Hello and welcome. My name is Eric Lascelles. I'm the chief economist for RBC Global Asset Management and very pleased to share with you our latest monthly Economic Webcast. The last few webcasts have had the term ‘soft landing’ very much featuring centrally in the title. This time we don't. This time we're focusing on inflation and rate cuts. And I think there's justification for that.

Inflation has fallen fairly nicely, if tentatively, in the last month. And we think there's a bit of room for further progress. That's quite important.

We are on the cusp of and indeed, perhaps by the time you're watching this, even experiencing some interest rate cuts in some pretty relevant countries. So I think that's rightly where the focus should be.

But just a reference to soft landings. We do still expect a soft landing. We do still believe it's more likely that economic growth continues as opposed to countries descending into recession.

Okay, let's get started here. As always, we'll begin with a report card.

Report card: We'll start on the happy side of the ledger. So let's just run through some of the good things going on and some of the not so good things going on out there.

• To start with – and this has been true for quite a while, but it's worth celebrating each and every month – economic growth is persisting. We are still seeing economies grow. We are still expecting them to be capable of continuing to grow. And really that's sort of question one when you're an economist.
• I can say that inflation did begin to fall again. The back story here is that particularly in the U.S., but really to an extent everywhere, we had a back-up in inflation in the first quarter of 2024. It was rising instead of falling. We didn't want that at all and we seem to be starting to fall again. The April numbers look better. Our nowcasting suggests the May numbers can look better again. So that's quite important.
• That actually is part of the story in terms of enabling the next bullet, which is central banks nearing rate cuts. Actually some of them have already cut rates, but there's some more minor central banks. I'm recording this at the very, very end of May. In early June, at a minimum, the European Central Bank is very likely to cut rates.

There's a chance the Bank of Canada could. There's a debate June versus July, but there's a chance, a good chance that it's in June. So we are getting pretty close to lower interest rates, which of course was the big headwind. And that big headwind could start to go away, which is quite nice.

• I want to say the U.S. consumer is okay. That might seem obvious, but I'll run through just some some reasons for concern and then why we ultimately aren't that concerned.
• We'll talk as well about China. China is, by some measures, the world's biggest economy. By some measure it's the second biggest, but it's right up there at a minimum. And so we do need to care a lot about it, going forward. Chinese housing stimulus was delivered recently in a pretty important way, and in a way that does suggest China is pretty serious about stabilizing what has been a very weak housing market.
• And then I'll throw out there as well – and this has been true for a while, I'm happy to say – risk assets. That's code for the stock market and credit and these sorts of things, mostly happy these days, expressing more contentment than discontent. And of course, we like that. Here we are, ultimately providing advice to investors, so we're looking for markets to go up more often than not, but it's also a sign that perhaps the economic outlook isn't so bad either, because markets tend to be forward looking.

Okay, so that's the good. What about the bad?

• Well, you know, higher rates. First of all, rates are still high. Maybe I should start with that. So that remains consequential. That's the big headwind that we are still grappling with. Even as rates perhaps start to come down, we're going to be grappling with this for the foreseeable future, at least for the next year.
• There is still a risk of recession. We think it's a manageable risk. We think it's a risk that operates at this point well below a 50% chance. But it is a material risk of recession that can't be completely ignored. So it's maybe not a time for aggressive investing, even though the base case scenario is is pretty decent.
• I can say the geopolitical space, is still a complicated one. That U.S. election keeps on marching ever closer. It's now five months away. We have a lot of turmoil in the Middle East. We still have a war in Ukraine. We still have frictions between China and the U.S. with some tariffs recently being introduced by the U.S. And still there are issues there. There are some upside risks to inflation and downside risks to growth that emerge from that space. And just a generalized source of uncertainty.
• I guess I stole my thunder on the last item here, but I'll just say it anyhow, that the U.S. election is getting quite close, and it is set to be consequential. It looks like it's close, but the policy proposals and platforms of Biden and Trump are pretty different. and so there are some consequences as to who wins. And it's surprisingly nuanced.

The stock market might be fairly content with a Trump win, given some talk of corporate tax cuts and deregulation. Possibly the economy might be a little bit less so, to the extent there's also talk of tariffs and reducing immigration. And so all sorts of different consequences slicing in different directions. But the bottom line is we do need to be paying attention to this.

Often the summer before an election, you get some clarity as to who's going to win. At this point we don't really have that clarity. It looks very, very close. Maybe you would say Trump is a hair in front of Biden, but it's very close and it could go either way. That’s really the only proper way of critiquing it right now.

