00:00:05:08 - 00:00:28:09

Welcome, my name is Eric Lascelles. I'm the chief economist for RBC Global Asset Management and very excited to share with you our latest economic thinking, as per our August monthly economic webcast. The title of this particular edition is The (economic and political) plot thickens. That's a reference to some pretty interesting, tricky things going on, on both the economic and political side of things.

00:00:28:09 - 00:00:56:08

On the economic side, it really is just that we are continuing to see some evidence of a deceleration, which is probably benign and probably even necessary. But you can't completely rule out more “sinister” outcomes in terms of a problematically weak economy. And so we'll talk through that and those risks.

On the political side, of course, the plot has thickened in a major way, at least in the context of a U.S. presidential election, with all sorts of wild things happening over the last month that I'll get to in a moment.

00:00:56:08 - 00:01:14:04

Report card: And so, without further ado, let's just jump our way in. We'll start with that report card we always begin with, and within that, why don't we start with some of the good things going on out there? I can begin with an observation that is very, very important: inflation continues to fall. And so you'll recall, inflation was much too high.

00:01:14:10 - 00:01:37:17

It was then falling pretty nicely across the majority of 2023. But it got stuck there for a moment and even backed up a little bit in early 2024. We have received, in particular for the U.S., also for Canada and some other places, we've received the latest month's inflation data. It was down very nicely indeed, further confirming that view that inflation is not going to get stuck at a high level.

00:01:37:17 - 00:01:56:17

It can probably continue to improve. Central banks can therefore cut rates and so on. So that's really important. That's pretty central to the whole story right now. The economy is still growing. I think I said the exact same thing a month ago. It's still true. It doesn't sound that exciting. It's not that exciting because as I'll grumble about in a moment, the economy is also slowing.

00:01:56:17 - 00:02:12:14

That's a negative theme, but let's not completely lose sight of the fact that it's still growing. So that's kind of the baseline minimum we're hoping for from an economy. It is delivering that for the moment. We do still think a soft landing is more likely than a hard landing. So we believe the economy can continue to grow.

00:02:12:18 - 00:02:39:09

We're not budgeting for fast growth, however. In fact, we're budgeting for slow growth over the next several quarters. But we think it's more likely that economies can keep moving forward as opposed to outright stagnating or falling into recession. That risk isn't zero. We'll talk about that in a moment.

But we still believe there are enough tailwinds out there. And indeed, as central banks have begun cutting rates and as others such as the U.S. Federal Reserve (the ‘Fed’) begin to cut rates, that should help to keep the economy moving forward.

00:02:39:09 - 00:02:59:09

So not a long list of positive themes, but I think a pretty important one. On the negative side of things, let's start with an idiosyncratic shock that came along just a few weeks ago, at least as I record this at the very, very end of July. We had a worldwide IT outage, a crucial piece of software that no one sees much on a day-to-day basis had a bad update and took down a large swath of the world's computers for a period of time.

00:02:59:16 - 00:03:16:09

Most of those were resolved within a matter of a day or so, or within a few days. But a few of those issues have lingered and stuck around, at least for a few weeks. And so I guess there's a few things we can say about this.

00:03:16:09 - 00:03:34:19

Maybe the highest-level comment I can make is that from an economist perspective, this reminds me a lot of a natural disaster in the sense that you get this short-term, acute negative hit. You then sort of rebuild or recover fairly quickly. Maybe that month's economic data is weaker than it otherwise would have been.

00:03:34:21 - 00:04:04:09

But you then get a bounce back the next month. Maybe the next month is even a bit stronger than it would have been. And there doesn't tend to be a long-lasting set of consequences.

Not a perfect analogy, perhaps. After natural disasters, you have to rebuild. There isn't quite the same amount of rebuilding here, but maybe there is, to the extent that I would suspect that many companies are now a little bit more attuned to the resilience or the durability of their IT systems and maybe a bit of de-prioritization of the cost minimization going forward, maybe a bit more time spent on ensuring that they are robust.

