TORONTO, July 30, 2012 /CNW/ - Ramping up government spending on
infrastructure, rather than trimming interest rates, may be Canada's
best path should economic growth falter in the next year, notes a new
report from CIBC world Markets Inc.
"Canada's Plan B can't depend on monetary policy, given how low rates
already are," says Avery Shenfeld, Chief Economist, in CIBC's latest
Economic Insights report. "If the global picture materially sours,
borrowing more, particularly at the federal level, and spending more on
infrastructure projects" could serve to "reduce future deficits and
improve growth in the process."
The math supporting this approach is illustrated in 30-year government
bond rates which are now below Canada's long-term economic growth rate.
That means the cost of financing longer-term debt will steadily shrink
over time as a share of GDP. "Infrastructure spending that adds to the
economy's productive capacity will raise tax revenues that will offset
the added financing costs," says Mr. Shenfeld.
In other cases, the arithmetic is even simpler, he says. "Some projects
— toll roads, power projects — generate a direct revenue stream for
governments that can more than cover the risk-adjusted financing costs.
Canada has a number of projects under consideration in the power
sector, some of which involve publicly owned utilities where government
funding is part of the plan. The dive in interest rates makes those
projects look ever more attractive, and getting moving would be even
more compelling if slack opens up in the economy."
There are other reasons why targeted infrastructure borrowing and
spending would be more advantageous than rate trimming in the event of
economic shock, the report notes. "Trying to squeeze more growth out
of housing and debt-financed consumer spending" by cutting rates
increases longer term risks from excesses on both those fronts, says
There's also "notable elbow room" for Canadian governments, particularly
at the federal level, to borrow and spend more if needed to spur
growth, the report notes. "Governments across Canada are improving
their fiscal position by rolling mature debt into new lower coupon
bonds," say Mr. Shenfeld and Government Strategist Warren Lovely. The
drop in interest rates since 2007 has resulted in $25 billion in
savings on debt servicing costs in the current year.
Borrowing costs are once again lower than was expected at budget time.
"Today's tamer rate environment could deliver another $2-3 billion of
combined interest savings for federal and provincial governments in
2012/13 relative to budget plans," say Mr. Shenfeld and Mr. Lovely.
That position combined with additional budget buffers like
contingencies in spending and reserves for forecast disappointments,
creates additional room for governments relative to their spring
Mr. Shenfeld cautions however that the benefits of increased borrowing
to fund more infrastructure projects would only be realized if we are
facing a longer period of economic slack. Otherwise the additional
building activity might only accelerate the timetable for Bank of
Canada rate hikes and crowd out private construction projects. At this
point, Mr. Shenfeld remains hopeful that policy makers in Europe and
the U.S. will do enough to improve the global environment so that
neither monetary nor fiscal stimulus will be needed here.
That said, growth is unlikely to be so robust that the Bank of Canada
has to ramp up interest rates in the coming year. The Bank of Canada is
looking to an acceleration in capital spending to push overall growth
in 2013, but Peter Buchanan and Emanuella Enenajor, economists at CIBC,
note in the report that "the roar of booming business investment has
sounded more like a whimper in recent quarters, contributing a mere
fraction to GDP of what it did earlier in the recovery."
And they say it "may not be just a temporary blip, as domestic as well
as external economic headwinds conspire to discourage firms from
beefing up capital at a hearty clip."
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/eijul12.pdf
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SOURCE: CIBC World Markets
For further information:
Avery Shenfeld, Chief Economist, at 416-594-7356, email@example.com or Tom Wallis, Communications and Public Affairs at 416-980-4048, firstname.lastname@example.org.