Then on the interesting file, maybe more than usual, as I look at this big list in front of me all of a sudden, one would just be this notion of economic divergence and convergence.

• There was economic divergence in 2023. The U.S. economy kept on roaring forward and everyone else stumbled to an extent. We are seeing a degree of convergence now. The U.S. is becoming a bit less exceptional. It's slowed somewhat. The rest of the world, at least the rest of the developed world, if anything, has actually picked up a little bit. So they're looking more similar than they have for a while.
• I'll mention just on the fiscal side and I have fiscal on the mind because really, one of the big surprises of 2023 was how profoundly supportive U.S. fiscal policy was to growth. That really was the source – one of the big sources, at least – of the upside U.S. economic surprise. So we're paying very close attention to the monthly fiscal numbers as they come out.

I can also talk about where we are, just to steal my own thunder later. It's about a neutral impulse. We're not seeing another big boost, but neither are we seeing a drag. It's about the same level of spending or level of deficit as last year.

• I mentioned a moment ago we're seeing yet more tariffs and yet more frictions between the U.S. and China. The U.S. White House did just apply a significant number of tariffs on, it seems to me, strategic industries and so on, electric cars and, to a degree, on solar panels and electric batteries and these sorts of things. Again, continuing to interfere with global trade, in a way that does, we think, take a bit off global growth and adds a little bit to inflation as well.
• On the Canadian side, and I have a nice little chart to support this later, so I won't spend too much time, but we’ve seen a big spike in Canadian business bankruptcies that made people pretty nervous. I think there is some genuine increase. The reality is there is some pain from higher rates, but there were some artificial, temporary factors we thought were happening. Looks like that was indeed the right interpretation because we've seen Canadian business bankruptcies starting to come back down again. So we think in the end, not too, too much genuine concern there, at least in terms of the economic signal that it's giving.

Okay. So that was the report card. Why don't we just move forward here and we'll start with inflation.

Inflation finally improving again: Inflation has been the story again I think for 2024. It was a story of disappointment over the first three months of the year. And this is particularly true for the U.S. You have U.S. numbers in front of you here.

We saw a material acceleration in the monthly rate of price increases in the U.S. That was true both for overall inflation and it was true for core inflation, which is excluding food and energy. It was creating some concerns. You suddenly had inflation ticking along in the mid-threes instead of the low threes, and running in recent months at an annualized rate that was closer to 5%.

That was not at all what anyone was looking for or hoping for. So we thought that was probably a blip. We knew there were some seasonal distortions that would probably go away in April. We knew we'd get a little bit of a helping hand from a few other forces.

The good news is we did then start to see inflation pressures ease in April. As you can see on this chart, both those lines starting to come down a little bit recently. As we nowcast May inflation, which won't be available till mid-June, which is in the future. As I say these words, we can say that it's looking pretty good for May as well.

• We've seen gas prices come down.
• We can see shelter costs probably easing a little bit and so on.

We believe there's room for further improvement. Still a long journey back to something resembling 2%. Probably a choppy journey. We may yet have a few more episodes of being a little bit nervous when inflation doesn't fully cooperate. We do think there are more favorable forces than not, going forward.

Actually, let me put a few of those sorts of considerations – good and bad considerations on inflation – in front of you here.

Insurance inflation should soon turn lower: One thing, one source of actually fairly intense inflation over the last several months has been insurance inflation. And that's coming for a few things. Maybe the most important thing in front of you here is just insurance inflation famously lags overall inflation.

And so you can see every time – well, not every time, but most of the time there's a spike in the gold line. That's just overall inflation. And a year, year and a half later, you see a spike in insurance inflation.

The reason it's so slow is really twofold. One reason is just that people often lock in insurance contracts, maybe on home or auto insurance for a year.And so even if the cost of everything to the insurance company goes up immediately, the insurance company doesn't have a chance to pass on that extra cost for another 364 days. So there's a lag built in just to the contract structure.

Also, we know that at least in some jurisdictions, insurance rates are regulated. The state or perhaps the province has something to say about the rates that these companies are allowed to charge. And it takes a while for insurance companies to convince governments that they deserve to increase the price. They really need to prove that their profits are collapsing and that it's just not a viable business and that takes time to do.

The bottom line is we tend to see the blue line spiking pretty reliably about a year and a half after the gold line. So here we are looking at a recent spike in the blue line, having seen a spike in the gold line about a year and a half ago. We believe that we are in the realm of seeing insurance inflation peak and start to come back down.

