Potential growth with infrastructure investing

There is growing consensus on the need for increased infrastructure spending globally. While central bank policies have appeared to run their course, governments are looking at fiscal policies to encourage growth. The low rate environment means governments are arguably in a better position to assume more debt. For investors, some sectors could benefit from increased infrastructure spending.

Infrastructure Push Ahead?

After years of extraordinary central bank efforts, monetary policy appears to be reaching its limit in terms of effectiveness. Governments are now exploring using fiscal policy as an additional measure to stimulate growth. Investing in infrastructure may be the necessary catalyst to increase productivity and help foster job creation. In the near term, equity sectors like industrials and materials may stand to benefit from increased infrastructure spending.

Infrastructure is top of mind for economists and politicians around the world. In the U.S. specifically, both presidential candidates supported increasing infrastructure spending. And for good reason: Improvements in infrastructure have lagged over the last several decades, and there is broad agreement on the need to build or improve a range of infrastructure projects. Moreover, global growth has slowed considerably, which is forcing governments to examine alternative ways to stimulate their economies.

Depending on the type of project, infrastructure has the potential to create a positive multiplier effect on markets from an economic perspective. In the short term, the expectation is that infrastructure projects could provide private sector growth and jobs, thus leading to increased tax revenues and a boost in consumer confidence and consumption. As a recent report from the BlackRock Investment Institute suggests (“Global fiscal policy: a material change in tone,” September 2016), an increase in government spending can add up to 2% to GDP, depending on where in the economic cycle the spending occurs. (Not surprisingly, it is more effective when it comes in a recession.) However, it’s important to recognize that the impact of infrastructure investment can vary widely based on a country’s current growth state, the project being financed (e.g. construction vs. maintenance), as well as the method of financing (i.e. through debt issuance or raising taxes).

A number of conditions suggest that infrastructure could become a major trend over the coming years:

  • Government shift from monetary to fiscal policy
  • Cost of funding through debt is at all-time lows
  • Growing political consensus/support