Why the USMCA likely won't unleash a wave of pent-up business investment

Remember, fear and uncertainty have been constant factors in the economy since the financial crisis of 2008. As the recovery dragged on, businesses worried it wasn't durable. In 2014, the price of oil fell off a cliff, causing concern throughoutevery sector of the Canadian economy. By 2016-17, it was NAFTAnegotiations that began to rattle nerves.

By then though, the economy was chugging along. The Trump administration's tax cutsseemed tosparkeven faster growth and stronger corporate earnings. As the U.S. economy boomed, Canada benefited, too. U.S. demand for Canadian goods and services surged. With that, came a critical moment for Canadian businesses.

Orders started to pour in. It became hard to keep up. In an ideal world, businesses would invest at this point in the cycle,adding factory space or buying new equipment to make their facilities more productive. But all that uncertainty weighed on businesses.

Reluctant to spend big money until they had some certainty, companies tried to substitute labour for capital investment. But that was only ever going to work so well.

"Firms added extra shifts, added weekend shifts, worked through nights," House said. "They couldn't squeeze any more output out of existing plants and equipment."

Invest or else

At that point, he said, the choice was either "invest or leave orders on the table."

And sure enough, by the end of 2017, spending on "non-residential structures, machinery and equipment" began to shoot up by 8.7 per centin the fourth quarter compared to the same period a year earlier,and by 8.2 per centin the first quarter of 2018.

Sothe notion that uncertainty over NAFTA prevented companies from spending just isn't borne out by the facts, House said.

"We don't see evidence [investment]hasbeen dented by some kind of chilling effect in the way most folks supposed it would be."

You need to balance out the positive impact from the Trump administration's tax cuts against the negatives that came with all that NAFTA uncertainty, he said.

"If anything, the effect of the U.S. on Canada has been a wash or a bit positive."

The popular argument has been there is a wave of pent-up investment that's been waiting for some certainty around trade to be unleashed. But if the uncertainty cost less than we imagined, won't the expected surge be slightly less as well?

"I don't want to sound like I'm pouring cold water on the notion that concluding USMCA should lead to a bump up in investment and business activity it should,"House said.

Itjust might not be as big as many seem to expect.