00:04:04:09 - 00:04:24:05

Maybe – and this is getting quite speculative for a single bullet on a single page here – but maybe also we could see regulators and government officials taking a closer look and wondering how the world's computer systems could be so reliant on one single thing. And so perhaps a greater regulatory oversight as well could emerge over time.

What else can we say on the negative side?

00:04:24:05 - 00:04:46:16

Well, we are still seeing economic activity decelerate. So I mentioned the economy's growing. It is, but it is growing somewhat less quickly. And so that's again probably benign, probably necessary to cool down to help inflation come down to get to that fabled soft landing. But we can't quite rule out the risk of something worse.

It's undeniable that high rates are still here and still painful.

00:04:46:16 - 00:05:04:08

They're starting to come down, but they're certainly not low. And we can't deny there is still a non-trivial risk of recession. We've had the same probability, really, almost from the start of the year. We think it's a 65% chance that the North American economy gets to keep growing. There's maybe a 35% chance that it could submerge into a temporary recession.

00:05:04:08 - 00:05:26:17

We think any recession would be short and shallow. It's not our base case scenario, but it's not impossible either.

On the interesting side of things, the U.S. election was up ended. I'll go into a bit more detail later, but for the Coles Notes edition it would be something along the lines of:

• A very bad debate performance by Biden
• An assassination attempt against Trum
• Biden no longer contesting the election.
• Kamala Harris now the presumptive nominee.

00:05:26:19 - 00:05:45:12

And so really it was up ended in a number of ways. I'll talk about what that means a little bit later.

An item that I think was missed by most people was a legal ruling that came along in late June. It has been called the Chevron ruling.

00:05:45:12 - 00:06:08:16

Essentially, this ruling has pretty materially reduced the executive power of American presidents. As it stands right now, you have laws on the books. Often the laws are fairly vague. There's a lot of wiggle room for presidents to interpret those laws and to decide how many people should work at the border, even if the law says clearly that people can't cross the border illegally and things like that.

00:06:08:18 - 00:06:34:04

The Chevron ruling is significantly diminishing the ability of presidents or people working in those agencies to interpret those laws as they see fit. So it's been described as a shift in power from the executive branch to the legal branch. Maybe that’s one way of thinking about it.

Another would just be presidents having less discretion. Maybe you could say in the context of this election, with a fair likelihood of a divided Congress that would limit the ability to pass legislation.

00:06:34:07 - 00:06:55:24

It maybe diminishes the ability for either presidential candidate to significantly deviate from where things stand right now. That probably overstates how limiting this is. But nevertheless, this might be one of the more relevant developments of 2024 when we look back, 5 or 10 years from now.

Lastly, we've done some serious fiscal work. I've been talking for quite a while about governments running big deficits, having high debt loads.

00:06:55:26 - 00:07:12:28

We did some work, and looked into who just is internationally in the most challenging position. And we walked away with the view that Italy is perhaps worst off. But the U.S. and UK and Japan and Brazil also deserve a pretty close look. And I'll swing around to that in a moment. Okay, so that was your overview.

International inflation closing in on 2% target: Let's just jump into some of those topics in a bit more detail here. And we'll start again with inflation. Inflation has improved massively. You can see these are metrics for some of the bigger developed countries. We've seen inflation that's gone from 8, 9, 10% to inflation that is now, you know, 2 to 3 to maybe 3.5%.

00:07:28:20 - 00:07:47:02

There's been a big improvement. There was some stuttering that I mentioned earlier in the year. We are seeing, broadly speaking, some downward progress again more recently. So that's nice. It's still not where it needs to be. But we are generally – both us and the markets – feeling better about inflation, much, much less nervous that inflation gets stuck at 3 or 4%.

00:07:47:02 - 00:08:05:11

That seems less plausible than it did even a couple of months ago.

U.S. inflation trend has improved beautifully: Let's look at the inflation numbers for the U.S. in particular as that bellwether economy. And so this is the month-over-month change. The dark blue bars are overall consumer prices. The last two months have seen overall consumer prices that were flat effectively and then down slightly.

