Eric Lascelles - Managing Director, Chief Economist and Head of Investment Strategy Research

How is the current geopolitical environment affecting your global growth forecasts?

Eric: This is certainly a time of high geopolitical uncertainty, and none more evident than the war between the U.S. and Israel and Iran. So we can certainly say this is of relevance to the global economy, and we have somewhat downgraded our growth forecasts on the presumption that some damage should surface. I do hasten to emphasize, though, that this shock, at least unless it were to persist for a very long period of time, is very unlikely to be outright recessionary.

And the reality is, the global economy is much less oriented towards oil than it was, let's say, 40 or 50 years ago, but also even 10 or 15 years ago. And so there is a degree of resilience that exists, but equally, some damage is reasonable to expect. There's a regional variation in that. Certainly, Asia and Europe should be more effective than North America to the extent they are the central consumers of the Middle Eastern energy that is now temporarily

That North American advantage is tempered a little bit by the fact that we do see some subsidies from governments in Asia and Europe, narrowing the gap a little bit. And those economies, in fact, tend to be just less intensive in their use of fossil fuels. But the bottom line is there is a North American advantage, an Asian and European disadvantage at the end of the day. When we look at the actual data, it is remarkable, though, how much resilience we can see. And so, for example, the U.S. labour market looking completely normal, no real evidence of damage there. At looking across global developed economies, we can say purchasing manager indices are actually moving higher and lower. There is actually quite a degree of resilience here.

So again we're assuming that there will be a little bit of pain later, but it's very much not in evidence right now. The more visible effect certainly is on the inflation side, but that's another story.

What is your inflation outlook for 2026 and into 2027?

The war with Iran has certainly increased the price of energy - that's very visible, and that has shown up quite directly in consumer price indices around the world, even as governments have tried to temper that somewhat via subsidies and other special measures - and so that's showing up directly. We are of the view, as most are: this is a temporary shock.

So there's reason to expect a significant reversal of that price pressure later, but it probably isn't fully realistic to expect energy prices to settle right back down to where they were beforehand. That's in part just because inventory levels have been depleted, and countries will want to rebuild those. There has been some damage to production; ships aren't where they need to be at this juncture for when the Strait of Hormuz is fully opened.

And so on a number of fronts, we are assuming that energy prices remain somewhat elevated, if not as elevated as they have recently been. I think equally, the question of second order price effects is important, and so it's not unusual, once an energy shock has lasted about three months (which happens to be, as I'm recording these words, about where we are right now), it's not unusual for that to start to trickle out into other costs.

And so via higher transportation costs - very often in this particular instance, there is also something of a fertilizer shortage specific to the Strait of Hormuz. As a result, we are starting to see a broadening of the price pressures, that is, of course, unwelcome in and of itself. It's also a little bit harder to put the genie back in the bottle once it's moved beyond purely energy prices.

So while we do assume some reversal on that front later as well, there is a bit of scarring we think that's happening. And so the takeaway is this is still very much a 2%+ kind of inflation world where we are living right now. We think there's room for some settling back down in 2027, but price levels probably don't return to the trajectory that they were previously on.

How could AI reshape the economy over the long run?

Artificial intelligence is a truly incredible technology, and certainly the key theme, I suspect, of our time. It has both short-term and long-term consequences. In the short run, very visibly, we've seen this remarkable surge in capital expenditures as hyperscale companies are building out their models, and that has been to the enormous benefit of many hardware companies and data centre companies.

And so a great deal of money and stock market valuation has already been created. On the back of this theme, it's worth recognizing, even in the short term - there are some losers as well, as we've seen some sectors identified as potentially being disrupted by the artificial intelligence. And so software companies most visibly have seen their valuations decline on that basis.

So winners and losers, even in the short run. Over the long run, I think the stakes just get even higher. And to be perfectly frank, it's impossible to speak with complete conviction or clarity on where exactly this goes. We've been thinking very much in a scenario-type of context. And so, it could be that artificial intelligence is a big deal, but doesn't radically remake the world.

So you end up with moderately faster productivity growth, and that's perhaps helpful for the economy and for investors more generally, but could actually be disappointing for the companies building out the AI that they have such great hopes for. Not the most likely scenario, but in the realm of possibility. We think the most likely scenario is this is truly a major general-purpose technology of the sort that does change how society operates, how people live their lives, and how businesses operate.

We think that there's a very good chance this actually boosts productivity quite significantly, which is code for corporate profits and rising prosperity and these sorts of things. Whenever this kind of technology comes along, it does displace workers. So there's some pain. However, historically it hasn't created a structurally higher unemployment rate. The prosperity, the opportunity, and the technology has historically allowed other opportunities to come along.

