EIB Working Paper 2024/02 - The effect of uncertainty on investment

Abstract

Using firm-level survey data combined with firm-level financial information, this working paper examines the impact of uncertainty on EU firms' investment and employment growth. The analysis shows that increased uncertainty significantly dampens investment and employment. Specifically, high uncertainty is associated with a 1 percentage point drop in employment growth and a 3 percentage point decrease in investment rates. Firms that cite uncertainty as a major impediment also report lower growth rates. The study reveals that if uncertainty levels had remained at 2021 levels, investments in 2022 would have been higher by 1 percentage point of fixed assets, and employment growth would have increased by 0.7 percentage points. The research underscores the substantial influence of uncertainty on economic activity and suggests policy measures to mitigate its impact.