China poured more concrete between 2018 and 2019 than the United States during the entire 20th century. America can now reverse decades of sluggish investment and renew its aging infrastructure with a $ 2.2 trillion spending program. This offers the unique opportunity to invest in the potential winners of the new economy.
The post-pandemic economic recovery is an opportunity to renovate infrastructure, an area that has lacked investment since the great financial crisis of 2008-2009. The need to invest in infrastructure is not limited to the United States, although it is especially compelling there. In 2017, the World Bank calculated that the gap between US spending and the country’s investment needs over the next 20 years could rise to US $ 3.8 trillion, double the gap seen in China (1,900 billion USD). After several decades of investments to modernize its economy, China is at a different stage of development; the country already devotes more than 5% of its gross domestic product to infrastructure projects.
The “American Jobs Plan,” proposed on March 31 by the Biden administration, would reverse decades of American public “divestments” and put the economy on sustainable foundations for the future. The proposal highlights that the United States is ranked 13th in the world for the quality of its infrastructure. Over the past sixty years, US federal government spending on infrastructure has fallen by more than half as a percentage of gross domestic product, from 3.8% in the 1960s to 1.6% in the last decade .
The gigantic civil engineering projects carried out over the last century must be reinforced, replaced or recycled. According to a report released last month by the American Society of Civil Engineers (ASCE), the country’s dams, dikes, roads, schools, transit systems, hazardous waste and air transport infrastructure are in poor condition and have not seen any real improvement between 2009 and 2021. To remedy this situation, ASCE estimated that US infrastructure will require an investment of 2390 billion USD over the next decade.
Pay the smuggler
Between 2015 and 2020, the United States recorded one train derailment by 30 kilometers of track. Nearly 8% of bridges need to be repaired or replaced nationwide. At current spending levels, the United States would take 40 years to repair all 45,000 fragile bridges, says ASCE.
Half of the US plan’s total spending will go to repairing roads and railroads, and upgrading lead water pipes and airports. In addition, USD 620 billion will be injected into the transport network, including the charging of electric vehicles and the establishment of universal access to high-speed internet.
President Biden also wants to link this spending to building union power and increasing wages. He also pledged investments in “human infrastructure”, including education and childcare.
After peaking at almost 15% as the pandemic hit, U.S. unemployment has already fallen to 6% earlier this month. This rate is still far from the lowest level for 50 years recorded at the end of 2019. Indeed, there are still some 10 million more unemployed than before the pandemic, which strengthens the argument in favor of spending on infrastructure as a counter-cyclical support for the economy. The Federal Reserve (Fed) has said it measures the strength of the economy by looking at long-term employment trends and looking only at average inflation levels.
US spending will be spread over many years, which will limit its inflationary effect. In advanced economies, large projects may also encounter unforeseen difficulties. In Boston, MA, work on a highway tunnel, first approved in 1982 and budgeted at $ 2.6 billion, ended up taking sixteen years and costing nearly six times as much as expected. Berlin Brandenburg Airport opened in October 2020, nine years late and cost three times the budgeted amount.
In addition, the Fed now reacts asymmetrically to inflation shocks. For these reasons, we do not believe that the interaction between inflation and these expenditures will trigger an inflationary surge; moreover, it should not have a significant impact on the dollar.
Spending in China and Europe
China’s multi-decade vision for economic leadership calls for linking its military infrastructure investments in sectors such as artificial intelligence and semiconductor manufacturing to its military capabilities.
China, which is at a very different stage in its economic development, continues to spend more than the rest of the world. Over the next two decades, the world’s second-largest economy will have to devote 28 trillion dollars to its infrastructure if it intends to keep pace with its development, according to World Bank estimates in 2017.
European Union infrastructure investments have been in decline since around 2010, in the wake of the great financial crisis. In 2017, EU spending in this area was equivalent to 2.7% of GDP and this parsimony has taken its toll even in the richest nations of the continent. Germany has one of the worst digital networks among the world’s advanced economies, according to the Organization for Economic Co-operation and Development, while other nations, like Spain and Ireland, have cut corners. costs in order to cope with the financial crisis of 2008-2009. In the UK, the Treasury has pledged to invest £ 100 billion in economic infrastructure spending.
The European Union has already set out its spending program. Last year, it established a stimulus package of EUR 1.8 trillion, which includes its seven-year budget of EUR 1.150 billion and a ‘New Generation’ stimulus fund of EUR 750 billion. The 27 Member States aim to transform their infrastructures in the sectors of energy, transport, agriculture and health. Of this total, some EUR 1 trillion is linked to the net carbon neutrality target set by the Union for 2050.
The proposed US bill includes climate-specific projects worth some $ 670 billion, or one-third of the total. The aim is to ensure a carbon neutral economy by 2050, including carbon-free electricity by 2035, and to end tax breaks and other subsidies given to the fossil fuel industries. The plan also calls for maintaining tax credits for wind and solar power for ten years, offering consumers incentives for electric vehicles and improving the rail network.
While this is a significant contribution to America’s sustainable future, it should be viewed in light of spending on fossil fuel subsidies. President Biden urged his country to end this aid, estimated at 650 billion USD per year by the International Monetary Fund. This development is not limited to the United States. As the world spends record sums to tackle environmental and sustainability issues, harmful subsidies and laws are undermining these environmental ambitions. Globally, 6.5% of GDP, or $ 5.2 trillion, is used to subsidize fossil fuels, eclipsing the 4.5% of global GDP spent on education.
Who will be the beneficiaries?
The benefits of these spending programs for the US economy should be visible over the next eight years, while the negative impact of tax increases will only be felt after fifteen years. Much depends on the final absolute level of tax increases.
This plan’s $ 1.7 trillion for physical projects will, in the long run, benefit sectors such as transportation and electric vehicles, construction, utilities, manufacturing and research. This plan will also support the industrial sector, the metals and minerals sector and the semiconductor industry. To generate better investment performance, it will be about selecting the right companies, rather than adopting a sector view.
On the less positive side, the tech, healthcare and consumer goods sectors are likely to be the hardest hit by a corporate tax hike. Overall, if one were to resort to such a hike to offset the cost of infrastructure spending programs, the consensus points to an average 7-10% reduction in the S&P 500’s earnings per share.
The external macroeconomic environment will also affect the US dollar. If the United States continues its fiscal stimulus while the rest of the world stagnates, its currency will appreciate. In contrast, improved global growth and international trade could reduce demand for dollars.
The envelope has yet to gain the support of Mr. Biden’s political opponents in Congress, which involves some compromises. We expect an agreement in the third quarter of this year with a result close to the initial proposals. Spending has some support among Republicans, as an infrastructure plan has already been sketched out under the Trump administration. Combined with the desire to avoid the political mistakes made ten years ago following the financial crisis, the economic impact of the pandemic and competition with China could help the political process.