By the way, I mean, in terms of other reasons why it peaked, there were a lot of natural disasters last year, probably more than you would expect, even with climate change. So probably not quite as bad this year. A lot of auto thefts last year, but it seems like, believe it or not, that's starting to fade a little bit.

So we think we're in a position where we can start to see this come off. So that's a helpful force to help pull inflation down.

Wages aren’t holding back lower inflation: When we look at labor costs, this is getting a little tricky. This isn't wages. Wages are not falling in an absolute sense or anything like that.

But when we adjust worker compensation for inflation – we subtract that out and critically we adjust for productivity – and productivity tends to go up over time – we get this. So this is wages, controlling for prices, controlling for productivity. It's fascinating to note how there was a declining trend for decades.

It's fascinating to note the 2010s were flat. I don't know that I have a great answer for exactly why that was, but that's what ultimately prevailed. It might be a statement about how low inflation was, perhaps, but the main point is it's right at the end on the far-right side, you can see actually this a downward arrow again over the last couple of years.

That would mean that once you've adjusted for inflation and productivity, wages actually aren't going up. In fact, if anything they're going down a little bit. So you would struggle to say that wage growth is the driving force behind inflation. It's still a little bit tricky because of course we're subtracting inflation. Inflation is high. So wage growth is pretty fast. But we're just saying it makes sense because inflation is high.

Of course companies to some extent are setting prices in the future based on the wages right now. And so it's not to say that workers and wages don't have anything to do with inflation remaining a bit high. But I wouldn't say they're the central culprit for high inflation. So this sort of trend would suggest, that we can, again, probably continue to see inflation coming down. The worker wage side isn't going to completely get in the way of that.

Higher U.S. home prices signal economic optimism: Then home prices. Shelter costs are actually the biggest component in most countries’ CPI (Consumer Price Index) baskets, at least in North America. And we saw a big drop in home price appreciation. In fact, it flattened out for a moment. We're seeing a bit of a revival again.

So there's a couple things to be said here. Obviously, the revival makes you a bit nervous and wonder whether inflation might struggle to come down. But I think that's actually maybe not the right focus. There are lags intentionally built into this as well.

Not everybody buys a new house every year. If you're renting your lease does not come up immediately. And sometimes the rent, the rate changes sort of lags what market conditions might otherwise dictate. Sometimes there are forms of rent control that even slow that down, depending on the jurisdiction.

Actually the bigger point is because home price inflation slowed so much a couple of years ago, we should still continue to get a negative force for a while. And so helping to pull inflation down. Eventually the recent bump becomes relevant. Actually, even in that context, it's a pretty moderate rate of increase now. So it would still be consistent with tolerable inflation, we think.

This is just to acknowledge that there are of course, risks to that cozy view.

A new supply chain complication emerges: Certainly a prominent risk would be this: our metric of supply chain problems, the cost of shipping a container, globally. We had huge problems in 2021 and 2022, famously contributing to inflation. Those problems mostly went away and of course inflation came partially down. We then had a bit of a blip higher, around the start of 2024.

And so, related to a number of things, a big part was Houthi rebels firing upon ships trying to transit the Red Sea and making the Suez Canal more difficult to access and so on. We saw that sort of spike the cost of shipping, though not anything like a few years ago, we saw that start to fade.

Not actually, because although the Red Sea was properly reopened, it was still quite limited transit there. And shipping companies just figured out and reorganized their routes. They go around Africa and it takes 10 days, but they've made it work. So we start to see that come back up. I think the reality is that there are some, some complications that persist given this rerouting of ships.

And you may or may not be aware, but there's also an issue in the Panama Canal with water levels. So the ships transiting the Panama Canal are fewer in number and smaller in load because there has been a drought there. And so there are a number of things. I suppose the Baltimore port might be thrown in there, although I think it's very much a lesser consideration at this point.

The point, though, is we are seeing the cost of shipping rise again. We need to be paying attention to this. It may exert a bit of an upward pressure on prices.

Again, we don't think it looks very much like a few years ago. We don't think it will have that level of effect. But neither is it completely trivial and the upward trend is, is a new one quite recently.

Okay. So let's pivot from there. I hope I haven't left you with a bad impression on inflation. The big story is it started coming down again. We think there's room for more despite some risks and despite some issues. That has enabled central banks to at least think about rate cuts.

The era of interest rate cuts begins: Looking at a pretty selective set of jurisdictions, admittedly developed world focused, central banks are expected to cut rates for the most part. The exception is Japan at the bottom. They are marching to their own drummer, very much a lagging indicator. They are just hiking, but again, they are a lagging indicator, we think.

