Infrastructure boost would spur growth: CIBC

By Staff | July 30, 2012 | Last updated on July 30, 2012
2 min read

If Canada’s growth stalls, the government will be pushed to find fresh ways to spur the economy and fire up investors.

The country’s best option, in that case, would be ramping up spending on infrastructure rather than trimming interest rates, says a new CIBC World Markets report.

Read: Infrastructure helps weather downturns and Infrastructure spending improving

“Canada’s Plan B can’t depend on monetary policy, given how low rates already are,” says Avery Shenfeld, chief economist at CIBC. “If the global picture sours, spending more on infrastructure projects could reduce future deficits and improve growth in the process.”

Why this route? The country’s 30-year government bond rates are below our long-term economic growth rate, meaning the cost of financing longer-term debt will steadily shrink over time as a share of GDP.

Read: Corporate bonds better than governments

Shenfield adds, “Infrastructure spending will add to the economy’s productive capacity, raise tax revenues and offset the added financing costs.”

Projects like toll roads and power projects could generate a direct revenue stream for governments, which would cover the risk-adjusted financing costs, he says.

And Canada already has numerous projects under consideration in the power sector; some of which involve publicly owned utilities where government funding is part of the plan.

Overall, targeted infrastructure borrowing and spending would be more advantageous than rate trimming because “trying to squeeze more growth out of housing and debt-financed consumer spending by cutting rates increases longer-term risks from excesses on both fronts,” urges Shenfeld.

Additionally, “governments across Canada are improving their fiscal position by rolling mature debt into new lower coupon bonds”, says the report. The drop in interest rates since 2007 has resulted in $25 billion in savings on debt servicing costs in 2012, and could potentially add another $2-3 billion of combined interest savings for federal and provincial governments this year.

Shefield cautions, though, the benefits of increased borrowing to fund infrastructure projects could only be realized if we’re facing a longer period of economic slack. Otherwise, building activity would only accelerate the timetable for Bank of Canada rate hikes, as well as crowd out private construction projects.

Over the short-term, the Bank of Canada isn’t expected to hike rates, looking instead at accelerating capital spending to push overall growth in 2013, says the report.

Peter Buchanan and Emanuella Enenajor, also economists at CIBC, warn, though, “The roar of booming business investment has sounded more like a whimper in recent quarters, contributing a mere fraction to GDP.”

Read: Canadian economy losing momentum: BoC

They add, “It may not be just a temporary blip either, as domestic and external economic headwinds discourage firms from beefing up capital.” staff


The staff of have been covering news for financial advisors since 1998.