European Central Bank research finds policy-related uncertainty in the euro area remains elevated and could weigh on business investment

The European Central Bank published analysis in its Economic Bulletin assessing recent signals from multiple uncertainty proxies and their implications for euro area macroeconomic outcomes. It concludes that uncertainty linked to the near-term economic situation is currently relatively low, while uncertainty tied to longer-term policy issues remains elevated and is likely to continue weighing on economic activity, particularly business investment, in the coming quarters. The assessment contrasts short-term indicators such as the Jurado et al. macroeconomic uncertainty index, forecast disagreement measures, the European Commission’s survey-based economic uncertainty series and the ECB’s Composite Indicator of Systemic Stress with policy-related measures including the news-based Economic Policy Uncertainty index and text-based indicators for geopolitics, trade and climate policy. While the indicators generally peaked around the Russian invasion of Ukraine and many near-term measures have returned to historical averages, most policy-related measures remain significantly above their historical means, with an earnings-call-derived risk index also indicating that risk perceptions have fallen from spring 2022 peaks but remain above pre-pandemic levels, especially for geopolitical tensions and climate. Bayesian vector autoregression results using data from the first quarter of 1999 to the second quarter of 2024 link increases in most uncertainty measures to declines in real GDP, consumption and business investment, with investment typically more adversely affected than consumption, and geopolitical risk identified as an exception in these estimates.