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Hello and welcome to our latest monthly Economic Webcast for the month of December. I'm Eric Lascelles and I'm the chief economist for RBC Global Asset Management. You can see the title for this month's presentation in front of you: The Post-Election Path Ahead. You might have heard there is a U.S. election. And we'll talk a bit about the aftermath of that and some of the policy implications that may come ahead.

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But I do want to say we are going to speak well beyond just that single topic. We will address a broader set of economic, inflation and even market issues as well. So let's jump in, as we always do.

Our report card: We'll start with that report card. Just to lay out that the key macro forces, on the positive side, I think number one certainly is that central banks are still very much in the business of cutting interest rates.

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That's the central driver and headwind that's going away, or maybe new tailwind that's presented itself, the central argument for that soft landing narrative that we've been talking about for quite a while now. So we think economies get to keep growing, which is quite nice. And indeed, when we look at the recent economic data, it's still holding up.

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In fact, the word ‘decent’ might understate the relative strength of the data that we have seen recently. It's been particularly true in the U.S., a little bit less universally true elsewhere in the world. But actually, in general, I can say that the economic data has looked mostly pretty decent. Maybe there’s a small exception if we're talking about some recent European softness.

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I'll get to a bit of that, slightly later.

On the inflation front, you’re still broadly seeing inflation pressures easing. I would say the last month or two hasn't been particularly profound in that direction. We've seen inflation numbers that have temporarily at least settled a little bit. But we do still believe there is scope for inflation to come down a bit, even in a post-election world in which there might be a little bit more growth and a little bit more inflation coming from tariffs and so on. We still believe U.S. inflation can even come down slightly over the next year, if not quite all the way back to normal.

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So those are the good things. On the bad things, some familiar ones here. High rates still in place. It's still a fairly painful place to be operating even as central banks are cutting rates. So that's helpful. We do still have a few stubborn recession signals out there that are blinking red, even though quite a number of them have already pivoted to green.

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We're feeling pretty fine about the whole environment and the outlook, but nevertheless not with complete certainty. There are still Chinese economic concerns out there. I'll update you on that and some policy expectations in a moment.

And then it's fair to say there are some considerable geopolitical risks as well. Some of those are just a general comment.

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It's been a time of trouble and a time of war in the world for some time. But with this latest political transition, plausibly, is a bit trickier, at least over the next few months, with additional uncertainty. But then also just some questions that aren't yet answered beyond that as to the direction of U.S., public policy and foreign policy, and where exactly that goes.

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So there is additional risk that exists in that space, too.

And then on the interesting side, and boy, we really filled that one up as I look at this. Let's start again with that election. So we've seen a Trump victory, we've seen the Republicans sweep Congress. That sweep was more than expected. The Democrats had been expected to win the House of Representatives and they did not.

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So we'll talk about that. In fact, in the next slide or two, I can say, from a broader and medium-term economic standpoint, I would just make the comment that we like to step back sometimes and look and try and get a sense for which countries are, you might say, living beyond their means and which are living below their means.

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And, as much as Europe has economic challenges and the U.S. is up, up and away at the moment and so on, just in terms of who's living beyond their means and who isn't, the U.S. economy is, by some metrics, living a bit beyond its means. And actually a number of the European economies are in the opposite position.

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So there's a little bit of a silver lining for Europe there that I'll get into in more detail in a moment. I'll also say something else, which you probably already know, but I'll explain in more detail a bit later, which is just the idea that the economy isn't quite the stock market. Certainly the economy matters. But there are a lot of things that go into what a stock market does and how it performs.

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The economy is just one bit of it. And the overlap is maybe more limited than you would think. So we'll talk about that too.

And then we won't talk about it, but I just wanted to have it out there because it is maybe the key Canadian debate for the next year or so, which is that we know Canadian immigration is set to really, really slow down.

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The government even thinks population could shrink in the next few years, which has not happened since World War Two. We're not convinced it's quite that negative, but certainly much less net immigration. And the question is, well, that takes away from growth. Can we see productivity pick up? It's been running negative, a productivity decline.

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Can that pick up to fill that hole? We think yes. And we think lower rates are helpful too. Therefore the Canadian economy can probably grow over the next year. But there is a certain leap of faith we're making here in the sense that the immigration comes off sharply and that exact same moment, productivity comes up sharply.

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Those things aren't quite so arithmetically connected as much as there is some linkage. So there is a potential for some choppiness there. And we're going to have to just watch that very closely as we go into the next year.

So there's your report card. Let's now just dig into many of these things in more detail.

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Macro implications from U.S. election: We'll start with the U.S. elections. Before we get into the various pros and cons and the economy and markets and so on, let's just kind of recap what what's happened. And I'll mention for those of you who like to click around on the internet, if you visit www.rbcgam.com/insights, you will find that we actually did record a pretty lengthy post-election video so longer than this analysis, the morning after the election. That still holds up pretty well, if you’re included to go get a 15-minute or so video summary.