00:08:05:11 - 00:08:27:05

That's certainly a very favorable trend compared to those wild months of 2022, when prices were rising by practically a percentage point every single month. So that's been nice. I think actually more important is the gold line (on the chart). That's core inflation. It does exclude some things which you can argue is inappropriate. But the reason we do that is just because it's smoother, it doesn't get head-faked by gas prices swinging around and so on.

00:08:27:05 - 00:08:45:22

The core inflation side has come down importantly, too. Not as widely or profoundly, but nevertheless, that gold line is on a downward trend. So inflation is looking much better. I will warn that as we track the July data – this is up to June – the July data is looking a little bit hotter. We just know that gas was up a bit and a few other things happened.

00:08:45:22 - 00:09:03:06

So don't expect a miracle with the next month. But in general, on a trend basis, we think there is some room for improvement and we're feeling pretty good about this right now.

Inflation looking good across a range of metrics: Here's our big busy table full of colors, but the main message here is green is good and we've got a lot of good on the one-month and the three-month basis as well.

00:09:03:06 - 00:09:21:10

So really across a wide range of metrics. So not just CPI (Consumer Price Index) but some of the more obscure variants of inflation, some of the components down in the second half as well, all looking a whole lot better than they were. So that's great. Again, no guarantee it stays quite this neat and tidy every single month.

00:09:21:10 - 00:09:42:27

But we do think that inflation is now pretty importantly moving in the right direction. So inflation is looking good.

North American rate cuts: Canada moves first: Turning now to interest rates and central banks – and of course these things are tied at the hip. So we are now seeing central banks cut rates. This isn't brand new; we've had a handful of developed world central banks cutting rates for a number of months now.

00:09:42:27 - 00:10:01:21

The process has continued in Canada. So Canada is the gold line (on the chart). Canada just delivered another rate cut very recently as I'm recording this. That's up to two. And so the Bank of Canada overnight rate has fallen from 5 to 4.5%. As I'm recording this, actually, just about an hour ago, the Fed rendered its latest decision.

00:10:01:21 - 00:10:21:26

It didn't cut. That was expected, though. We didn't expect them to cut. That blue line (on the chart) is still at its peak of roughly 5.5% right now. But the Fed is now talking more and more explicitly about rate cutting. The market is feeling pretty confident, indeed, that the September decision – that's the next decision – is likely to contain probably a 25 basis point rate cut.

00:10:21:26 - 00:10:38:21

I can speak with a pretty good level of confidence that the Fed in the U.S. will start cutting rates fairly soon. One thing is that markets are feeling much more emboldened about pricing in multiple rate cuts. So, you know, the thinking is – and I think the thinking quite correctly still is – that central banks don't need to desperately raise rates.

00:10:38:21 - 00:11:01:11

It's not going to be massive big, chunky rate cuts at every decision. But the thinking had been they could go really slowly. Maybe it'd be a rate cut, then they take some breaks, and then a rate cut and then some breaks. And we just saw the Bank of Canada cut rates at two meetings in a row. The market is pricing in not quite all of the next three meetings for the remainder of the year, but market thinks there's a fair chance they could cut all three decisions at a minimum, probably two out of the three.

00:11:01:11 - 00:11:16:20

That would then be four to five over the second half of the year. And so rate cuts are coming a little quicker than had been imagined before. Of course that's nice to the extent that high interest rates hurt the economy and hurt household borrowing and that sort of thing. But the Fed doesn't need to move quite as quickly. The Fed is coming off a higher level.

00:11:16:20 - 00:11:35:01

The U.S. economy has less interest rate sensitivity. but nevertheless the Fed is pretty close probably to a September cut, and probably another cut somewhere in that November or December timeframe as well. So the U.S. is starting to ease rates as well. It takes a while to get down, but again, they might move a little quicker than we had been thinking.

00:11:35:07 - 00:11:52:29

We are still of the view that a neutral policy rate is something like 2 to 3.5%. I wish it were more precise, but something like that. So it seems to me not unreasonable to think that particularly in Canada, you can work your way into the 3s pretty handily by the middle or so of next year. It might take a little longer in the U.S.

00:11:52:29 - 00:12:12:02

But the point is, there is a fair bit of room for easing. And that should take some of the headwinds away from the North American economy. Simultaneously, you have the European Central Bank in a position to continue cutting; Bank of England in a position to cut.

