Canada's new government promises big stimulus plan

A newly elected Liberal government vows to spend big to lift sluggish Canadian economy

Canada's economy is about to get a big shot in the arm.

After their economy slipped into recession this year, Canadian voters Tuesday elected a new Liberal government led by the son of a former prime minister who promised to lift the country with a massive infrastructure spending program.

The crash in global oil prices last year has hit Canada's economy hard, allowing challenger Justin Trudeau to seize on economic weakness in his bid to unseat the incumbent Conservatives with a plan to spend heavily to revive growth. He has pledged to borrow to spend tens of billions of dollars on infrastructure and other investment to make up for the drag on private investment from the nation's energy sector. The recession has brought a sizable bump in the nation's jobless rate, which hit 7.1 percent in September, up from 6.6 percent at the start of the year.

The latest data show some signs that the recession is easing, but the outlook remains weak.

Construction work in Toronto, Canada.
Roberto Machado Noa | Contributor | Getty Images
Construction work in Toronto, Canada.

The drag from falling investment is far from over, and the depreciation of the Canadian dollar hasn't materially improved export prospects, according to economists at Capital Economics. They expect gross domestic product growth of just 1 percent this year and next before a stronger recovery in 2017.

Canada's borrowing spree to pay for new roads, bridges and other public projects will be helped by the Bank of Canada's efforts to keep interest rates low. And there's plenty of work to be done; Canada has an infrastructure deficit of more than $700 billion (U.S. dollars), according the David Rosenberg at Gluskin Sheff, a Canadian wealth management firm.

"Folks on the upper end of the income echelons ... may not be too thrilled about having the tax bill go up, but insofar as the proceeds are moving toward some long-term benefits with a productivity payoff, this is likely a cost worth bearing," he wrote in a note to clients Wednesday.

It's not clear where the money will be spent, but the stimulus plan is expected to help offset a drop in business investment of nearly 8 percent this year, after years of strong growth for Canada's once-booming oil producers.

Canada may also get a boost from a stronger U.S. dollar, which helps make Canadian exports cheaper when they're sold south of the border to American business and consumers. The United States is the country's largest export market.

Low interest rates in Canada have sparked something of a housing boom, with investment in new home building up nearly 5 percent this year, nearly double the pace of a year ago. Though rates are expected to remain low, the recent slump is seen putting the brakes on housing investment next year.

But analysts say the country's budget is well positioned to take on the added debt in an attempt to use public spending to offset the private spending pullback. Canada's current net debt amounts to about 38 percent of gross domestic product, compared with about 80 percent in the United States, according to the latest figures from the International Monetary Fund.

In fact, Canada needs a supply of new, risk-free debt to keep the nation's long-term savings at home as baby boomers top off their lifetime accumulations of wealth, according to Carl Weinberg, chief economist at High Frequency Economics.