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We did also write a recent #MacroMemo that went into quite a bit of detail as well, if you like to read about this sort of thing instead. But here's the Coles notes version.

So we've had this election, we had a Trump win, the Republican candidate won. The polls had suggested it would be very close.

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It was fairly close, but it was nevertheless a resounding enough win for the Republican Party and for Donald Trump, in the sense that he won all seven of the swing states. And as mentioned, the Republicans swept Congress and he won the popular vote. And actually, recent Republican presidents haven't usually won the popular vote.

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And so a fairly resounding Trump win. We can say that to an extent, it was foreseen and we were flagging this a month ago and before in the sense that, betting markets since about early October had been saying that Trump was the more likely candidate to win. So indeed, that was correct.

And that takes us then, to the table you see in front of you, which is the economic implications and the market implications.

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And so without getting into every esoteric plus or negative, let's just run through this. Just to be clear, plus it doesn't mean good. It's not an endorsement either. We don't do political endorsements. It just means more. More growth is a plus. More inflation is also a plus. Higher stock market is a plus. A higher bond yield is a plus.

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So that's how you interpret this. The fact that in the first column, we have your taxes as a plus for a Trump win doesn't mean higher taxes, it means actually lower taxes, which then is a plus for the economy – just to make that crystal clear. And so it was a lot of speculation here. We still don't know exactly what policies will be implemented . . .

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whether we get the strong version of some of the Trump policies or whether we get some more moderate versions. We are betting on some more moderate versions in several contexts. We don't think we'll get the full Trump tariffs. We think we'll get a more muted version of that. We're not expecting, every illegal resident of the U.S. to be deported.

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We think it will be much more moderate than that. Still, significant negatives from tariffs for the economy, significant negatives from immigration as well, but just not as overwhelming as it would be if the full form of those policies were implemented.

I can say, though, that we believe ultimately the U.S. economy could actually run a little bit faster in the short run as opposed to slower, despite those two headwinds.

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That is because we do budget for significant deregulation, which is growth positive. Looser oil policy is probably growth positive on a few fronts. Lower taxes should help economic growth. More enthusiastic animal spirits should also help economic growth. And so in the end, we have a really fairly modest net positive, but we do have a net positive there.

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Do note, going into the election, we had been saying we figured that a Trump win would be about a neutral short-term economic implication. The reason that's now been turned into a positive after the fact is because we had assumed that Congress would be divided. Congress isn't divided. There's been a Republican sweep. It's still close, and it's still far from certain that Republicans can do whatever they'd like . . .

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and certainly, that the White House can do whatever it likes. But still, the scope for action is increased in that context. So we think that unleashes a bit more spending. I should mention a fraction of that additional economic impulse essentially comes from the U.S. government being presumed to borrow more money to do some of these things.

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And so, there is a fiscal cost associated with that and that's maybe not ideal given the deficit is already quite large. But we do still think in the short run it adds to growth.

I won't belabor the medium term other than to say we think over the medium run maybe some of those initial growth advantages start to erode a little bit.

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And so you're still left with a lower immigration rate as a drag on the economy. We think some of the initial boost from animal spirits and tax cuts and things becomes a bit less powerful. We think that, because the government probably borrows a bit more in the short run, you're then servicing more debt in the medium run, and that takes a little bit away from other productive activities.

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So we have more of a neutral economic impulse over the medium run.

What about inflation? Well, as you can see there, we do have inflation running a little higher than otherwise. And so we have added a little bit to our U.S. inflation forecast for the next few years. And that's centrally a story of tariffs.

Tariffs, even if only partially implemented are inflationary.

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They are like a tax on imports, so they add to the price of things. We figure also that if the U.S. economy's running a little bit faster that might add slightly to inflation as well. And so we have higher inflation, a partial counterpoint coming in that if the U.S. draws more oil that might be slightly deflationary. But we still think it's net a bit more inflation.

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And then when you talk about markets – stock market, bond market and why don't you throw in the currency market too, even though it's not on this table. The Trump trade going into the election was pretty clear. It was, the presumption that a Trump win would be stock market positive, bond yield positive, U.S. dollar positive.

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That is how it has played out. So that expectation was correct. We broadly concur in the sense that the stock market really, really does care an awful lot about deregulation and tax cuts in particular, much less about some of these other things. And so, the stock market feels pretty good about the near-term policy outlook. Bond yields, conversely, a little higher.

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And I say conversely, because that suggests bond prices lower to the extent that bonds are an asset class. And so, slightly higher bond yields. And that's a statement again about a bit more inflation from tariffs, which adds to inflation and to yields a bit more growth, which adds to yields and a bit more public debt, which adds to yields as well.