But Bank of Japan is not expected to cut, by the way. They just delivered their first rate hike in quite a while.

00:12:12:02 - 00:12:28:20

They’re just on a different avenue altogether. But most central banks are removing some of that interest rate pain. We can see some of that reflected in bond yields.

Lower yields reflect inflation and central bank expectations: This chart maybe doesn't do justice to that narrative, because of course, it shows that bond yields are so massively higher than they were in 2020.

00:12:28:20 - 00:12:45:06

Of course, if you were to take this chart a bit further back, yields weren't that low previously. The point I'm trying to make here is that after this long period of rising interest rates and rising yields, we are seeing a little bit of a retreat there. You can see that small downward arrow on the right. And that's the market pricing in the beginning of rate cuts.

00:12:45:09 - 00:13:06:18

And the market, in some cases, seeing actual rate cuts delivered in other jurisdictions.

Also, I think a little bit of concern about the growth story, that it might be weakening, and a little bit less concern about the inflation story, because that's also weakening. Every one of those things does contribute to lower bond yields. We think there's room for bond yields to fall a little bit more over the coming year. Okay.

00:13:06:20 - 00:13:25:20

U.S. presidential race has tightened back up again: Now we're on to the juicy business here. So let's talk about that U.S. presidential election. As I mentioned off the top, it has been up ended – that’s maybe the best way to think about it. Let's talk to begin with before I think it was June 27th. So let's talk about what happened, over the span of 2024 and 2023.

00:13:25:20 - 00:13:44:04

And the answer is it was a pretty close race. At times, the Democrats were even considered ahead in that race. But we had seen then the race really tighten up in the spring and the Republican candidate, Trump, take the lead a little bit. And that brought us then to that first presidential debate.

00:13:44:04 - 00:14:03:18

And Democrat candidate, President Biden, performed very poorly. So we saw the odds of a Republican president rising. That's the red line (on the chart) going up, and that continued to rise thereafter as concerns about his mental faculties and age and so on mounted. Then there was an assassination attempt on Trump. Of course, he survived that and he enjoyed a big boost in popularity.

00:14:03:21 - 00:14:23:18

It was sort of a heroic thing. and so Trump’s popularity rose even further. And at its peak, he was being given, you know, 2 out of 3 chances, to take the presidency. So about a 65% chance of winning. Not a certainty, but a very high chance. Then Biden stepped down.

00:14:23:18 - 00:14:40:25

At least, he's not contesting the presidency for another term. And it looks like Kamala Harris as vice president is the new (Democrat) candidate. She's enjoyed a real honeymoon. You can see that red line falling back down, and the blue line rising back up. To be honest, if you've been sleeping the last month, you could have just slept right through it – and not have known anything was up.

00:14:40:26 - 00:14:55:21

Because we're right back to where the numbers were roughly about a month ago, after all these wild things happening. But I guess the point is this is a genuine race again. We are three months away. The winner is not certain. There are lots of different ways this could go.

00:14:55:21 - 00:15:12:13

You could imagine that Harris maintains her momentum and takes the lead. You could imagine the honeymoon fading as Americans get a closer look. And she didn't campaign all that well in in 2020 as an example. There is supposed to be another debate or two so that could reshuffle the deck again. So there's a number of ways this could go, I think.

00:15:12:14 - 00:15:29:25

I think the most straightforward interpretation for the moment is that Trump is still slightly in the lead. So that is the most likely outcome, still, even if it's very close. There is momentum though, on the side of the Democrats. So that could change.

At this point. It could be either way. I was just in the in the middle of updating my quarterly economic forecast and it was a bit of a nightmare –

00:15:29:25 - 00:15:44:20

Because you need to make sort of a guess as to who wins to actually have a coherent forecast. It's just not that clear right now. It's a hard thing to do. You really do need to maintain almost two sets of economic forecasts right now. So, that's remaining awfully interesting.

