April, recorded a sharp and unprecedented increase since January, surpassing the 50,000-point mark at the end of March 2025 for the first time since the peak of the COVID-19 pandemic in 2020, reaching its highest level in five years. This reflects a climate of ambiguity looming over global economic and geopolitical prospects.

Such a rise in uncertainty has serious consequences for the economy as a whole. It discourages companies from investing and causes them to delay projects, while households curb consumption in anticipation of more clarity. Below, we present four key issues fueling the current wave of uncertainty: disrupted trade policies, unstable monetary shifts, escalating geopolitical tensions, and the wealth effect. We analyze how these factors intersect in shaping the features of the current global landscape, aiming to develop a perspective that helps us navigate wisely in a world of constant volatility.

1. Disruption in Trade Policies

Global trade policy is experiencing severe turbulence that contributes significantly to fueling economic uncertainty. Early 2025 witnessed surprising and escalating steps in trade wars, placing companies and nations in a foggy regulatory environment. The effects of trade policies on uncertainty appear in four key areas:

• Rise of Protectionism and Supply Chain Disruptions: Sudden decisions like broad tariff impositions—such as the U.S. announcement of a 10% blanket tariff on imports or escalations against major partners—have destabilized the global trade order, even though some measures have been delayed. International entities like the World Trade Organization have warned that such steps could push global trade into contraction this year. Many importers rushed orders before the new tariffs took effect, leading to a temporary boom at the beginning of the first quarter, followed by a sharp slowdown. For instance, a UNCTAD report noted a 40% drop in the Comprehensive Shanghai Export Containerized Freight Index between early January and the end of March 2025 after the pre-demand wave. Sea Intelligence predicted shipping profits would fall by more than 80% in 2025 compared to the previous year, reflecting trade slowdown under protectionist pressures.
• Reshaping Global Supply Chains: Amid uncertainty over future trade rules, multinational companies are reassessing their supply chain strategies. The “China +1” strategy has emerged as a model, with companies seeking production alternatives outside China to reduce exposure to U.S.-China trade shocks. This shift toward diversified or nearshoring supply bases comes with higher costs and lower efficiency but is seen as a hedge against supply disruptions. Yet, these strategic changes still carry uncertainty, as policies may change before these repositionings pay off, making today’s decisions bets on an uncertain future.
• Pressures on Emerging Markets and Regional Trade: Developing countries heavily dependent on exports are paying a steep price for trade policy uncertainty. These economies rely on stable demand from major markets and predictable trade rules. Sudden tariff or agreement changes hurt investor confidence and development plans. Recent analyses highlight the need for developing countries (especially in Africa) to learn from global trade shocks and strengthen regional trade to protect themselves. Without regional safety nets, growth remains vulnerable to uncontrollable global volatility.
• Decline of Multilateral Agreements: In a climate of doubt, efforts to finalize new global trade agreements have slowed, and trade liberalization talks are faltering. Instead, the focus is shifting to bilateral deals or regional blocs with geopolitical overtones. This shift confuses companies used to operating under the WTO’s relatively stable frameworks. They now face a patchwork of rules and standards per market, increasing regulatory costs and impairing long-term planning. Uncertainty has become the norm in every cross-border deal and investment.

2. Monetary Shifts and Market Volatility

Global monetary policy is at a historic crossroads, contributing to prevailing uncertainty. Monetary policymakers face the dilemma of curbing inflation while supporting growth, with markets scrutinizing every signal from major central banks. The monetary turmoil affects investor confidence and economic stability in the following ways:

• Central Bank Fluctuation Between Tightening and Easing: At the start of 2025, deep debate erupted over the next moves by the U.S. Federal Reserve, the European Central Bank, and others. After a series of steep rate hikes in 2024 to rein in inflation, signs of economic slowdown triggered fears of potential recession. Central banks now face a key question: pause or lower rates to support growth, or maintain a tough stance until inflation drops definitively? With interest rate paths unclear, forecasting borrowing and investment costs has become daunting for both governments and businesses.
• Financial Market Volatility at Historic Levels: Monetary uncertainty quickly spilled into financial markets. Stock and bond markets have seen intense swings since early 2025 under mixed signals. The Volatility Index—dubbed the “Fear Index” on Wall Street—reached historically high levels, posting the third-highest reading ever after the 2008 crisis and the 2020 pandemic. On April 8, it climbed to 52.33 points, up 61.4% over the last six months. This surge reflects investor anxiety and hypersensitivity to new information, causing sharp, rapid swings. Markets now overreact to any monetary or geo-economic developments, highlighting fragile confidence and readiness to withdraw at the slightest sign of trouble.
• Debt Burdens and Financial Stability Risks: The era of low interest rates followed by steep hikes in 2024 left behind heavy debt across public and private sectors. Rising debt servicing costs have raised concerns about potential liquidity crises or defaults among highly leveraged firms or indebted emerging economies. This heightened uncertainty about global financial system resilience, with fears of a debt crisis if a major economy or large financial firm defaults, possibly sparking a 2008-style contagion. These risks push monetary authorities into a constant defensive posture and force investors to demand higher risk premiums in anticipation of worse scenarios.
• Exchange Rate Fluctuations and Capital Flow Volatility: Diverging monetary trends among major economies have caused wide currency market swings. The U.S. dollar, for example, has repeatedly risen and fallen sharply against major currencies, based on shifting Fed expectations relative to Europe and Asia. Such currency volatility disrupts planning for multinationals reliant on stable exchange rates for cost and profit projections. Interest rate gaps have also led to unpredictable capital flows across borders—emerging markets saw outflows each time U.S. Treasury yields were expected to rise, only to experience partial rebounds as sentiment shifted. These swings force emerging economies to hike local rates preemptively, stifling domestic growth and adding yet another layer of uncertainty over macroeconomic stability.

