"Canada is not down for the count," Chief Economist reacts to major projects

After campaigning to power on a platform of major infrastructure investments and a commitment to “spend less and invest more” Prime Minister Mark Carney’s government announced last week its first raft of major projects to be undertaken. These projects are meant to be executed largely through deregulation and finance structuring, with some direct government spending, and are aimed at areas that the government has decided are of national interest. They include the expansion of Liquified Natural Gas (LNG) through expansion of the Kitimat facility, the construction of an operational small modular reactor (SMR), the expansion of the port of Montreal, as well as the expansion and construction of copper mines in Saskatchewan and British Columbia. It’s a raft of projects that Eric Lascelles greeted as “growth positive.”

Lascelles is Chief Economist at RBC Global Asset Management. He explained why he sees these initiatives as broadly positive as well as why they represent a shift towards a more pro-growth and pro-business government. He noted, too, that despite their likely positive impacts these projects do not necessarily negate the headwinds of structural uncertainty and damage to US trade. He highlighted possible equity market impacts and explained, as well, how advisors can discuss these projects with their clients.

“I think there's generally been a level of excitement and enthusiasm that it will become increasingly practical to undertake these infrastructure and resource projects that have really stalled in many ways over the last decade or so, and it's been a missing piece of the growth puzzle,” Lascelles says. “It's a pivot toward prioritizing the economy that probably is appropriate when we've lost the housing market as an engine of growth, at least for the moment. At a time when, of course, US demand is questionable, it is important to go seeking other avenues for growth, and this is a fairly promising one.”

Lascelles noted with approval that streamlining regulation and approvals offers the government a means of stimulating growth without necessarily adding to the deficit. He explained, too, that these five projects represent relatively low-hanging fruit for the government. Many of these projects had some degree of planning already completed and represent a way to rack up some successes before some of the larger and possibly more expensive projects outlined in the government’s strategic plans get underway. Paying for the development of the port of Churchill or of high-speed rail between Toronto and Québec City could be an easier sell with these projects already underway or successful.

Of these five projects, it’s the LNG and copper mining plans that Lascelles believes will have the biggest impact. While SMR development could be a huge technological advancement, that is a much longer-term investment. Increasing port capacity is important, too, but Lascelles notes that economic impacts forecasted from that capacity are relatively small in the context of the overall national economy. LNG and copper mining, conversely, are growth areas with significant global demand that Canada can help meet rapidly. He also notes that many mining firms are enjoying tailwinds from gold price appreciation, something that may also be leveraged to further support Canadian GDP growth.

While none of the projects are economically transformative, in Lascelles view, he sees them as positive steps. He argues, too, that because the structure of these projects is built around unleashing private capital and investment these ought to have greater positive impact than a simple Keynesian government transfer. They ought to come with a higher fiscal multiplier and result in meaningful ROI.

That ROI might not be quite enough to completely undo the impact of the structural uncertainty and higher barriers to US trade that were introduced this year, but Lascelles sees these ideas as positive regardless. He notes that the resources sector has been sluggish for some time and that the goal of kickstarting meaningful productivity growth ought to be pursued. He highlights the extended nature of infrastructure projects and says that framing these more around those productivity boosts rather than any short-term bumps in GDP may be more helpful.

Lascelles also notes the intended economic diversification in the selected projects. SMR reactors, for example, are largely US-policy neutral. Copper mining could be adversely affected by restrictions to the US market, but there are global markets for copper still to be found. LNG is almost explicit in its aim of detaching Canada’s natural gas exports from US markets. Expanding the port of Montreal, too, is directly aimed at better goods exchange with European and transatlantic markets.

From a Canadian equity standpoint, Lascelles says that this story highlights the ways in which Canadian equities remain detached from the Canadian economy. Nevertheless, he sees tailwinds emerging for mining and resource sectors as well as incremental benefits for companies involved in the import and export of goods. From a Canadian investor and advisor’s standpoint, he believes the projects represent meaningful cause for optimism in a year that has been plagued by anything but.

“It is a very helpful reminder that there is a reason to maintain exposure to that home market… We are seeing perhaps a rather important pivot in government policy that is now pro-growth, and, to a degree, pro-business and pro-investment, and it would be unwise to miss out on that opportunity,” Lascelles says. “even after a down decade for Canada from an economic standpoint, at a bare minimum Canada is not down for the count. Some fairly important structural things are changing here that could render Canada so more attractive going forward.”