00:15:44:22 - 00:15:59:16

Broader race remains nuanced: When we step back from the presidential race and recognize there are Senate races and House races and so on as well, this is what we see: Republicans thought to have about a 52% chance of picking up the White House. That's Trump. You can see the Senate and House, though, disagree with one another.

00:15:59:16 - 00:16:24:03

The Senate is at this point slightly more likely to go Republican. That's interesting. Right now it is Democrat, by the way. Conversely, the House is slightly more likely to go Democrat. That's also interesting. It's Republican right now. So everything is expected to switcheroo, essentially.

Right now the thinking is that it could then be a divided Congress – and that then limits the ability of presidents to do big, exciting things or some of the more aggressive things that they're proposing.

00:16:24:06 - 00:16:43:26

But do note that, generally, when public thinking swings, it swings not just in the presidential race, but often in some of those down-ballot races as well. And so to the extent that Trump or Harris were to enjoy a healthy victory, it's not impossible they could pick up the House and the Senate as well, given that they're all fairly close (right now).

00:16:44:03 - 00:17:02:13

In general, people are of the view that it's more likely that the House and Senate could be swept by the Republicans than swept by the Democrats. But I have to say right now, the most likely scenario is that one (party) gets one and one (party) gets the other, and it is somewhat of a gridlock situation. Again, the most extreme proposals of either candidate then probably don't come to fruition.

00:17:02:13 - 00:17:26:20

I can't quite guarantee that because some things the president can do via executive order.

Theoretical tariff considerations for GDP (gross domestic product):  For instance, tariffs have figured centrally particularly in the Trump platform. I should say it's not just a Republican thing though. We saw Democratic President Biden increasing tariffs on China in recent years as well. So hardly a purely partisan issue. But nevertheless, the Trump campaign talks about a 10% tariff on everyone and something like a 60% tariff on China.

00:17:26:20 - 00:17:43:25

Again, you would think that if tariffs are applied, they would probably be less extreme than that. But nevertheless, there’s certainly a lot of very genuine tariff talk.

One of the things we learned from 2016/2017, when the last round of tariffs came on in the first Trump presidency, is simply that they hurt growth.

00:17:43:25 - 00:18:02:08

And I'm going to talk through some of the implications. It's not an overwhelming effect, though. It takes a little bit off growth. It adds a little bit to inflation and so on. The sorts of tariffs applied last go around were not the dominant narrative for the economy. They were just at the margin, slowing the economy down. The risk is greater this time to the extent that those tariffs are greater.

00:18:02:08 - 00:18:18:20

So let's be aware of that. But when we think through just how tariffs work, I guess I can say a few things.

First of all, there are little good things that can happen. So if you were a country imposing a tariff on someone else, you can, in theory, enjoy more domestic production because your companies can make things instead of foreign countries making things.

00:18:18:22 - 00:18:35:08

Of course, the government collects tax revenue from the tariffs paid by the foreign companies, so that's nice.

However, there are potentially some bad things that are a bit subtler, but they are significant in number. So product prices go up, right? You're no longer getting those cheap foreign goods. And the competition is less extreme domestically.

00:18:35:08 - 00:18:51:01

So companies can raise prices. Your own economy is less specialized. And so it's kind of stretched thin, less able to do really well a certain number of things. It's trying to do everything, maybe a little bit less.

Usually your currency goes up if you apply a tariff. And so you lose a bit of competitiveness there.

00:18:51:03 - 00:19:10:08

Selection goes down because it's probably not practical for your domestic companies to offer the full range of products that the world's companies could have provided. There are supply chain headaches as well. Some of it's the adjustment, but nevertheless, of course, always headaches when you have to shift supply chains. And so when you tally that up, usually it is a net negative.

00:19:10:08 - 00:19:25:10

So the bad is usually outweighing the good economically. This is for the country imposing the tariff, by the way, not for the country being hit by it. But then if the tariffs are reciprocated, if the other country hits you with tariffs as well, then it's always a negative. But it's usually a net negative even for the home country.

00:19:25:15 - 00:19:42:24

Of course, for the country facing the tariff, it's a clear negative. You know, their currency goes down, which helps a bit. But of course they don't export as much, which is bad. They get their own supply chain headaches. And so it's certainly a net negative for them.

