Germany: Domestic political shocks affect investment and economic development

A recent study by the RWI – Leibniz Institute for Economic Research and TU Dortmund University has found that while international political uncertainties have had minimal impact on the German economy, domestic political shocks have significantly influenced investment and economic development. To better understand these dynamics, researchers have developed the Uncertainty Perception Indicator (UPI), a tool based on German newspaper content that measures the extent and nature of political uncertainty in near real-time. This allows for a more precise assessment of economic conditions and provides valuable insights for targeted and effective economic policy measures.

The study, conducted by Henrik Müller, Boris Blagov, Torsten Schmidt, Jonas Rieger, and Carsten Jentsch, highlights that the impact of political uncertainty depends largely on its source. Their analysis reveals that domestic political uncertainties play a far more significant role in shaping the German economy than global crises. Over time, the specific topics associated with economic uncertainty have shifted, with recent concerns increasingly centered around labor market policies.

To track these developments, the research team designed the UPI to break down political uncertainty into thematic areas. By analyzing a vast selection of German newspaper articles, the UPI can measure both the scale and characteristics of uncertainty shocks as they emerge. The indicator is systematically updated and evaluates data from approximately three million articles published in Süddeutsche Zeitung, Die Welt, and Handelsblatt, three major national newspapers that represent a broad political spectrum. Covering a dataset that spans from early 2001 to January 2024, the UPI provides a comprehensive overview of how political uncertainty evolves over time.

Torsten Schmidt, an economic expert at RWI, underscored the significance of the findings, noting that domestic political uncertainties have had a much greater impact on the German economy than international crises. “While global geopolitical developments may influence public sentiment, it is domestic concerns—particularly uncertainty in the labor market—that have had the most direct effect on economic growth. With the Uncertainty Perception Indicator, we can track in near real-time when and how political uncertainties influence the investment climate and overall economic development,” Schmidt explained. He emphasized that the UPI offers policymakers a crucial tool to make informed, timely, and effective economic decisions.

Source: RWI Essen, Photo: Fotolia