We have had now some developed central banks cut rates. Switzerland cut rates in March. Sweden, the central bank of Sweden, cut rates in May. Eurozone – again, I'm recording late May – seems pretty likely to cut. Market has about a 90% likelihood of a rate cut priced in for June 6th.

Canada: Canada could cut rates on June 5th. Actually, it might even move faster than the Eurozone. It's quite possible. I think the way to view Canada is it's very likely the Bank of Canada cuts rates in June or July. I personally think it's close to 50/50 between the two. The market thinks it's a bit more 60% June, 40% July. So June is absolutely in play. There might be a nice surprise coming in the not-too-distant future.

But whether it's June or July, I think the point is there's a bit of tentative easing likely on the way, celebrating the fact that Canadian inflation is now sub 3% and has actually been below 3% for four consecutive months. The economy is running a hair below its potential.

That's the sort of environment in which you'd start to conceive of removing some restraint, particularly given that it is quite a restrictive level of rates to begin with. So, it looks like we probably get a little bit.

One thing to be aware of – and this applies to every central bank on this list, I guess, minus Japan, which is just going a different direction – the easing, the rate reduction should be quite slow, quite tentative, quite gradual, maybe choppy in the sense of cutting, watching, waiting to see what happens. Moving again.

Historically, when central banks cut rates, it's very often using the elevator. It's often big aggressive cuts, but that's normally in the context of a recession. We don't think we're getting a recession this time. It's not a zero risk, but we don't think it's the most likely scenario.

As a result, central banks are going to move much more slowly. But I do find it important to convey the idea, though, that a neutral interest rate or a normal interest rate is arguably a fair bit lower than where these short-term rates are right now.

We think there is room in theory for a couple of percentage points of rate cuts over the next few years. I think that's the way to think about it.

So this isn't the new normal. The new normal is higher than we were in 2020, that's for sure, higher than we were, we think, in the 2010s. But probably not as high as today. So there's some room to eliminate a bit of that rate pain.

But I've gotten distracted here. Let's get back to this table. So the UK might cut in August. At one point the thinking was late June, but then, an election was called for July 4th. That, by the way, looks very likely to go to the Labour party, marking a change of government for the UK, barring a real huge reversal in the next several weeks.

U.S. might cut in September. Market thinking is ever evolving on the U.S. There were moments last year when it looked like it was going to be this spring. That didn't happen.

 I would say as of a week or two ago, it looked like September was pretty likely. Now there's a little bit of cold feet and some of the timing is shifting out a bit further. I would still say September is in play. That's probably the first plausible date that the Fed (U.S. Federal Reserve) could cut. It might end up being a little bit later. And of course, they have an election to work around as well.

And then as I mentioned, Japan just going a different direction. In fact, the Japanese 10-year yield just exceeded 1% for the first time in 11 years. So going in the opposite direction and, if anything, we're going to get a bit of hiking from Japan and some reduction in bond purchases because Japan is just escaping from a very long period of ultra-low interest rates.

Okay. So let's move on from there. And really just I guess, reiterating some of the points I just made.

The world’s central banks are pivoting from hikes to cuts: This is now taking a global view, the fraction of the world central banks that are raising rates are in gold. The fraction of the world central banks cutting rates is in blue. I've shared this before. I do like it though. And so you can see almost everyone was raising rates during the inflation shock.

Now very few central banks are raising rates. A small but growing number of central banks are easing. And we think that trend probably continues going forward.

So we do believe genuinely we are shifting to an easing environment. Our best guess is that bond yields, including term bond yields, can be a little bit lower in a year's time as opposed to a little bit higher.

I say a little bit just because the market has already priced in some of the rate cutting. It already knows about that. Yields are already lower than they would have been on that basis.

Let's pivot from inflation and central banks and get really into the proper economy for a moment.

Global economic activity picking up slightly: This is not a bad just overview of where the world sits right now.

So global purchasing manager indices (PMI) surveys give a sense for where we are and where we might go in the economy. Nice, fresh, monthly, timely indicators. Different jurisdictions are saying slightly different things, of course. But in general, I think the story is one in which people are feeling better about the situation and the outlook right now than they were a quarter or two ago.

So I would say the outlook is incrementally a little bit higher. It's not optimistic in an absolute sense. These are not super high levels that we're at right now. But it's enough to eke out modest to moderate economic growth. And that's what we're looking for.

Actually that is close to the ideal scenario. Keep in mind we don't actually want robust economic growth right now because that would not just risk but almost certainly overheat economies and send inflation higher and force rates to stay high or go higher. Two things that we don't want.

