Hello and welcome to our latest monthly Economic Webcast. My name is Eric Lascelles. I'm the chief economist for RBC Global Asset Management. As always, I’m very happy to share with you our latest economic thinking. Why don't we start with that title sitting there in front of you, which is ‘Elections in Focus.’ I'll be honest, there's a lot going on in the world right now.

There are any number of titles we could have picked. We could have stuck to the sort of themes we've had in recent months, along the lines of soft landings and the economy still alive, and that sort of thing. Those are true statements still, by the way. But it struck us that this does happen to be a moment when there are an awfully large number of elections coming into focus, and some of them actually coming very quickly indeed.

So we'll spend a little bit of time talking about that. But it isn't the only place we'll go today.

Report card: Let's start, in fact, with that report card we always begin with. We'll take a peek at the positive themes to begin with, and then work our way through some of the more negative ones and some of the interesting ones that defy categorization.

To begin with, I do want to emphasize as much as this is not a long list, this is a really important list. And the first item is that U.S inflation fell again in May. We had seen some really undesirable unfortunate inflation trends, in particular in the U.S., over the first few months of the year.

April got a little bit better. May data then came in and was a lot better, and I'll speak more about that in a moment. But it's taken a lot of inflation fear off the table. It's also, as I'll get to in a moment, created the potential for some more rate cuts as well, which is pretty central to the economic outlook.

Economic growth persists. So I'm going to put that up there because it's true, first of all. But you will see me grumbling in a moment about how economic growth has slowed a bit. That's in the Negative Themes column, as you might imagine. But I don't want to lose complete sight of the observation that we are still getting economic growth here.

There's no recession here right now, as far as we can tell. indeed, we still think a soft landing is the more likely of the two options – that soft landing versus hard landing debate. To us, a soft landing, that is to say the economy keeps growing, is the more likely of the two. And that's a pretty consistent view we've had for 2024.

Then, as I mentioned, the central banks have begun cutting interest rates. And, gosh, just in the last month as I'm recording this at least, we had the Bank of Canada, we had the European Central Bank deliver their first rate cuts. Previously Switzerland and Sweden, and a number of other central banks on the emerging market side have also been cutting rates.

Haven't had the U.S. just yet, but we are potentially getting closer to that as well.

Still, the point here is that we are seemingly entering the realm of rate cuts, and it's an important thing  because high interest rates are the biggest headwind out there to economic growth.

On the negative side, I don't want to focus too much on the number of bullets here.

Five versus four doesn't mean there are more bad than good things happening in the world, but there are some not so good things happening, and some of them are just variations on what I just mentioned.

Again, economies are still growing, but economic activity is decelerating. So we are seeing slower growth. And that's been most obvious in the U.S., which it should be noted, has started from a particularly strong starting point.

But we are actually getting a bit of a deceleration visible in Europe, in Japan and a number of other places as well, but we still think fairly benign in the grand scheme.

Let's not forget, even as we get excited about interest rate cuts, that interest rates are still very high and are plausibly set to remain pretty high over the next year, let's say, even as they are potentially starting to come down.

So there is still a headwind, there is still pain that comes from that. As much as we think a soft landing is the most likely outcome, we can't rule out a recession. We do see signs of some stress among households with regard to high interest rates. We do see signs of an economy that is slowing.

We think it's slowing just to a reasonable rate of growth. But we can't completely rule out the idea that it's slowing in a more pernicious way.

Let's acknowledge geopolitical risks that exist out there are still rather significant. And whether we're talking outright wars in the context of Russia, Ukraine or the Middle East, or just frictions in the context of the U.S. and China, or upcoming elections, there's a fair bit going on.

And I would say the risks do tilt a little bit more to the negative than the positive in terms of how those things could well be resolved.

Lastly, on the inflation side, we celebrated lower U.S inflation. But let me complain a little bit that the latest Canadian inflation data actually went in the wrong direction. It was higher than expected.

It should be noted Canadian inflation was very well behaved over the prior four months of the year. So I don't think we should make too too much of this one potentially blip month. We think there's room for improvement to come. But the Canadian numbers didn't cooperate as much as hoped. And maybe one potential implication is that the market is no longer quite as convinced that the Bank of Canada cuts rates again in July.

That's looking a bit less likely than before. In fact, my thinking is that maybe it's below a 50% likelihood right now.