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So we think that's positive there. The thinking is that the U.S. dollar also at least enjoys an initial gain. Usually countries applying tariffs see a stronger exchange rate. So that's where we are broadly.

Just a couple of additional thoughts on the side. I've talked about the significant uncertainty that still persists. I've talked about the Republicans’ sweep being an enabler of more Republican action.

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I've mentioned we don't expect the most extreme form of these policies to be implemented. If they were, you might have some problems. We'd have to revisit. It's one of the risks to this view, but it's not part of our base case view, nor is it the base case for most people. If you're wondering why it's not the base case, well, for a number of reasons.

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One is that we did live through 2016 to 2020, and the economy grew and markets went up, and we generally didn't see the more extreme form of policies implemented. We know that in particular, this time around, there are a lot of C-suite, meaning CEO types, who have supported Trump and are even set to be in his cabinet in various forms.

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And we think they will keep him somewhat focused on the economy and on businesses and ensuring that policies that do damage to those things are not implemented in an aggressive way. We also know that Trump was very fond of using the stock market as a gauge of his relative success as a president. And so it strikes us as being fairly unlikely that he would do radical things that might hurt the stock market or send bond yields flying significantly higher.

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So, the takeaway is we're not expecting the extreme action. We do think, though, there are consequences as described here. And maybe the one thing missing, and it's a pretty big thing that's missing, which is the rest of the world. So that's all U.S. focused. A Trump win probably is a net negative for the rest of the world.

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It's fairly simple. Tariffs from the U.S. hit other countries, so that's, a drag on growth. Geopolitical uncertainty is quite relevant to some countries and somewhat relevant to others. You think of Europe having to make some decisions about Ukraine and will they step up and step in if the U.S. provides less support.

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And that's a costly thing and there are all sorts of calculus associated with that as well. Similarly, to the extent that the U.S. is proposing to become a less regulated place and a lower tax place, that attracts capital into the U.S. and that takes capital away from other places. Businesses say maybe “That's the country we like to operate in right now,” and that’s to the disadvantage of other countries.

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So we have been subtracting something from the economic outlook for other countries as well. Not overwhelming, but a little bit shaved off those countries. Okay.

A couple additional, election-specific slides here and then we'll move on from there. Just to elaborate, so tariffs and immigration are maybe the two big fears, the economic fears, at least, that most immediately come to mind post-election.

Economic simulations can quantify tariff damage: This is our tariff work and we've actually revisited it since the election.

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These numbers are a hair different than what you might have seen from us a month or two ago. Similar conclusions are we're not expecting the full tariffs. If we got that, there would be some problems and the economy would be hit pretty hard. We are looking for partial tariffs. Partial tariffs do take a bit off growth.

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That's how much less growth countries will achieve, spread over the next two years or so. The U.S. does grow less quickly. So does China. So does Canada. So does Mexico. So does almost everyone actually. But the effect, while palpable and while significant and while we incorporated it now into our forecasts as the base case assumption, it's not an overwhelming hit.

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It's not a recession-inducing blow. And then similarly, from an inflation standpoint, it's mostly the U.S. that gets the extra inflation. And keep in mind again, we're talking the partial tariff scenario here. You get a little bit more inflation. Not necessarily a ton. And keep in mind one of the reasons it's not a ton more is because there's been some economic damage done that then kind of limits the inflation, just from an economy-overheating perspective.

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Unauthorized immigration into U.S. has already dropped substantially: And then just talking about immigration, certainly one of the plans is to slow immigration in all its forms. One imagines, just to show you this, this is a metric showing, the number of – our proxy, at least, for the number of – undocumented border crossings in the U.S.

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It's actually land border encounters in the southwest, where most of these things happen. And so, again, not every person is encountered. And so therefore, this isn't the total number, but it gives us a pretty good sense for direction and trend. And you can see that, of course, there was a very real spike in illegal immigrants into the U.S., it would appear.

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It was running many, many times higher than normal. You can see in the last year that has come down quite a bit. It makes sense. It was a central election campaign issue, because it has been a pressing matter. It is slowing already quite significantly. It's down by about a factor of three.

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Not to say it's all the way back to where it was across the 2010s say, but nevertheless it is down quite a bit. It is still trending lower. So you can say some of the work has perhaps already been done, though I certainly would budget for more aggressive border controls going forward. The other angle to this is the deportation side.

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There have been proposals to deport a large fraction of the undocumented residents in the U.S. We're not budgeting for 11 to 15 million people being removed. We think that from a practical, economic, financial, and legal perspective, for all of those reasons combined, it's quite unlikely. Do note, the U.S. has long been in the business of deporting undocumented residents. In fact that has picked up in recent decades.

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It does run at about 400,000 people being deported a year, as it stands right now. It's certainly conceivable that could double. It's conceivable that could somewhat more than double, quite unlikely to rise to the 3 or 4 million a year that you'd need to actually deport every single person over the next four years.

