The Bank for International Settlements published a bulletin assessing how the recent surge in trade-related policy uncertainty is reshaping private business investment and the conduct of monetary policy. It concludes that uncertainty linked to broad-based US tariffs and potential retaliation is likely to weigh on investment and output in the near term and can also reduce the responsiveness of investment to interest rate changes. The paper finds that business fixed investment as a share of GDP has fallen or remained flat in advanced economies for decades and has recently levelled off in several emerging market economies, including China and India, amid structural forces such as cheaper capital goods, ageing and a shift in demand towards services, weaker public investment alongside higher public debt, and increased market concentration, as well as slower growth in global trade and foreign direct investment. Using an econometric model conditioned on economic policy uncertainty remaining at the elevated levels observed in April and May 2025 through the second quarter, the authors estimate a substantial negative contribution of uncertainty to non-residential private investment and GDP growth in the United States, the euro area and Japan over 2025 and 2026. On monetary policy, the bulletin characterises tariffs and uncertainty as a stagflationary shock for economies imposing or retaliating with tariffs, while suggesting the effect in non-participating economies may resemble an adverse demand shock, and it reports evidence that monetary easing stimulates investment when uncertainty is low but has no significant effect when uncertainty is high.

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