But I guess the point here is it's negative for the country you're hitting, but it's also usually negative for yourself.

00:19:42:24 - 00:19:57:21

That's part of the equation. As we do the math on a possible Trump presidency, we do have to subtract a little bit from growth for this. We subtract a little bit from growth, for the potential for less immigration in the U.S. as well. You could add something to growth, though, if you think that tax cuts are going to get passed.

00:19:57:21 - 00:20:15:00

So that is a function of Congress being able to do it. Of course, in the end it is a nuance thing. But we've been of the view that in general, a Trump presidency might actually be slightly negative for economic growth, might add a bit to inflation, but might actually be good for the stock market all at the same time, because companies care a lot about deregulation and tax cuts.

00:20:15:00 - 00:20:32:01

So a lot to consider there. Certainly the Harris-side policies look a bit more like the incumbent, like Biden, and so less of a deviation. And so probably less math to be done on that side. Okay.

Let me get myself out of trouble here. Let's get into more stable economic terrain. So let's talk about that.

00:20:32:01 - 00:20:49:14

Economic deceleration visible: One thought would be these are economic surprises, for the U.S. and globally. And actually some common themes here, which is just both are negative right now. Both have been on a downward trend, you could say, over the last several months. Economic activity is slowing. This is, I think, the way to interpret this.

00:20:49:14 - 00:21:08:20

Again, we think it's okay, it's maybe even necessary because the U.S. economy in particular was overheated before. But there is a deceleration that's creating some understandable anxiety as we see that happen. You have U.S. companies that are complaining quite a bit.

U.S. companies are complaining: So here are the ISM (Institute for Supply Management) manufacturing and services indices, represented in the blue and gold lines, respectively.

00:21:08:20 - 00:21:30:10

Both are sub-50, which indicates both are in theory in contraction mode. Do note the manufacturing (in blue) has been in that mode since late 2022, and nothing horrific has happened to the economy. It's rare, though, for the service sector to be sub-50, and that is a little bit concerning, as well. Certainly some nerves about the U.S. consumer in particular, but I would say consumers more generally.

00:21:30:10 - 00:21:48:25

Consumer worries continue: In terms of why those concerns exist, there are some fundamental reasons.

• We can see that unemployment is going up. Of course, that limits spending.
• We can see that in the U.S., specifically, pandemic savings have been more or less fully deployed and the savings rate is pretty low. This doesn't leave a lot of room to deploy savings into spending.

00:21:48:27 - 00:22:09:11

• The household delinquency rate for loans is rising, suggesting some measure of distress, particularly among lower income households.
• Of course, the burden of high interest rates is still significant.
• Consumer confidence isn't that great. So it makes sense that consumers are going to be somewhat softer. We do hear a lot of moaning from corporations right now, who are consumer -facing.

00:22:09:11 - 00:22:28:28

• Consumers are becoming more price sensitive. We can see that from a number of sources. So less willing to tolerate high prices. That's great for fixing inflation, by the way. I should mention that's part of the reason inflation is coming down. But it's probably less great for corporate profit margins as they're forced to cut prices or not to raise prices.

00:22:29:00 - 00:22:48:21

• Consumers are moving down market. They're moving to cheaper retailers, cheaper restaurants and this sort of thing.
• Lower-income consumers are pulling back particularly, we could say.
• We've had any number of corporate reports recently but I'll just pick on McDonald's because theirs was in the news most recently. But McDonald's reported its first same-store sales decline since 2020.

00:22:48:21 - 00:23:11:27

• So people are genuinely spending less in certain areas. Consumer-facing companies of almost all stripes have a cautious outlook. So they're predicting softness ahead. I do want to say for all of that, so let's expect softness, consumer spending is not a position of strength right now. But I don't think it's disastrous.
• Despite all that, real U.S. consumer spending – meaning inflation -adjusted – is rising.

00:23:11:27 - 00:23:31:26

In fact, it rose pretty nicely in May and June. Q2 GDP was recently released for the U.S. and consumer spending was an important part of the growth. So it's not a disaster.