What we want right now is economies that move forward, at a pedestrian pace. That allows inflation to come down, that allows interest rates to come down and just lets things normalize. I would say the sorts of indicators we're seeing right now are broadly consistent with that. So that's a nice sign.

Economic convergence: U.S. no longer outperforming: On the notion of economic convergence or maybe the end of U.S. economic exceptionalism, I wouldn't say this chart is the be-all and end-all of that.

In fact, it just gives you one little slice or perspective. But I would say focus on the gap between these two lines. And so that blue line was higher than the gold line for the better part of the last year. That was the U.S. economy, consistently having more positive economic surprises than the world. That’s not quite the same as saying the U.S. economy was stronger. But in a nutshell, that's what was happening.

So the U.S. economy was strong. The rest of the world was a bit less impressive. Now there's been a bit of a reversal. Not a huge one. We’ll see if it even sticks. But to me, the bigger point is just the U.S. is not profoundly the more positive of the two right now. Technically, the gold line is a little higher than blue.

That would indicate, in fact, we can say that the U.S. is now experiencing slightly negative economic surprises. Numbers have been a bit more inclined to disappoint than to please, whereas for the world we've actually seen, to a small degree, the opposite. Again, it's not so much to me that the U.S. is falling out of bed.

It really is just more that the U.S. was moving really fast, now it's slowing down to a modest moderate rate of growth. That's probably good for the U.S. The rest of the world was moving pretty slowly in 2023. It's picking up now to a modest to moderate rate of growth. That's good too. So we're meeting in the middle, and it's probably the medicine that everybody needs.

Let's talk about the U.S. consumer though in that context. It is easy to be at least a little bit worried about the U.S. consumer. I've seen a lot of questions come my way recently on the subject. Hence the next few slides that I'll share.

U.S. consumer worries mounting: So if you want to worry about the U.S. consumer, there is some real pain coming from higher interest rates. These are our mortgage and auto and credit card delinquency rates. And they're all rising. Those auto delinquency rates and credit card delinquency rates in particular are pretty high, actually, by the standards of the last couple of decades.

So we are seeing some pain. There is a subset of Americans who are struggling in the context of high interest rates. We can't ignore that.

Not shown here, but another concern often expressed is that it looks like Americans have more or less spent their way through their pandemic savings glut. They accumulated a lot of savings during the initial phase of the pandemic, government stimulus being at least a partial contributor, but maybe limited opportunities to spend being another contributor.

So now we're in a position where it looks like Americans have spent through most of that. It's very sensitive to the assumptions you make. Some measures say it's all gone. Some say it's mostly gone, but it's at least mostly gone and the personal savings rate now is pretty low. It's only 3%. You know, the historic low is 1%.

There's not a lot of room for spending to move aggressively forward without income helping in a significant way. So if you want to be nervous, that's why you would be nervous. Ultimately, we think it's reasonable to expect consumer spending growth to be a bit more meager over the next few years, not to be the big driver of growth.

You’ve heard me say these terms already a few times, but a more modest or moderate rate of consumer spending growth is likely just as it is for the broader economy. But we do still think that there is room for spending growth. I'll show you a couple of charts that support that notion.

Still room for consumer spending to grow: So one thought here is household net worth is rising and quite high. Don't get too thrown off here. I know there's a little spike higher a year or two ago and it looks like we're falling now – but that was actually sort of pandemic distortions. Essentially, we don't think this maybe was a sustainable reflection of where things were.

To me, the story is one in which we're seeing an upward trend and just objectively, stock markets up. And objectively, home prices are a whole lot higher than they were five years ago in almost any country in the world. And so when we think about the ability of consumers to spend, sure, we can look at the amount of money being saved on an income.

But, you know, wealth grows not just via savings but also via appreciation. And the appreciation side has been very friendly. We've seen the net worth of households go up quite a bit as a result. So there's room to spend that exists on that front as well.

U.S. labour market is still fine: Labor market is looking fine. Certainly job creation has slowed, but I think slowed in a healthy way. And we are still seeing job creation.

Ultimately, if you're talking about the consumer, the single biggest predictor of consumer spending is do  people have jobs? Obviously, the answer is yes. There is still job creation.

Maybe one of the fresher indicators we can get is weekly jobless claims, which is in front of you. It's very low. You really can't tell just how low it is given we only show you a few years of data. But this is really low by historical standards and going roughly sideways. We're not seeing a big deterioration there, nor do we expect one. So, we think that will remain okay.

I talked earlier about how wages, ex-inflation and labour and productivity are not going great. But you know what? Wages ex inflation are higher. People do have more money to spend. Maybe not as much  you could say as they deserve, based on what productivity has done. That's where you might have a debate. But people do have more money to spend. So that's something that supports spending as well.