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We think that would be sufficiently economically damaging that it also probably, in the end, would not be pursued. We certainly do, though, budget for very minimal population growth in the U.S. over the next few years. You know, developed countries are in a position now where there's not a lot of organic, population growth happening just from fertility rates at home.

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There's a little bit of that in the U.S., but not a lot. Immigration is kind of the game in town for population growth. And so the U.S. isn't likely to generate much population growth in the next few years. And just simplistically, to the extent economic growth is really population growth plus productivity growth, you are losing one of those engines.

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Again, as mentioned earlier, that does take something off growth. We think the tax cuts and so on are enough to provide an offset to that. But this is a material negative, but not the negative you would calculate if you thought a full 11 to 15 million people were going to leave the country. Okay.

Last election thought here and then we can finally move on to standard economic fare.

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Election reduces uncertainty, but questions remain: So just a couple thoughts here. These graphs are expected volatility in the stock market, bond market and currency market. Nothing too radical going on here. But you can say that there was a period of higher than recent, at least, uncertainty in those markets going into the election. And that is now somewhat down.

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And so the statement essentially was you had two very different policy visions that the market was juggling, unsure which candidate would win. We now know which candidate wins. It brings with it implications and we need to sort through that, certainly. But that level of uncertainty is down.

Now the debate is do we get the more moderate or the more extreme version of the Trump policies?

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Again, we think the more moderate is more likely. But there is some risk to that view.

Okay. Now we're into standard economic terrain, stable ground you might say.

U.S. business expectations have been trending higher: So just a broad sense for the economy is that business expectations do continue to improve. So it's a pretty decent economic environment where conditions are, at a minimum, stabilizing if not improving to some extent.

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This particular set of surveys, this aggregate we've built, does tilt a bit toward the manufacturing sector. So the level of enthusiasm isn't especially notable, but that's largely manufacturing linked. And that's just been a sore spot for years.

We do generally see more optimism as opposed to less. And we think we could see a leap higher, as the next set of monthly indicators come out.

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Because a lot of businesses actually, were looking forward to a Republican administration and the prospect for some of those tax cuts and deregulation and things. And so I wouldn't be surprised if this grows further.

So overall, the economy seems to be holding together just fine. We think as we've said before, recession risks have come down and they're fairly limited.

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Global recession risk is low ex-Germany: This is a bit of a busy chart and this isn't actually our forecast. This is the consensus Bloomberg forecast for recessions in different countries. But you can kind of get a sense for this, which is there was a very real recession risk in 2022 and 2023 and early first half of 2024. Those risks, with the exception of Germany have declined. But the German recession risks are perceived to be pretty high right now, which I will speak to.

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But for most other countries, including the U.S., including Canada, the risk is perceived to have declined. It's not totally vanished. And a lot of those risks are in the 25% chance over the next year sort of range, which is precisely where we are in terms of the risk of a U.S. recession over the next year. But in general, feeling fairly good about the state of affairs and not actively expecting a recession other than some concern about Germany. Germany, well, here it is.

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German economy remains quasi-recessionary: It's kind of amazing the, the metronomic type of pattern that's played out in quarterly GDP in Germany. And you can see essentially, the economy shrinks every second quarter. It's sort of a weird coincidence, I think. But the point would be the German economy not exactly racing forward.

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You're getting quarters of growth, but they're paired with quarters of decline. And if anything, the quarters of decline are slightly out-muscling the quarters of growth. So this has been a period of stagnation, anyhow, for Germany. If you think the definition of a recession is two quarters of decline (I would argue it's a bit more nuanced than that), but if you take that simple rule of thumb . . .

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they haven't quite pulled it off because of the funny way it's just gone positive/negative, positive/negative. But it's certainly not inconceivable that a couple of negatives get strung together just by happenstance. So again, that recession risk is elevated.

I would note one rebuttal, though, which is just that the unemployment rate really hasn't gone up all that much.

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It's up, but it's not up particularly radically. Certainly the unemployment rate isn't at a level you'd normally expect to find it during a recession. So it’s kind of part of the story that really applies to almost every developed country outside of the U.S., which is just there's not been much productivity growth. And so if you're an older country without a lot of population growth like Germany, and you're not generating much population growth, your economy sort of isn't growing.

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The average person doesn't feel like it's a full-on recession, and it's not that large numbers of people have lost their jobs. But nevertheless, this is hardly a desirable economic environment to be in.

So why has there been weakness? You know, high energy costs, that's a function of the war in Ukraine and the availability or lack thereof of cheap natural gas.

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So that certainly changed the equation for Germany's manufacturing sector, which is a big chunk of the economy. You know, just less fiscal support coming from Germany. They're much more conservative when it comes to running deficits and things like this. And they have automatic fiscal brakes. So they certainly are not providing the level of government support or government stimulus that the U.S. is or certain other countries are.