• We can say that real income is still going up. Wages are still fairly robust, even if they're slowing. So that is also contributing to the ability to spend.

00:23:31:28 - 00:23:49:17

• Unemployment is still low, even though it's rising.

So our takeaway is that we are expecting consumer spending to grow. We're just expecting it to grow pretty slowly over the next few years. It's part of the slower growth story. But it's not obvious to us, it's not a slam dunk to us that the consumer needs to retreat into outright contraction.

00:23:49:20 - 00:24:12:11

Canadian businesses also aren’t very happy: A quick nod to Canada here. So this is Canada's business outlook survey. It remains fairly soft. So Canadian businesses also aren't feeling all that great. And we believe the Canadian economy is decelerating to some extent.

We can see that, as an example, in Canada's unemployment rate, which has increased from what was admittedly a very, very low and unsustainable low of probably 4.8% in late 2022.

00:24:12:12 - 00:24:35:17

It's up to 6.4% now. And so I would say that's gone from being a position of significant excess demand and very significantly overheating an economy, to one that in the last couple of months has shifted, we believe, into a position of sort of underheating or being a bit too cool. This is part of the reason why the Bank of Canada has been in a position to do some pretty notable rate cutting. So Canadian businesses are not feeling great. Nor are Canadian consumers.

00:24:35:17 - 00:24:55:12

Individual Canadian consumers are buying less: Now, this is cheating a little bit, but Canadian consumers are in contraction on their own spending. So let me be clear on a few things.

• First of all, this is retail sales. So just paying for goods not services.
• Second of all this is real. So we're adjusting for prices.
• Third, this is per capita. We're adjusting for population.

So really what you're seeing is the average person buying less stuff.

00:24:55:12 - 00:25:13:11

In Canada, the average person is buying less stuff than they were a year ago. The average person is behaving very cautiously. Normally they buy more stuff each and every year.

Do note that overall consumer spending is still growing in Canada. That's because the population is up so much that, you know, each person is buying less, but there are more people to buy things.

00:25:13:14 - 00:25:34:13

The price of things is going up. You might be buying fewer things, but you're still paying more for the things, if that makes sense. Not to say that retailer revenue is falling or anything like that, but nevertheless, there is a degree of caution being demonstrated by Canadian consumers.

By the way, it's probably quite a healthy thing to do because those very same consumers are being faced by rising mortgage rates and things that at a minimum, they're saving for and preparing for. Or maybe they're already facing right in front of them.

00:25:34:13 - 00:25:54:13

Medium-term fiscal issues are significant: Okay, now we're on to my last topic here. So this is a medium-term issue. This isn't the issue for 2024. We've said for a while we think that once we sort out recession/no recession and does inflation stabilize – and those are looking increasingly sorted – once we sort out maybe the U.S. presidential election.

00:25:54:13 - 00:26:13:23

And that's not at all sorted right now. But when it is, you could imagine markets starting to pay more attention to fiscal matters. And as we've said before, a lot of governments are running really big deficits.

So a high number here is bad, by the way. And red is especially bad. You can see there are quite a number of countries running deficits that are, let's say 4 or 5, 6, 7, 8, 9% of GDP (gross domestic product).

00:26:13:27 - 00:26:32:04

Those are huge. Those are really, really big deficits, not normal deficits. You would see these normally only during recessions and things like that. So these are big deficits. And they do need to be addressed at some point in time. So we've sort of color-coded this. And you can see quite a range of countries are extremely poor.

00:26:32:07 - 00:26:49:07

Not a whole lot are looking outright good. You'll note if you're Canadian, Canada's pretty far to the right. So we can grumble about Canada and Canada's deficit, but it's actually pretty small compared to most countries and not that problematic. That includes, by the way, provincial governments, not just the federal government. But again, the point being, there are some significant issues.

00:26:49:07 - 00:27:05:06

These deficits are going to have to be reined in. The need to rein them in is even greater.

Many countries carry high public debt loads: If you blinked, by the way, this is a new chart. Same colors, new chart. This is the debt-to-GDP ratio. So this is now saying not how much more were you spending as a government than you were taking in as revenue in the latest year?