3. Geopolitical Tensions and Reshaping the Global Order

The geopolitical landscape is no less turbulent than the economic one—perhaps even more so in driving today’s uncertainty. The year 2025 began with ongoing old conflicts and new tensions, painting a world in flux between a fading old order and an emerging, unclear new one. Some of the geopolitical flashpoints fueling global uncertainty include:

• Ongoing Conflicts and Economic Fallout: Regional hotspots remain active, especially the Russia-Ukraine conflict, which has disrupted global energy security and reshaped grain and fertilizer supply chains. Uncertainty over the war’s duration and outcome keeps oil and gas prices volatile, despite European diversification efforts. This affects investment decisions across sectors from heavy industry to agriculture. Likewise, the Middle East sees security rivalries and civil conflicts that pose risks to oil stability and trade flows. Any escalation on the ground increases uncertainty about resource availability and pricing.
• Great Power Competition and Realignment: Relations among major powers have reached a sharper inflection point. The U.S. and China are locked in strategic competition across trade, tech, and political influence. This includes a tech war over semiconductors and AI, and efforts by each to form economic and security blocs. This rivalry creates uncertainty for tech and industrial firms: Should they invest in China or seek alternatives? The specter of traditional crises—such as the Taiwan Strait—is back, with any tension there rattling global stock markets. International politics is now an unpredictable arena, complicating long-term strategic planning.
• Domestic Political Instability: Political risks are not just international—they extend to internal turmoil in major nations. Changes in administrations can reverse policies overnight. The U.S. saw a political shift that revived protectionism and renegotiated international agreements. In Europe, divisions over energy and defense spending, alongside the rise of populism in some states, threaten EU unity. In emerging powers like India and Brazil, policy directions remain fluid ahead of elections, puzzling investors and analysts alike. These internal shifts in key nations translate into volatile cross-border policies—from trade and climate change to migration—making it difficult to count on consistent international commitments.
• Geo-economic Fragmentation and Global System Redesign: In the long run, the above tensions lead to broader geo-economic fragmentation. We appear to be witnessing the erosion of the liberal global order that followed the Cold War, with a transition toward rival economic-political blocs. Trade, finance, and supply chains now follow strategic and security imperatives, not purely economic ones. Parallel trade and financial institutions are emerging in the East as alternatives to Western-dominated ones. This transitional reality brings deep uncertainty: What will globalization look like in a few years? Will the world split into disconnected networks with different standards and financial systems? For executives and strategists, this means constantly reevaluating assumptions that once guided investment and expansion decisions. The very rules of the game are subject to sudden change.

4. The Wealth Effect and the Vicious Cycle

Amid rising uncertainty, the “wealth effect” emerges as a significant psychological and economic mechanism. When asset values—stocks, real estate—decline, people and institutions feel poorer, even if actual incomes remain unchanged, and vice versa. Currently, this phenomenon is likely to have widespread macroeconomic impacts and create a reinforcing cycle of slowdown driven by several key factors:

• Household Consumption Contraction: When households see their paper wealth shrink due to falling stock or real estate prices, they feel financially insecure and cut spending—especially on durable or luxury goods like cars, tourism, and electronics. This spending drop affects not just consumer-linked sectors but also supply chains and retail, weakening overall growth—particularly in economies where domestic consumption makes up a large share of GDP.
• Delayed Investment Decisions: As asset valuations fall, investors grow cautious, delaying new projects or expansions. Companies may hold back on capital spending, fearing further declines or poor returns. Even firms not facing liquidity issues may be constrained by market and shareholder pressure to conserve capital instead of taking risks. This hesitance deepens recessions and stalls the growth cycle.
• Business Confidence Decline and Risk Aversion: The negative wealth effect fosters a collective sense of losing control among investors and business leaders, leading to excessive risk aversion. The priority becomes maintaining the status quo rather than exploring new opportunities. This typically brings reduced innovation, slower decisions, and business stagnation—making markets less resilient to future shocks and reinforcing uncertainty.
• A Self-Perpetuating Downward Spiral: Falling wealth leads to reduced consumer and investment spending, which causes deeper economic slowdowns and further asset declines, reinforcing uncertainty and restarting the cycle. Breaking this vicious circle requires external interventions that tackle the root causes of uncertainty—such as effective stimulus policies, sudden confidence boosts, or market rallies that restore optimism. Until then, the global system remains psychologically and economically fragile with uncertain outcomes.

In conclusion, the sharp rise in the World Uncertainty Index reflects more than just temporary anxiety; it points to a deep and structural transformation in the global system. We are witnessing the slow unraveling of familiar frameworks—economic, geopolitical, and financial—and the emergence of a new world that is still taking shape.

Navigating this evolving reality requires decision-makers—whether in governments, central banks, or multinational corporations—to adopt a new mindset: one that abandons the logic of yesterday and embraces agility, strategic foresight, and continuous scenario planning. We must learn to manage uncertainty not by eliminating it, which is impossible, but by building resilient systems that can withstand shocks and adapt to change.

The four forces discussed—disrupted trade policies, monetary instability, geopolitical tensions, and the wealth effect—intertwine to produce a volatile environment that challenges all traditional models of risk assessment and economic forecasting. Only by recognizing the interconnectedness of these drivers and acting with coordinated, forward-looking policies can we hope to restore a measure of predictability and stability to the global economy.

In a world where unpredictability has become the norm, the true advantage lies not in certainty, but in the ability to respond wisely to the unknown.