So it's not automatic that the labour market loses, though that is very much in focus right now. And, I suppose the third scenario is the radical one and the one that says: perhaps this is just an unprecedented disruption, unlike prior technologies. It's moving so quickly it can self-improve, it can get rid of the good jobs, not the bad jobs, and so maybe this is completely different. And again, you would say, well, if that's true, there could be truly astonishing productivity gains. And it could be very, very good for investors, at least in a variety of sectors, including importantly, AI users - not just the producers of the AI. But it does create some very concerning issues, perhaps for workers in the scenario in which workers could be much less needed than in the past.

We've generally thought that if that were the path that AI ends up taking, policymakers, of course, would not be pleased if unemployment was rising significantly. And there are mechanisms such as taxing compute, or taxing AI, that can probably strike some semblance of balance between the needs of workers and the desire for productivity gains. And so, in the end, though, it's fair to say that the labour market is a particular question mark right now. I would say that arguments that AI is already displacing large numbers of workers, probably mostly unfounded, but that is a risk. And so, we step back and look to the long run: probably faster productivity growth, probably good for investors, more again of a question mark on the labour market side. Not automatic - maybe is a key point that the labour market suffers here.

That has not been the fate of workers with other major technological advancements.

After all the tariff disruption in 2025, where do things actually stand?

The big tariff bang was in 2025, when the U.S. imposed quite significant tariffs on a wide range of countries around the world. When you look at 2026, if anything, the tendency has been for those tariffs to be slightly reversed. And this is less by White House design and more the Supreme Court to overruling one type of tariff and requiring the repayment of those tariffs.

And so functionally, the average tariff rate has actually fallen in 2026. That isn't the end of the story, though. The U.S. does continue to bandy about various other tariff ideas and is working to re-implement some of the tariffs that have been temporarily reduced for Canada and Mexico and the U.S. There is still another major lingering question, though, which is the USMCA renegotiations, which are meant to take place significantly this summer and perhaps beyond.

So that is a source of lingering uncertainty in terms of the economic outlook for those countries. I can say that from a timing perspective, we're of the view that at this point, it's more likely that we get a resolution, a deal of some sort in 2027 than 2026. The clock is ticking. It doesn't look as though Canada in particular is keen to move too quickly.

And so we think it's more likely this drags on, which is not ideal from an uncertainty perspective, but could perhaps yield a better outcome. We will see. In terms of the deal itself, I fully expect to see significant moments of concern and perhaps threats made and, proposals to withdraw from the deal even. But at the end of the day, we are of the view that it's pretty likely that this deal that eventually arises will either be roughly in line with the current arrangement, which is to say, crystallizing some of the existing tariffs, but not getting worse.

Or possibly actually paring them a little bit, and so seeing some slight reduction or exemptions created. So, we think the end of this will not be bad and could even be slightly good and critically will then open up, we think, additional CapEx in Canada and Mexico in particular, as they have clarity as to their relationship with the U.S.

Does the threat if El Niño impact your economic outlook?

Weather models are increasingly of the view that an El Nino phenomenon is very likely for the year ahead, and in fact, a super El Niño or particularly strong version is increasingly plausible. And so this is something that's worth watching, even from an economic standpoint. At its most basic level, it's warmer Pacific waters. It tends to create a warmer global winter and a warmer subsequent 2027 summer.

Which may sound nice to you, however, it does bring with it other, more directly economic implications. The last super El Niño, which was 2015 / 2016, by some estimates did see about 0.7% chopped off the level of global economic output for a number of years. And so it's not inconsequential when we think about the channels by which El Niño could do some damage, it's mostly agricultural prices and the quantity of products available.

And so, for instance, India often suffers less of a monsoon season, which very much hurts their rice production. So that can be an issue for rice prices. Southeast Asia is less capable of producing palm oil also because of less rain than normal. Often Australia and Western Canada can't produce as much wheat because of dry conditions.

And so again, it's not unusual for agricultural prices to go up. You sometimes see certain base metal prices rising as well. It can complicate the process of extracting product from some mines and related to some extent to electricity, and dams as well. Interestingly, for insurance companies, while they do perhaps need to fret more about flooding and wildfires and so on, on one side, one clear takeaway from El Niño years is there tends to be fewer North American hurricanes, which can be very damaging for the insurance sector.

So there is a give and take here, it's a complicated subject. We don't think it's going to be the dominant economic theme, to be sure, for the year ahead. But it is a reason to perhaps consider shading one's economic outlook a little bit and to add a little bit to the inflation outlook as well.