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Structurally, I would say China has gone from being the client or the customer of Germany – Germany would sell its high-value industrial goods and its vehicles to China. Suddenly China is now a competitor of those high-value industrial goods and machines and equipment. China similarly is now booming in terms of vehicle production and selling a lot of those vehicles to its own home market, which is a huge market, the biggest car market in the world. This was a huge source of demand for European and American carmakers until recently.

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Now that's fading as the Chinese car makers start to take over, so that very challenging to Germany. Germany has had faster wage growth than some of its key competitors. And then Germany does have poor demographics. It is particularly old. It is very Japanese-esque in terms of how it looks from a demographic standpoint.

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So it does make sense that Germany has been struggling. I can't say that all of those problems go away.

High interest rates, which I don't even have on the list here, is a headwind for every country. The high interest rates do go away. It's plausible. In some other countries demand starts to pick up as that takes hold.

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But, you know, Germany's sustainable growth rate does appear to be materially lower right now. So we are budgeting just for half a percent to 1% growth, as an optimal scenario. And realistically, they are undershooting that in the near term. Okay.

So here's the flip side, though. So that's fair. Indeed we do have the U.S. economy outgrowing Europe as a general statement, and so on.

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I do want to say, though, that when we talk about who is living beyond their means and who is living below their means – and again, not to say that's the only thing that drives an economy, because ultimately you need that productivity and you need that workforce growth as well. But in terms of just who is overdoing, who might need to pull back a bit, ambiguously, in the coming years . . . who is behaving conservatively, who could be in a position to increase their demand faster without any kind of magical boost in in productivity . . .

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And this is this is what we get.

Revisiting the Economic Upside Index – Europe has promise: This is what we call our economic upside index. We first built it about a decade ago. It was dormant for a while. We actually just revived it. We thought it would be interesting to take a look at and we tweaked the methodology a little bit too. But I guess just to summarize it, the question is, for instance, what is each country's fiscal position?

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The U.S. has a big, fiscal deficit. And you can see the U.S. is the far-right country here, and a negative bar is bad. So the U.S has a big fiscal deficit. That means it's just spending more money than it's taking in. It is living beyond its means at some point. Not sure when, but at some point you might think it'll have to scale that deficit down.

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That'll be just less spending money, less economic activity. And so there's some downside risk in the U.S. and in other countries running big fiscal deficits. You can broaden that out and look at the current account balance, which really is the fiscal position of the government, but also of households and businesses. Are household saving a lot? Are business saving a lot?

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A lot of households in other countries are saving more than the U.S. right now. And so that also is something that puts the U.S. at a disadvantage on this front.

We can also look at the output gap. The idea of it is the economy itself just running hotter than it can sustainably be, or is it running cooler than it should be?

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So there's a room for it to sort of catch up. And so a lot of countries are running a little bit below their potential. The U.S. is kind of running at or by some definitions, a little bit above its potential. So the U.S. needs to slow a bit. Other countries could pick up slightly. We do also factor in some currency valuation considerations.

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This slices the opposite way, by the way. The U.S. dollar is quite expensive. The U.S. dollar comes back down to fair value, that's actually a bit of an economic boost for them. The high currency is hurting them. So there's something that pushes in the opposite direction.

We also look at just how demographic trends are changing. A country with an accelerating population growth would have the potential to do better over the medium run.

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One with slowing population growth is the opposite, though the changes tend to be slow enough that it doesn't change things too quickly over the time horizon we're using. So you get this. And so again, the U.S. has some downside. It's living in a little higher than maybe it can sustain, to a lesser extent the UK and Italy and Canada as well.

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Conversely you have Ireland sort of right off the top of the page, almost, in terms of being, in theory, in a position to spend more. I should note that's primarily because Ireland runs a massive current account surplus worth 20 or 25% of GDP. That literally means that Ireland, the country –

00:26:11:07 - 00:26:31:25

and this is not just households or businesses, but also the government, Ireland, the country saves about 25% of the money it produces or it earns when it produces things. That's a function of Ireland being this low-tax haven in Europe and attracting so much multinational business and profits and so on. It's kind of a special, unique situation, but it's extremely to their advantage.

00:26:31:25 - 00:26:51:12

In theory, they could afford to spend a whole heck of a lot more, without overheating, without borrowing and so on. So there’s a lot of potential there. But Sweden, Netherlands, Switzerland and Germany as well, also have some potential. So you could argue some of Germany's problem is sort of its own making in the sense that they don't have to save quite that much.

00:26:51:14 - 00:27:10:20

And they might be in a position for the economy to move a little bit more quickly.

So not the central driver of really anything, I would say focus on productivity and those sorts of forces, but just a little bit of silver lining for Europe, you might say in a little bit of a red lining, if that's a thing, for the U.S.

