How economic uncertainty disrupts investment

A dollar you invest today can earn you more money in the future—if you invest it wisely. That’s a basic principle of investment, and it holds true whether you are a person investing in the stock market or a company investing in its own operations. But any investment carries some level of risk and business investment is no different. When businesses make a major investment in their operations, they often borrow money to do so and pay it back over several years. To make this type of commitment, they need to be confident about the future.

Business leaders tell us about many different sources of economic uncertainty that can affect their investment decisions, including:

• economic and political conditions, both domestic and global
• challenges accessing financing
• trade policy and tariffs

Increased uncertainty makes it more difficult to know whether an investment will work out, even if a business knows it could have a big pay off in the long run.

Investment drives economic activity

Investments drive economic activity, which benefits both companies and workers. New equipment can make a business more efficient and enable them to produce more. Higher levels of production can mean more economic activity, and that, in turn, can lead to the creation of new jobs.

But uncertainty can cause businesses to delay investments, to make more limited investments, or to not invest at all. Consider an example with uncertainty around trade policy and tariffs. When trade policy is unpredictable, businesses don’t know if they will have access to the markets where they sell their products or if tariffs will undermine their competitiveness. This means they don’t have a clear picture of how much they will be able to sell, which makes it difficult to estimate how much revenue an investment will generate.

Even the threat of tariffs increases uncertainty, making it difficult for businesses to predict how much of a product they will be able to sell. This uncertainty gets in the way of decision-making. When a business has a reasonable amount of certainty about market access and tariffs, it knows which markets it can do business in and which ones it can’t. Tariffs, once imposed, can make some ventures unsuccessful. But even when tariffs are in place, knowing the details can help a business make investment decisions faster. When businesses know which products will be tariffed and by how much, the potential return on the investment becomes much clearer to calculate.

Expectations can become reality

High levels of uncertainty affect the expectations of businesses and consumers. And what people expect to happen in the economy plays an important role in what actually happens. Expectations affect purchasing decisions—especially major ones. Consumers often borrow money to make a major purchase such as a new vehicle, and businesses often borrow money to invest in equipment. If people believe the economy will be stable and strong, they are more likely to make these types of purchases, which could take years to pay off, and that helps drive economic activity. But when people don’t know what lies around the next corner, they are reluctant to make a major purchase because they might benefit by delaying it, and this can slow the economy.

To understand how Canadian businesses and consumers will behave, the Bank of Canada actively seeks out their perspectives. Their views help us interpret trends we see emerging in the economy. We connect with Canadians by:

• meeting regularly with industry associations to understand what’s happening in different sectors of the economy
• meeting with business leaders and owners as well as community representatives across Canada to gain insight into the current realities of our country’s diverse regional economies
• surveying and interviewing Canadians and business leaders on a regular basis

Every quarter, the Bank conducts the Canadian Survey of Consumer Expectations with individuals across Canada. This survey helps us understand Canadians’ expectations for inflation, the labour market and their household finances. Four times a year, we publish our Business Outlook Survey, based on in-person and telephone interviews Bank staff have every quarter with about 100 businesses across Canada. The Business Leaders’ Pulse is an online survey conducted each month. It is designed to provide timely input into the Bank of Canada’s monetary policy decision-making while also creating a tool for analyzing business conditions and uncertainty.

We speak with companies of all sizes, from every region of the country. And we try to understand how businesses are doing in key sectors of the economy—from resource industries like mining and forestry to service-oriented sectors like technology and financial services. We ask leaders about their own business plans, and what they expect to happen in the economy. By listening to businesses and consumers, we gain a deeper understanding of the sources of economic uncertainty and how people are responding to it. This helps us forecast economic growth and inflation and feeds into monetary policy discussions about how the economy is working across the country and where inflation might be heading.