No need to rush infrastructure spending
Amid booming economy, not surprising government reigned in projects
In some quarters, the most alarming promise of the incoming Trudeau government was its pledge to spend more than $180 billion on infrastructure projects. Sums that large invite fears of wasteful spending on white elephants, and of skills shortages and inflationary wage gains. So, last week’s report by the Parliamentary Budget Office (PBO) criticizing the slow pace of Ottawa outlays on its vaunted infrastructure intentions might not be quite the negative it is described as.
Not until last week did the Grits’ new Canada Infrastructure Bank make its first investment, in Montréal’s Réseau express métropolitain (REM). The feds’ $1.28-billion loan toward the $6.3-billion electric passenger rail network makes possible Montréal’s biggest public-transit project in half a century.
Elsewhere in the country, though, a significant $3.6 billion of the $10 billion in the Liberals’ first phase of infrastructure investments remains unspent. But a Liberal government that stands accused of reneging on a centrepiece promise is reliant on planned provincial and municipal infrastructure improvements, to which federal financing is tied.
The PBO notes that those governments appear to be holding back on such projects due to budgetary pressures. (Such pressures can be trumped by political ones: the REM gets underway as a Québec governing party that is trailing in the polls heads into an election this year.)
A less judicious Ottawa would be cutting ribbons across the country, on projects large and small. Instead, the feds are mindful that infrastructure spending as a job-creating policy declines in effectiveness as GDP increases.
Canada has outperformed the economic expectations of 2015, when the feds’ infrastructure schemes were first developed, and it shouldn’t surprise that a booming economy has caused those ambitions to be reined in.
How the sun could set on failed NAFTA talks
Don’t take too much comfort next week from likely news of a breakthrough between the U.S. and Mexico in their bilateral negotiations on the North American Free Trade Agreement (NAFTA). There remain a few stumbling blocks between the U.S. and Canada, which has been kept out of the past five weeks of NAFTA talks.
The White House strategy is to use significant gains it achieves with Mexico to provide momentum going into resumed talks with Canada and get- ting Canada to agree on a new NAFTA on U.S. terms.
But Justin Trudeau, the Canadian PM, cited again last week the Grits’ mantra that Canada will sign “a good deal, not just any deal.” That’s the same, successful stand Ottawa took in negotiating the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
“Just any deal” would be one in which Ottawa caved to U.S. demands for a dismantling of Canada’s supply management system in dairy products and for a “sunset clause” that termlimits a renegotiated NAFTA to five years. While there’s room for movement on a Canadian supply management system widely unpopular in Canada – outside the powerful dairy producers lobby, of course – NAFTA’s ultimate fate could hang on the sunset clause. A key development in the home-stretch of negotiations would be Mexico’s agreement with Canada that a trade deal that can be abruptly cancelled after five years introduces so much uncertainty as to make the deal useless. For Mexico to agree to the sunset clause or simply remain silent on the issue could force Trudeau’s hand in torpedoing the talks.
Investing and the Trump impeachment factor
Canadian investors in U.S. stocks should keep an eye on U.S. presidential impeachment developments. U.S. equities would likely benefit from Donald Trump’s removal from office, notably those tied to exports and stock in companies with a wide geo- graphic footprint. Speculation about a Trump impeachment, which has waxed and waned for months, reached a new high point with last week’s criminal conviction of a former Trump associate and a guilty plea from another. Trump’s own reaction last week to the legal outcomes was to assert that “If I ever get impeached, the market would crash. I think everybody would be very poor.” Obviously, Trump’s removal from office would not mean the impoverishment of 320 million Americans. And the conventional wisdom, that political instability around impeachment proceedings would be a market negative, is misguided.
Impeachment proceedings against Richard Nixon, commencing in 1974, did not cause, but merely coincided with, a 1973-1974 bear market already underway, a misery compounded by the “stagflation” (low GDP growth and double-digit inflation) caused by the first “oil shock,” in 1973. And the dot-com euphoria of the late 1990s continued through Bill Clinton’s impeachment ordeal, a boom that didn’t end until a year after Clinton was acquitted. Fact is, Wall Street has already secured the two things it wanted from Trump: tax cuts that further enrich Corporate America and deregulation. What remains of Trump’s economic agenda – trade wars – is a curse for U.S. business. Trump has already disrupted U.S. business relations with America’s allies, and threatens to freeze U.S. Big Business out of China.