Liberal infrastructure program a timely gift to investment-starved economy

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If you want a good reason why the incoming Liberal government's ambitious infrastructure program can't start soon enough, look no further than the Bank of Canada's latest economic update. Another downgrade of the central bank's outlook is a powerful reminder of how the lack of private-sector investment is slowly starving the economy.

The central bank's new economic forecasts, published in its quarterly Monetary Policy Report on Wednesday, present a gloomier view of Canada's growth momentum over the next couple of years. The bank cut its growth estimates to a thin 2 per cent in 2016 (from 2.3 per cent previously) and 2.5 per cent in 2017 (down from 2.6 per cent).

Especially for 2016, that's no one's idea of a blistering pace – and it's drifting in the wrong direction. A big reason for that is the second shoe to drop from the oil shock: An acute loss of business investment that, as it persists, is eroding the economy's future capacity to grow.

The Bank of Canada had previously hoped for modest growth in business fixed investment (such as in facilities and machinery) in 2016 after a rough 2015 in which the bank expects the lack of business investment will lop nearly a full percentage point off the year's gross-domestic-product growth. But now, the bank is bracing for business fixed investment to fall again next year, subtracting another 0.2 points from GDP growth.

"Declines in investment in the resource sector are occurring faster than increases in investment in other sectors that are expected to occur with strengthening foreign demand and improvements in competitiveness," the Monetary Policy Report (MPR) said.

One might be tempted to take solace in the fact that, despite the downward growth revisions, the bank's projected timeline for the economy's return to full capacity is little changed – it's now talking about "mid-2017" compared with its previous "first half of 2017." But, in fact, this speaks volumes to the even bigger problem: Full capacity isn't farther in the distance because, without sufficient business investment, the economy actually has less capacity to increase future output.

The Bank of Canada now thinks the economy's "potential output growth" – defined as the rate of growth that is sustainable without triggering inflation – "is more likely to be at the lower part of the range of estimates" that it had outlined in its April MPR. That suggests that the bank now thinks potential output growth is probably not much better than 1.5 per cent over the next two years – down from 1.8 per cent this year and over 2 per cent last year.

But there is something on the horizon that could help offset this. The newly elected Liberal government has pledged billions each year to fund public infrastructure projects, starting in 2016. While this is a long-term need for the Canadian economy's future productivity (which speaks to growth capacity in the longer run), and thus would be welcome at almost any time, the timing of such an injection of public funds couldn't be better. The public sector is poised to step into the private sector's investment void.

This isn't something the Bank of Canada has incorporated into its economic assessment yet, for the simple reason that, until a couple of days ago, it didn't even know if the Liberals would form the government and thus be able to act on its infrastructure ambitions.

In a press conference following the release of the MPR, Bank of Canada Governor Stephen Poloz acknowledged in broad terms that "fiscal shock" – in the form of increased spending – would indeed "tilt the risks" of the bank's economic outlook. But he suggested it was much too early for the bank to have any sense of how the fiscal plans would affect growth. Indeed, we don't even know when the new government will formally outline its spending plans and the timing of its investments – let alone when infrastructure projects will get approval and shovels will break ground.

However, Mr. Poloz allowed that, by the next quarterly MPR, in January, the bank should be starting to incorporate the new government's spending plans into its numbers. At first, he said, those calculations may be "judgmental" – a central banker's word for "an educated guess" – but that they will become more concrete as the investments become reality.

Mr. Poloz also suggested that the economic benefits "can be more gradual than the simple shock that an economist sticks in their model." But given that the effects of the shifting sands in business investment are also gradual and long-term, that may dovetail nicely.

In a period when the economy is starving for investment, some nourishment from Ottawa is both timely and welcome.