So let's talk China for a minute.

00:27:10:20 - 00:27:31:23

Chinese economy is growing approximately in line with official estimates: So, you know, we run quite a variety of Chinese economic proxies. And the reason we do that is just because there's always a skepticism. Is Chinese GDP real? Is it telling the truth? Is China really in freefall or something like that?

We don't think China is really in freefall. In fact, we run three alternative GDP proxies and actually two of the three are a little bit higher than the official GDP number.

00:27:31:23 - 00:27:47:09

That's not to say the economy is secretly stronger than it is. There's lots of uncertainty around these metrics. But we're comfortable enough with the official numbers is the takeaway there. So that's the starting point. You can't really talk about China until you decided whether you believe the numbers or not.

And then, well, this one doesn't look quite as good, I'll admit.

00:27:47:11 - 00:28:15:11

Waiting for the Chinese consumer to pick up: This is Chinese consumer sentiment. Chinese consumers are very pessimistic right now. They have been kind of reliably pessimistic ever since, you could say, the Shanghai lockdown from a number of years ago. Whether that just challenged the public's confidence in the government, was such an unpopular policy, or whether that contributed to the housing bust that then so constrained consumer spending because consumers have such a lot of money tied up in the housing market.

00:28:15:11 - 00:28:39:01

I think you could debate all of that. But undeniably, there's not a lot of consumer confidence. To be clear, we do see retail sales rising and consumer spending rising. It's not as though consumer spending has followed this confidence track exactly. But you I mention this and show this just to say, Certainly one of the challenges for Chinese policy makers going forward is to revive this and to get consumers feeling more normal and to be more in a position to spend.

00:28:39:06 - 00:28:58:01

Part of that equation is stabilizing housing and doing some other things. Some of it may be actually providing fiscal incentives that apply directly to households. Traditionally China's been shy about doing that, in part just because Chinese households save practically half of their earnings and so you give them a $100 check to spend, and they save $50 and kind of half of the money was wasted.

00:28:58:06 - 00:29:12:24

So it's not the most useful form of fiscal stimulus. But we wouldn't be surprised if they do some things. In fact, let's just go to the next slide here.

China stimulus: This slide is awfully busy. And I'm not in any way going to speak to all these things. But I guess a couple of points here, which is just that China is doing stimulus.

00:29:12:25 - 00:29:44:03

They are making an effort. They've been cutting rates. They've been trying to stabilize the property market, which is probably the most important thing. And we don't want it to be boom time again. It was a bubble before and that was too much.

But some measure of stability would be good. So the government is helping to absorb unsold condo and apartment units and is lending to builders and helping to stabilize them to some extent and, easing mortgage rules and this sort of thing. We're seeing some efforts to help local governments, including allowing them to borrow at a cheaper rate and kind of extend their loans and so on.

00:29:44:03 - 00:30:04:17

Banks are benefiting as local governments in the property market and interest rates are resolved. As I mentioned, we think that there will be additional efforts to support consumption. It may be in the form of transfers to low-income households and this sort of thing. And so we do think there'll be more help there, too.

00:30:04:20 - 00:30:21:08

We have seen help for financial markets. In fact, I'll show you a chart on that in a moment. The point being that financial markets and I guess financial market participants were told to go buy Chinese stocks. So they did and the Chinese stock market went up quite a bit. And there could yet be more efforts on that front as well.

00:30:21:08 - 00:30:39:29

The Chinese government knows that households historically only put their money into housing and they're trying to create this viable alternative asset class. And just people have been skeptical, and it's taking time for the housing market to get going. And then very, very often and traditionally, if China was delivering stimulus, they would focus on infrastructure and manufacturing and so they do some things like that.

00:30:39:29 - 00:30:55:19

But I would say the scope for that is diminished, in part because they've already done many of the big things that need to be done. The bang for their buck is diminished going forward on that front. The point being, we think we will get more stimulus. That stimulus might be linked to the U.S. election.

00:30:55:19 - 00:31:16:15

Donald Trump takes office on January 20th. We may hear about tariffs very shortly thereafter. Or they may be implemented even shortly thereafter. The thinking is China is sitting on additional stimulus until it gets a sense for the nature of the blow that will be struck against it. And so we could see another significant round of stimulus from China.

00:31:16:15 - 00:31:31:08

I think the level of pessimism on China is probably overblown. This is still an economy that can grow at four point something percent this year, 3 to 4% in the next several years, which is much less than before, but still a pretty decent rate of growth. And I think, again, we are going to see some more stimulus.

00:31:31:10 - 00:31:49:25

Chinese stock market stimulus effect is fading: Just briefly, you can see the Chinese stock market is certainly no great shakes. That would be a conservative way of describing the great challenges that have dominated recent years. The stock market in China has generally been more inclined to fall than rise, whether it's the Shanghai or the Shenzhen version you're looking at. You can see, though, that incredible spike higher in October.

