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How significant are U.S. moves? Just how significant are the Obama administration's new stimulus plans? Not very, Scotia Capital economists say. The U.S. government unveiled one new plan over the long weekend, a $50-billion (U.S.) boost to infrastructure and air navigation, and another proposal is expected today that will allow businesses to fully write off new plant and equipment investment through next year.
The infrastructure boost is impressive, economists Derek Holt and Gorica Djeric said in a research note today, though they question its significance: "The target of fixing 150,000 miles of roads is about 5 per cent of all paved roads in the U.S. according to the Federal Highway Administration. Laying or rebuilding 4,000 miles of railroad track equals under 2 per cent of all track in the U.S. according to the Association of American Railroads. Clearly these are big numbers but modest in relation to the size of the system involved."
The writeoff plan is more significant, they noted, carrying an estimated cost of about $200-billion. Still, the total impact of the programs is "modest," the economists wrote.
"An extra $250-billion in incentives compares to about a $14.5-trillion economy in nominal GDP terms, or about 1.7 per cent if fully incurred within one year. We're not certain of the distribution of such spending over time, but the annual effects would be well under 1 per cent of the U.S. economy as a first pass. The second pass raises more doubts.
"First, the take-up rates on such incentives are unclear. Businesses already face incentives to re-tool, particularly larger ones with access to capital markets funding, while nonfinancial corporate balance sheets are generally solid and borrowing costs are low. The issue remains one of continuing to shake off excess investment from the past cycle. Technological obsolescence makes much of the older capital stock obsolete, but we're not certain how much additional investment firms are prepared to make especially given expectations for modest growth going forward. "
U.S. outlook drives central banks The slowing economic recovery in the United States is making policy more challenging for major central banks. Both the Reserve Bank of Australia and the Bank of Japan today cited the U.S. slowdown as they held interest rates steady, with officials in Tokyo saying they could take emergency measures. While analysts noted that China's outlook is more important for both Japan and Australia, troubles in the world's biggest economy would still obviously spread globally.
This, too, is a dilemma for Bank of Canada Governor Mark Carney as he and his rate-setting colleagues prepare to meet tomorrow. Many economists believe Mr. Carney will announce the latest in a series of interest rate hikes, of one-quarter of a percentage point, before taking some time out to see how developments in the U.S. play out. Not all believe that, however. Here are the views of four banks:
"On the eve of the Bank of Canada's latest rate announcement, two major central banks flagged concerns over the U.S. outlook and left their key rates unchanged. Do their views matter to the [Bank of Canada] Somewhat, but there are important differences too. The Bank of Japan is mired in a renewed deflationary trap that doesn't exist in Canada, while the RBA's cash target rate of 4.5 per cent portrays much tighter policy conditions than the still emergency 0.75 per cent level that exists in Canada. ... The main point is to lift rates further off the emergency floor for non-emergency conditions as low rates encounter the growing risk of over-stimulating household imbalances." Derek Holt and Gorica Djeric, Scotia Capital
"While a weak external backdrop has been a cornerstone of the Bank of Canada's outlook for quite some time, the severity of the slowdown has surpassed the bank's expectation. Similarly, the performance of Canada's domestic economy has also been a touch softer than what the bank had forecast in July. Not surprisingly, the universal deceleration in economic growth and inflation has undermined the confidence that both the market and economists once had in expecting additional hikes. While this uncertainty is certainly warranted, an assessment of the relative rate of decline at home and abroad suggests that there remains a sufficient amount of domestic momentum to warrant a 25 basis point increase in the overnight rate [Wednesday]" David Tulk, TD Securities
"It's a close call for Bank of Canada policy on Sept. 8. After two consecutive rate hikes, lower-than-BoC-projected growth and inflation on the ground now, along with escalating U.S. risks, are weighing on the 'pause side' of the policy scale. Weighing on the 'hike side' is the fact that longer-term interest rates have fallen sharply since the last policy announcement, household credit continues to expand rapidly, and GDP growth is, nevertheless, still slightly above its potential pace. We see the scale nearly perfectly balanced. However, given that a pause would represent a policy shift, the scale would have to be pointing much more decidedly on the pause side to elicit inaction, particularly with a fresh set of economic and inflation projections available for the next announcement on Oct. 19." Michael Gregory, BMO Nesbitt Burns