So, as we walk away from this topic, we can say it makes sense that consumers can keep spending, if not enthusiastically. We don't see any signs of particular weakness when we look at the real-time data. So one of the very few silver linings to come out of the pandemic is that we ended up with this wealth of real-time indicators that everyone was generating and looking at.

No sign of consumer weakness in real-time data: This is just one of many examples. This is a Bank of America credit card index. RBC actually maintains one for Canada. But I'm looking at the U.S. here. So we need to stand on the shoulders of others and the point here is just that we're still seeing a pretty normal performance of the consumer. That line is going roughly sideways with some wiggles, no real sign of great distress at this juncture.

It's worth mentioning, even in the context of those higher rates that obviously are painful to a subset of Americans, and are problematic, even, to them. It's worth mentioning that when you actually look at debt servicing costs in the U.S. for households right now, it's actually a completely normal share of income right now being dedicated to paying interest and principal on debt.

It was unusually low for a moment during the pandemic. At this point it’s no higher than it was before the pandemic. Now that might start edging higher. Maybe that story changes, but for the moment it's actually not that burdensome on the aggregate.

So when we talk about economic growth, you hear me talking about modest to moderate as though that’s a good thing as opposed to strong.

The reason fundamentally is just that for the U.S., at least, the economy is a little bit overheated. Unemployment's probably a little lower than it can sustainably be. The level of output is probably a little higher than we can sustain if we really want inflation to come back down to normal.

There are plenty of ways of proving that. Looking at historical unemployment rates, they’re still pretty low right now. That would be the simpler way of doing that.

But why do simple when you can do complicated?

Soft landing entails some economic deceleration: We have, gosh, five different metrics we put together that try and measure where the U.S. economy is versus its potential. It's easy to conceive the economy underperforming its potential, but economies can outperform their potential. They can kind of run hotter than they can sustainably run.

The reason it's not sustainable is because inflation picks up when then rates go up, and then it hurts the economy and you get pulled back down to earth. But, you know, there is this notion of the economy running at its potential. The difference is called the ‘output gap.’ That's what this chart shows. And so just in a nutshell, when you look at those five lines, first of all, they're not exactly the same, but they rhyme with each other.

This is just the nature of economics, managing contradictions, trying to find trends among them. You can see those five indicators at this point, really, all of them would have indicated not long ago the U.S. economy was in a position of excess demand. So it was overheating a little bit. They're arguing the U.S. economy is now starting to come down to earth. But a number of them would say there's still a bit more work to be done.

So we probably do need an economy that runs a little bit more slowly, just to be confident that we can get inflation fully back on track and get rates lower and that kind of thing.

2024 U.S. GDP growth set to match 2023, but 2025 to slow: Just a quick nod here, this is a chart we trot out occasionally. I just sort of like it. It's interesting in a number of ways.

It's kind of amazing to look back at the pandemic and see how in 2019, the 2020 outlook was pretty normal. Then suddenly it wasn't, when the pandemic struck . Each of those lines, to be clear, is the forecast and how it changed for that year. So you can see that jaw-dropping drop in the brown line would show just how the economic outlook deteriorated under COVID for 2020.

And then 2021 was rising because that recovery came faster and just more impressively than almost anyone expected. So there's a story to be told about each year. And just looking to the far right here, we can see just a couple of things about 2024 and 2025.

First of all – and we've done this as much as anyone else – we have become more optimistic about 2024 over the last 6 to 9 months. At one point we were pretty nervous about a recession. We're not fully out of the woods, but we're less nervous about a recession right now. You can see that that line, I don't know what color that is. The 2024 line, we'll call it, just rising a little bit.

And so becoming a bit more optimistic and looking for about 2.4%, growth in the U.S. That’s not too, too far from our own forecast.

Then 2025, you'll note, is a little bit lower. So maybe that's the point there. You know, forecasters have just started working on 2025. So not a big, long line to think about.

Not a lot of movement yet in 2025.

But the default thinking – and we concur with this – is that 2025 growth should be a little bit slower. And so that's the idea of the economy coming back down to earth to some extent. It might be more in the realm of a high one-percent type growth rate for 2025, which is, you know, underwhelming by U.S. standards. It would constitute, technically, the worst year of growth since 2020, since the pandemic.

But it's fine. It's more than fine. In fact, again, it's probably what's needed to get inflation fully down to where we want it to be.