00:31:49:25 - 00:32:15:16

That was the government essentially saying, okay everybody, time to buy some stocks. And people did. You can see there has been a material reversal. Nevertheless, you know, at the end of the day, we can say that Chinese stocks are quite a bit higher than they were before. And it is probably fair to say the level of pessimism and just the valuations and so on in the Chinese market did seem hard to justify, given the economic circumstances on the ground. Just like consumer confidence is so low and yet we are seeing the economy grow.

00:32:15:18 - 00:32:36:21

We see an unemployment rate that at least officially – and you might debate this one a bit more – but officially is 5%, which is the familiar unemployment rate for China, despite consumers actually are incrementally increasing their spending, despite that caution. Okay.

Peaking Canadian pessimism? Canada, I've sort of presented this little idea before and we'll see whether it actually works, but I'll just share it with you.

00:32:36:21 - 00:33:04:23

Certainly it is a time of pessimism about Canada. High interest rates have hurt Canada disproportionately, and economic growth hasn't been great in recent years, particularly in 2023. But the first part of 2024 was challenging as well. With unemployment rising and so on, productivity growth has been non-existent. There was an immigration surge, which might have helped growth, but it's created an indigestion and frustration and so on.

00:33:04:25 - 00:33:28:17

Our population now is set to slow as the immigration comes off. Again, economic growth is often  technically workforce growth plus productivity growth. The threat of U.S. tariffs, there was talk of 25% tariffs against Canada, which we are skeptical about. It's not consistent with the USMCA (United States-Mexico-Canada Agreement). It was very explicitly tied to border controls and the flow of illegal drugs and the flow of illegal residents.

00:33:28:17 - 00:33:46:15

That's really more of a Mexico story than a Canada story. And so we suspect that Canada will not in any broad way encounter 25% tariffs. Nevertheless, you know that concern weighs as well. And so the question then is, okay, so does that mean Canada is just in really rough shape for the foreseeable future?

00:33:46:15 - 00:34:08:24

Or, and this is what I'm positing, could we be in the realm of peak pessimism? To say that we might be in the realm of peak pessimism doesn't mean the economy surges tomorrow. I think it will still be a fairly challenging first half of 2025, realistically. But nevertheless, I do wonder whether, to the extent that there's a lot of pessimism built into the outlook, whether maybe we're in the realm of that peak pessimism.

00:34:08:24 - 00:34:27:27

I think about the future, and I think about interest rates that are falling and can continue to fall, likely, in Canada, and how that actually helps the Canadian economy disproportionately because it is so rate sensitive. Inflation is already at 2.0% as I record these words. That's on target, which is a welcome thing. Economic activity has stabilized in Canada.

00:34:27:27 - 00:34:51:01

We are seeing little signs of life here and there, which really wasn't the case over the summer. As an example, we are set for an election in 2025 in Canada. It looks as though it could be a conservative government, which might be a more growth friendly, productivity friendly, business friendly type of outcome. That's awfully speculative from this distance on a number of fronts in terms of the outcome and the policies that might result.

00:34:51:03 - 00:35:09:11

As I just mentioned, we think the actual tariffs against Canada should be fairly small in the end. So not totally destroying the economy, more aligned with the earlier chart showing a 0.3 or 0.4 percentage point hit to growth.

Canada has fewer fiscal problems than most of its peers.

00:35:09:11 - 00:35:28:27

The deficit is a lot smaller. And so that's less of a challenge and something that might become relevant to markets going forward.

There's a housing shortage in Canada that encourages construction.

Household savings are very high in Canada, which suggests the potential for consumer spending growth as those rates start to hurt a little bit less. However, it's going to take some time to get there.

00:35:28:29 - 00:35:45:06

Canada's a soft currency. Sure. And that does reflect some of that pessimism for sure. But, a weaker currency helps competitiveness. It is an economic boost.

And then we think – and maybe this is the part where we're speculating here – but we do think productivity can go back to growth in 2025. And that's a support too.

00:35:45:07 - 00:36:10:17

So maybe we are in the approximate realm of peak pessimism right now about Canada.

Two quick inflation thoughts on Canada now:

Canadian household inflation expectations continue to fall: A bit of a non sequitur here. One would just be inflation expectations certainly still coming down in Canada right now. This is a survey of consumer expectations. So consumers feeling more and more confident that numbers in the realm of 2% inflation can stick, which has Canada ahead of the game versus many of its peers.

00:36:10:20 - 00:36:27:00

Canadian inflation is already quite low excluding mortgage interest costs: And then we just when we look at inflation in general, be warned, the blue line is on a different scale on this chart than the other two lines. So mortgage interest cost inflation is still quite fast and still double digits, or in the realm of double digits. Again, that's the right-hand axis or scale. So just be aware of that.

