How a boost in defense spending could lift the Canadian economy

Canadian Prime Minister Mark Carney announced an immediate rise in military spending to 2% of GDP yesterday (from 1.37%) and said it would rise from there. He also suggested there would be an effort to source more from the domestic market, rather than importing it from the United States.

The jump this year means $9 billion in additional funding and would mean at least $62.7 billion in funding over five years. Those are considerable numbers for an economy the size of Canada.

RBC looks at how that could lift Canadian growth but notes key uncertainties around how that money will be spent. If it’s all sent to the US for planes, then it’s minimal while if it’s all spent of domestic troops, there these is a big multiplier, though even higher if the investments are in intellectual property.

RBC notes that this is all hard to pin down but there is clearly a tailwind here for the loonie, though execution will be critical.

Empirical research on the effect of defence spending on long-run growth has found both positive and negative effects.

Positive impacts tend to arise through industrial development, innovation, and infrastructure channels. The defence sector is notably research-intensive. Dual-use civilian/defence infrastructure can also enhance internal connectivity and access to external markets.

Negative impacts tend to stem from capital leakage, fiscal overspending, and the risk of diverting resources from more productive sectors of the economy. Without a procurement framework that prioritizes domestic suppliers, increased defence spending could result in capital outflows.

This article was written by Adam Button at www.forexlive.com.