Golden Bridges
Opponents of Keynesian policies for supporting the economy love to vilify costly useless projects, bridges to nowhere. If French, they will denounce roundabouts located for no reason at the entrance of towns and, more recently, high-speed trains purchased to run on France’s conventional railway network. The harshest critics will speak of the “Sapeur Camember“, the19th century French cartoon character who, under the watchful eye of Sgt. Bitur, digs one hole to fill another. Despite this, the economies of Japan, the United Kingdom and the United States are planning to get out their shovels… and to dig a great deal.
These three major economies, following the lead of the €315 billion Juncker investment plan, have unveiled their own large-scale infrastructure programmes. Over a five-year period, US$210 billion has been cited for Japan and US$133 billion for the United Kingdom. As for the United States, Hillary Clinton has proposed US$250 billion in federal infrastructure spending over the same period accompanied by the creation of a bank to support loans for another US$250 billion infrastructure projects. As for Donald Trump, in keeping with this tendency for one-upmanship, he has announced to double this amount of spending… Is such spending reasonable at a time when debt levels are very high?
In any case, they are necessary: these three countries share the severe ageing of their infrastructure. In the United States, the average age of infrastructure has risen from 20 in 1990 to 27 years today.
The bridges and highways are not quite as old in Japan though the trend is the same: since the 2000s and the increase in the ratio of debt to GDP, Japanese authorities have curtailed investments. At the current rate, more than half the bridges will be older than 50 in 2030. The “Japan Revitalization Strategy 2016” accordingly reflects a real need.
It remains however to be determined how it can be financed. With interest rates at zero, the response is self-evident: by debt. A response however which raises another question: is this the right use of capital? At the risk of disappointing fans of the 19th-century French cartoon character, the response would appear to be in the affirmative.
A study published by the IMF in 2014 indeed demonstrated that a policy focusing on major works would today benefit from “abnormally favourable” conditions.
1) The first condition, already mentioned is linked to borrowing costs close to zero: painless borrowing offers higher returns for newly built infrastructure. The multiplier effect so appreciated by economists is in this way increased. In this universe of “zero interest-rates”, 1% of GDP invested produces three points of additional growth after four years. A virtuous effect making it possible to accelerate repaying the debt.
2) The second favourable condition stems from the fact that most developed countries now have a negative output gap, i.e. real GDP is far below potential output. Here as well the IMF study shows that in such an environment the multiplier effect of a public investment strategy is amplified.
In other words, billions in investments will not be immediately reinjected into the economy. There are many steps to be surmounted (for example the US Congressional vote). But have no doubt that these different initiatives will finish by jumpstarting global growth. An objective we unconditionally support.
* Sources : Goldman Sachs (Fortnightly, September 2016), Exane.
Didier Le Menestrel
with the participation of Marc Craquelin