00:36:27:00 - 00:36:44:24

But nevertheless it is coming off. I'll still make the point, though, that from a Bank of Canada perspective, what's enabling them to cut rates is in part an economy that has been softer and in part inflation that's 2%. But actually, from the Bank of Canada's perspective, they probably care most about inflation, excluding those mortgage interest costs.

00:36:44:24 - 00:37:01:17

The reason being, of course, when the Bank of Canada cuts rates, they reduce mortgage interest costs. So if mortgage interest cost inflation is the main source of inflation, you don't keep rates high for that reason. The high rates are making that inflation. So you would look at inflation minus that component. And actually on that metric it's well below 2% right now.

00:37:01:17 - 00:37:18:00

So that's why we think the Bank of Canada has been cutting rates, why we think they can continue to cut rates, likely including in early December. I should say I'm recording this in late November.

Economy is not the stock market: We're getting toward the finish line here, folks. So let's just acknowledge this before I talk about the bars in front of you.

00:37:18:03 - 00:37:34:19

Corporate profits are a pretty small chunk of GDP. It's in the realm of 15% or less, it's sort of 10 to 15% share, often, depending on the country. Economies are about much more than what corporations are up to.

00:37:34:19 - 00:37:52:24

They include wages and government spending and things like that. So that's maybe your starting point for how the economy isn't the stock market. Stock market is more internationally exposed. For the U.S. overseas earnings are about three times bigger as a share of corporate revenue as exports are, as a share of U.S. GDP.

00:37:52:24 - 00:38:10:07

So all sorts of ways that the sector mix is different. The geographic mix is different. What's inside an economy is not just profits. Even if it were or even if you said, okay, now we've got a pretty good handle on revenues as an example, because revenues tend to correlate pretty well with economic growth, if imperfectly.

00:38:10:10 - 00:38:33:13

You can see here this is going to take some explaining. So the S&P 500 from really pre-global financial crisis – from the fall of 2007 through to the middle of 2024 – has increased a pretty remarkable 257.7%. So that's the gold line here. That's a remarkable increase over the span of the last 15 or so years.

00:38:33:16 - 00:38:56:21

The question is, where did that come from? And the answer is, it wasn't all from just revenues rising because the economy was growing. In fact, only about a third was from rising revenues. You can see  79.7% of the 257.7% was from kind of a classic economic driver.

Then you had two other things that were essentially as important for stock market returns. One was margin expansion.

00:38:56:21 - 00:39:16:02

So this was the idea that revenues rose at a certain rate, but profits reliably grew quite a bit more quickly as corporate profit margins grew. That's not something the economy necessarily assumes. You can think about that and talk about how corporate concentration is rising. Tech companies tend to have higher profit margins and network effects enable these sorts of things.

00:39:16:02 - 00:39:33:02

Low interest rates traditionally at least have helped this and wages that for a long time didn't go anywhere have also helped. So all sorts of factors have enabled this. But profit margins have been more important for the stock market than the actual underlying growth in the economy and the revenue associated with that.

00:39:33:04 - 00:39:50:21

Then you look at the price earnings (P/E) ratio and the extent to which P/E ratios have risen and that's delivered another 78% return. And so that's something where you wouldn't assume that you're necessarily going to get that again next time, if that makes sense. It's possible valuations keep rising. But by traditional metrics they are already fairly high for the U.S.

00:39:50:24 - 00:40:07:03

Fairly low in many other countries, by the way. That’s an interesting thing to consider in one's geographic investment allocation. But the point being that actually only about a third of what drove the U.S. stock market higher in the last 15 or so years has come from the traditional economic variable. It's been other important things, too.

00:40:07:05 - 00:40:22:13

So, don't assume the economy tells you everything you need to know. As much as I'd like to pretend it does, as an economist . Secondarily, just looking at this, there's a lot less scope for P/E expansion going forward. I think there may be less scope for margin expansion. I think there should be.

00:40:22:13 - 00:40:40:27

But it's been remarkable how buoyant it's remained despite thoughts to that effect in recent years. So I'll just say there may be less scope for margin expansion going forward. It could be a stock market that doesn't deliver. In fact, it probably will be a stock market that doesn't deliver the sort of incredible returns that were delivered over the last 15 years or so.

00:40:40:29 - 00:41:01:03

On that slightly sour note, note we still think markets can go up. I'll say if you if you've found this useful, if you're looking for more, please do follow us along on Twitter, on LinkedIn, or best of all, and certainly most comprehensive, visit www.rbcgam.com/insights, where there are plenty of things, including, eventually, this webcast.

00:41:01:05 - 00:41:07:11

And so I'll say thanks so much for your time. I wish you very well with your investing. Please consider tuning in again next month.