U.S. fiscal trajectory in 2024 remains very similar to 2023: A couple other thoughts here. So one, on the fiscal side, I gave you the preamble right in the table of contents. I'll just say again, a big part of the 2023 growth story was a huge fiscal impulse that hadn't been completely anticipated.

So we've been paying very close attention.

You can see that because the orange line, the 2023 line, is higher than the light blue line, which was 2022. So that's basically saying, bigger budget deficits mean just more government spending. So that was a fiscal impulse that was positive and helped to push the economy forward.

So what matters is the gap in the lines between adjacent years. We can now start to say some intelligent things about 2024, which is the dark blue line. We look at the dark blue line, we compare it to the orange line and we say, okay, is there a net positive fiscal impulse or a net negative fiscal impulse for 2024 so far?

And the answer is there's no fiscal impulse. That dark blue line is hard to distinguish from the orange line. They are following a very similar pattern. So it's a neutral force. So the reason we insist on tracking it month to month, and the reason it wiggles around so much, is that you do get some seasonal factors here and there.

It wouldn't quite be fair just to pretend it was a smooth experience. But it's been very similar. So I would say at this point, the fiscal side is neutral, neither adding to growth nor subtracting from growth. It’s worth keeping track of that, given the surprises that came last year.

Okay. A couple other quick ones for me. One would be this:

Geopolitical risks are higher than normal: We've talked before about geopolitical risks. I told you off the top that, there certainly are issues and questions around the U.S. election, around the Middle East, and around Ukraine, and China-U.S. or even China-West relations. A lot of hand-waving involved when we talk about geopolitical risks and how they really higher than normal.

Now, I must confess, I'm even a bit of a skeptic to the extent that it seems to me if you were to, randomly pick a year in the last century, you would find a couple of wars and you would find some not-so-great things going on, and you'd find some social strife. I'm not sure that we're living in such incredibly unusual times, but nevertheless, it does feel as though we have maybe a little bit more geopolitical trouble than usual right now.

The nice thing is, at least we can try to quantify that. So that's why this chart is in front of you. This is a chart of geopolitical risk. And it does concur that we have a higher level of risk than normal. You see those little acute moments where it spikes? This is actually constructed by searching newspapers for geopolitically relevant words.

It's one of these things that computers are very good at doing. Of course, we're not in the middle of a new war that started yesterday. So the headlines aren't everywhere. We're not in one of those spike moments. But nevertheless, just the overall level of geopolitical news is pretty high compared to the norm.

So, yes, there are more risks. And that, I guess you would just say the unfortunate nature of geopolitical risks is they are a bit more likely to turn negative. They skew to the downside, I guess, is the way to put it. They can be resolved. And that's a happy event. But there are always these risks of a big bad problem happening.

There's always a sharper downside risk element to it. So we're aware of that.

And, when we think of our own investing, certainly we're taking risk and we are invested in stocks and credits and the sorts of things that you would want to be in, if you were hoping to capitalize on growing economies and fairly pleasant conditions.

But we're not taking huge risks, even though we think the economy can keep growing. And it's for a number of reasons.

One is that we think that we are mid- to late cycle, which normally provides moderate returns as opposed to huge returns. Part of it is just because there are more risks, maybe, than usual.

We can't completely rule out a recession. Some of these things make a bit less of a strong argument for risk taking. The U.S. stock market is expensive. Credit spreads are narrow. It's not as though markets are especially cheap outside of maybe the international equity space. That ultimately motivates the moderate risk-taking that we are undertaking right now.

Equity returns are usually moderate if we are indeed mid/late cycle: I thought this was next, and I'm glad it is because that segues perfectly. I just mentioned this, in fact: we think we are probably a mid- or late point in the cycle. Don't be too nervous about the idea that it might be late. Late is usually associated with a number of years of growth still left to go.

So that's not saying that things necessarily go pear-shaped tomorrow. If we're mid- to late-cycle, actually historically, you can say that that is generally an okay time for the stock market. This is the S&P 500 and the median and mean returns and the distribution of returns. You can see probably exactly what you would have guessed, but it’s nice when theory aligns with reality.

It happens less than I would like, if I'm being honest, in the economic space. So this sort of chart delights me. The biggest equity returns happen at the very start of the cycle. Stock market is depressed after a recession. If you're nimble enough, quick enough to realize the recession is ending or it's not that bad, that's where you make the most money.

The market does very well in general, when you're early cycle, the first year or two of a recovery. It’s more moderate in the mid- and late-cycle.

And then when you're on the cusp of a recession, when it's end-of-cycle, when you're in a recession, those times tend to be when you lose money. That's when the returns are negative.

So no surprises there. But just nice to see that theory aligns with reality.

