How to overcome the side effects of global economic uncertainty on financial volatility?

Economic uncertainty is the absence of clarity or predictability regarding the state of the economy going forward. It includes a number of elements that make it challenging for investors, businesses and policymakers to predict economic trends, make decisions and create long-term plans with accuracy. Several fundamental components of economic uncertainty include the following:

  1. Macroeconomic Factors – A geopolitical, environmental, or economic event that affects the financial stability of an entire nation or region as opposed to a particular segment of the population is referred to as a macroeconomic factor, including GDP, inflation and interest rates, fiscal policy, etc. Uncertainty arises, when these variables deviate from past trends or when it's unclear how they will change in the future.
  2. Policy Uncertainty –The fiscal, regulatory or policy changes of the government can create uncertainty in the economy. Uncertainty regarding trade agreements, tax laws or monetary policy, for instance, can affect investment plans and business choices.
  3. Geopolitical Events – Global economy can be impacted by events that cause uncertainty, such as wars, trade disputes or other large scale political conflicts.
  4. Market Volatility – Economic uncertainty is exacerbated by fluctuations in commodity prices, stock prices, exchange rates, and other financial markets. Unexpected events or abrupt changes in the market can raise uncertainty and cause investor anxiety.
  5. Technological Disruptions – Automation, artificial intelligence and digital transformation are examples of rapid technological advancements that have the potential to transform entire industries, open up new business opportunities and challenge the nature of the labor market and future job prospects.
  6. Consumer and Investor Sentiment ­– The sentiment of investors and consumers are key factors that boost economic activity. Future economic conditions can be unpredictable, which can have an impact on investment choices, consumer spending and overall economic growth.
  7. Global Economic Interconnectedness – Events in one area of the world can have ramifications in other areas of the world due to the increasing interconnectedness of the global economy. Trade links, financial contagion or supply chain disruptions can contribute to the global spread of uncertainty from one nation or market to another.
  8. Black Swan Events - A black swan is an unforeseen event with potentially dire repercussions that goes beyond what is typically anticipated from a circumstance. Examples include financial crises (2007–2008 Global Economic Crisis), pandemics(COVID-19 pandemic) and natural disasters. Even though it's hard to predict when these things will happen, they have the potential to seriously raise economic uncertainty and cause financial market disruption.

Proactive actions and strategic decision-making must be combined to mitigate the negative effects of economic uncertainty on financial volatility. The following are some tactics that people, companies and legislators can use to lessen the effects of economic uncertainty:

  1. Diversification – “Don’t put all your eggs in one basket,”- a well-known proverb about the importance of diversification. Diversification across sectors, geographies and asset classes can help reduce exposure to overall risk. This can act as a buffer against market or industry-specific volatility caused by uncertain economic conditions.
  2. Risk Management – In order to protect investments and reduce potential losses, proactive approaches, thoughtful decision-making and continuous monitoring are necessary for effective risk management in the context of market volatility.
  3. Liquidity Management – It is crucial to have enough cash on hand to meet short-term financial obligations which in turn will give the flexibility to take advantage of investment opportunities or get past unforeseen challenges during market downturns.
  4. Long-Term Perspective – It is important to pay attention to the underlying value and fundamentals instead of impulsively responding to market sentiment, to stay focused on long-term investments and to refrain from acting rashly in response to transient market fluctuations caused by the unpredictability of the economy.
  5. Policy coordination – To promote economic growth and contribute to the reduction of economic uncertainty, policymakers should implement clear and coherent policies.
  6. Communication and Transparency – Reducing uncertainty and reviving confidence in the financial markets can be facilitated by policymakers, central banks and financial institutions communicating and being transparent with each other.

These are just a few examples of how to mitigate the impact of economic uncertainty on financial volatility. The economy is always changing, so it's critical to remain flexible and sensitive to these changes. Making educated decisions and modifying strategies in response to geopolitical events, market trends and economic indicators requires constant observation. Businesses, investors and policymakers can successfully navigate the changing economic landscape by managing risks with agility and proactivity.

“In an economy where the only certainty is uncertainty, the one sure source of lasting competitive advantage is knowledge.”

Ikujiro Nonaka, Japanese organizational theorist

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Prepared by: Seda Janazyan, Business Analyst at

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