00:27:05:06 - 00:27:25:28

This is saying, really, what is the sum of all those excess spending years versus, insufficient revenue years? And the answer is, you know, you've got famously Japan with a massive debt level of 250% of GDP or thereabouts. You’ve got Greece still with that hangover from its earlier sovereign debt crisis up above 150%. Italy, not quite as bad.

00:27:25:28 - 00:27:45:06

Some other countries not quite as bad. But, you know, if you were to rewind 20 years, the kind of thinking was, you know, 60% debt to GDP was okay and 80% was a little tricky and 100% was really bad. And here we are in a world in which 100% is almost table stakes and lots and lots of countries, including Canada, by the way, have 100% debt-to-GDP ratios or higher.

00:27:45:06 - 00:28:07:06

So that's not great. That costs a lot of money to service that debt in perpetuity, as it stands right now. So you can again see some color coding, some countries doing a whole lot better, including Russia, which did, to its enormous credit, pay down a lot of its debt prior to engaging in war. That means it's not as difficult a situation in terms of finding people to lend to it, which it otherwise would suffer from right now.

00:28:07:08 - 00:28:21:15

Our fiscal health scorecard identifies vulnerabilities: Then this is the big, complicated chart. You might need to press pause if you care about this sort of thing. You might need to zoom in as well. This is our fiscal health scorecard. So we basically said, okay, you know, deficits are really important for figuring out which governments are healthy and not. Debt levels are really important, too.

00:28:21:16 - 00:28:39:19

We've talked about those two, but other things are as well. We need to look into the necessary fiscal adjustment to stabilize those debt ratios. And those rhyme with the other variables. But it's not quite the same thing.

• Interest payments as a share of GDP. How much of GDP is being sort of squandered servicing debt? And how quickly can an economy grow that matters?

00:28:39:19 - 00:28:56:17

Because you can grow your way out of debt problems if your economy's moving fast enough. So if you're growing fast, that's good. Slow is bad.

• Current account balance that says not just is your government running a deficit, but what about your private sector? That matters too, and who owns that debt. If it's foreigners that is a little bit more precarious.

00:28:56:17 - 00:29:18:08

• Do you control your own currency? That's really helpful when you've got a debt problem.

So we did that. We made a scorecard. We created a fiscal health index. That's the far-left side here (on the chart).

What do the numbers mean? Well, one is really good and five is really bad. So everybody's between those two ranges. But on a color-coding basis, really the takeaway here is, as I said, off the top, Italy seems to be in the worst position.

00:29:18:12 - 00:29:45:15

The U.S., UK, Japan and Brazil are somewhat better than Italy, but not in a great position. Not to say anybody's going to be defaulting or anything like that. It just speaks to the need for some austerity over the remainder of the 2020s, and the potential that economies might move a little bit less quickly as that happens, and the potential that these countries might need a little risk premium in their bond yield to compensate investors for lending to these countries with high debt loads and big deficits and difficult pathways back to normality.

00:29:45:21 - 00:29:59:09

You can see a big, long list of countries in the poor bucket as well. That includes France and Belgium and Greece and some others. Canada shows up at the very bottom of that one. And so that high debt load, is not consequence free for Canada.

00:29:59:13 - 00:30:21:16

Not a lot of countries are looking outright good, I have to confess. Countries have been borrowing a lot in recent years. But again, we think that – maybe not this year, maybe next year, maybe beyond, maybe less relevant to the U.S., which gets away with a lot because it's the world's reserve currency – but we do think there's going to have to be some austerity as these deficits are drained, as debt loads are stabilized at the minimum or hopefully pulled down to some extent.

00:30:21:18 - 00:30:39:22

And it could be a period of slower growth over that time frame. Again, it’s a medium-term issue to watch closely.

Okay, that's it for me. So if you found that interesting, please do consider following along in real time or something approximating it via formerly Twitter, now x via LinkedIn. We post most of our research to those platforms.

00:30:39:25 - 00:30:51:03

Or of course, you can go to the source which is rbcam.com/insights. So I'll just say thanks so much for your time. I wish you so well with your investing. And please consider tuning in again next month.