We think, as I said, we're mid- to late cycle. That's consistent with equity gains, which is great. But it's consistent with moderate equity gains, not outsized ones.

Okay. A couple charts to go here, folks. Let's just talk Canada.

Canada in the global context: This is a bit of a broad view, but it's just nice to pull Canada in a bit more detail.

There's the map, I suppose, but let's talk about this. First of all, the world has been confronted with largely global forces over the last few years. So the pandemic was certainly global, as was the response in terms of lockdowns, and these sorts of things. Excessive inflation was more or less global. Maybe China and Japan didn't fully get it, but it was pretty global.

High rates have been pretty global as well. So that's been a shared, common experience.

Canada has some specific things going on, though, that are not totally shared. Let's recognize Canada is among the more interest rate-sensitive economies. That is by virtue of a lot of household debt and poor housing affordability.

Also, the nature and structure of the mortgage market does render Canada notably more rate sensitive than the U.S., maybe even somewhat more than a number of other countries as well. So that affects Canada. Those rate hikes hurt more. Rate cuts if we get them in the next few months, if we get them this summer, maybe help more, which is quite heartening.

Plenty of fiscal support. I think, like with many countries, maybe too much fiscal support, during the recovery phase from the pandemic. But in recent years, actually, for all of the grumbling and all of the complaining about what is still a lingering deficit that frankly doesn't in my eye have to be there, actually, Canada did not do the kind of deficit spending that the U.S. and that a lot of other countries have.

On that note, actually, Canada should be lauded. And, you don't need to worry as much about a medium-term drag on growth because Canada doesn't have the level of fiscal austerity necessary that a lot of other countries may be grappling with over the next few years. So that's quite nice.

We've talked before and I'm sure we'll talk again about that Canada had the big immigration boom that added, in theory to growth,

though it did create some headaches and complications as well. It's still running as of the latest data, though it is set to slow a little bit this year. Then conversely and relatedly, to an extent, a productivity bust. And so some was just indigestion from immigration and maybe pandemic hangover effects.

Some is more structural in nature and really does need to be tackled and hasn't yet been all that seriously tackled. So some Canada specific issues.

In terms of sort of summarizing it all, at the bottom, again, as I mentioned, lower rates should be especially helpful for Canada. That's something to look forward to, particularly if you have a mortgage or something like that.

We're looking for fairly modest growth, but we are looking for growth despite some ongoing pain for households. We think Canadian inflation can come down. It's behaving better than the U.S. already. The question mark and maybe the issue for Canada is rent inflation. That is running hotter and showing less inclination to come down.

Of course, it's very responsive to the big population growth recently. And so that might be a stickier point and might make life a bit more complicated for inflation and the Bank of Canada. And that I'll just flag as well.

And this is stating the obvious, but the U.S. election – five months out – matters to the U.S., matters to the world.

It matters to Canada a lot. The 2016-2020 period was a tricky time for Canada, and the trade deal was renegotiated, not entirely to Canada's favor in some cases. It could well be another tricky time, particularly if there were to be a Trump presidency and some isolation inclinations that emerge from that.

Canada does need to be ready to be at least thinking about that sort of issue. So, certainly a lot going on in Canada. But the big story is one in which we are looking for some modest economic growth, which is just fine.

Canada’s business bankruptcy spike was indeed temporary, as suspected: I'll finish with this, which is a bit of an aside, but, you know, one source of concern that we weren't actually that concerned about, is this: that blue line is business bankruptcies in Canada.

There was quite a spike. We're talking on the order of an increase of three, four plus times. It can look bad, but was it a sign that the economy was crumbling? Well, you know, I think some of it is genuine. I mean, it's undeniable rates are higher and the economy is not moving especially quickly forward.

But we thought – and we think even more so now as we start to see the theory play out – we thought that there were some distortions. The distortion here really is that there was a big lending program by the government, a pandemic-era lending program that demanded eventual repayment. And essentially, it all came due in early 2024.

And there were businesses, these are small businesses, probably not viable businesses. So not with a huge effect on the economy, though not to downplay the pain, I'm sure the proprietors are feeling. But nevertheless, it was sort of a moment when a lot of businesses said, okay, we are we are going to cease operations here. We are not viable as these loans are coming due.

So we've seen a spike, but we are now starting to see that come off. And so we believe that most of that spike did relate to really just the expiry of this loan program and some of the problems that temporarily, ensued.

 Okay. and so I'll say thank you so much for your time.

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I'll just say thank you again. Thanks for your time. I wish you well with your investing and please tune in again next month.