And then just to throw the interesting items up there, that didn't quite fit into either category. First of all, that busy election calendar. I'll stop teasing you on that in a moment.

We're going to jump into that in the next slide.

Let's also just acknowledge Canadian consumers and households and home prices, and we'll take a peek at just how they're doing.

There certainly are some challenges. But equally, I would say many of those challenges are being met, fairly well, by the majority of Canadian households.

And then this sounds like a real sharp right turn, I'm sure, but weight loss drugs.

So how does that figure into an economic assessment? Well, we are seeing such substantial advances in weight loss drugs that there are starting to be potentially not just societal but also economic implications to that. So let's talk about that right at the end. So that's the teaser. Make sure you stick with me to the end. It's quite interesting, I think.

2024: The year of the election. Okay, let's jump in here. Let's just run through what's going on.

So the preamble here is that this is the year of the election. This is the largest fraction of the world's population voting in national elections in history. We've already had a number of them this year. We had Indonesia, we had Taiwan, we had Russia.

There have been quite a few already. Some were quite recent and actually fairly consequential. So let's speak to those.

On the emerging market side, there were three big recent elections in India and South Africa and in Mexico. All re-elected the incumbent party. That sounds maybe boring and uneventful, but actually all had the market not entirely pleased.

In the case of India, the ruling party won a smaller number of seats than before. So there was concern that India might not be able to deliver the same amount of economic reforms as in the past.

In South Africa, the ANC, which has been in power since Mandela and has been in power for 30 plus years at this point in time, did not win a majority.

So the ANC needed to partner with other parties. There were concerns as to how that would work out.

And then in Mexico, the incumbent party won and actually won by more, unlike in the other two cases. But the market wasn't entirely pleased about that because the policies aren't necessarily economically friendly. So in all cases, there was a little bit of disappointment by markets.

I will say the concern has faded pretty significantly, at least for India and South Africa. In India's case, it does look as though the reforms are able to continue, which is what the market is hoping for. In South Africa, it appears that the ruling party has partnered with at least one pro-business party and it's ultimately going to find itself on a policy course that's tolerable.

There’s still some concern about Mexico which should be noted.

I should emphasize this is looking forward from my perspective, which is recording this in late June before the first French election on June 30th. So you probably know the results by the time you're seeing some of this, but I'll just flag it nevertheless. The French election is in two rounds traditionally. So June 30 is the assembly election, not the presidential election.

First round is Sunday, June 30^th. Based on polling, it does appear that the ruling party is going to underwhelm. Instead, the far right and a fairly far left coalition of parties are the most likely to do well here. In particular, the far-right party.

So that has created some concern. The euro is a little bit softer than it was before this election was called.

It's a snap election. French bond yields are higher and the spread to German bond yields has widened pretty notably, expressing some level of concern. It is, I wouldn't say a completely pivotal moment for French fiscal finances, but it is a pivotal moment in the sense that the French fiscal deficit was on track prior to this to be in the realm of about 6% of GDP.

That's a big deficit, although not unprecedented. The U.S. is worse than that. So France is not the worst in the world or anything, but it's a big deficit. The main leading parties, not the existing government, are promising many things that could be expensive. So it will be difficult to reconcile the policy promises with the fact the deficit is already quite high.

There was a downgrading of the French debt rating not long ago and markets are antsy. So there is a level of concern there. It does appear pretty likely the far-right party ends up winning the most seats.

Do note that this is not an unfamiliar outcome from a European context. Italy and Ireland both have elected non-standard, non-conventional governments in the recent past.

In both cases, there has been some pivoting to the middle and some recognition that there are limits to what fiscal policy can achieve. So we think it will ultimately be okay. But it is a source of uncertainty. It is a risk.

You would think that France, not that France would leave the European Union, though there have been people talking, perhaps tongue-in-cheek, about Frexit.

You recall Brexit, which is when Britain left the European Union. We don’t expect that. This (French far-right) party is eurosceptic, but not to the point of outright separation. Instead, I think you will see maybe some of the terms of the deal being renegotiated.

For instance, there’s some talk about maybe France leaving the electricity union, that exists within the EU. I should say Spain is already out of it.

This would not be an unprecedented thing. France may want some additional border controls. And so again, not standard European Union practice, but Denmark and Sweden both have additional border controls. So it wouldn't be a surprise to see some initiatives like that appear.

On the British election – not long after the French election, in fact, I should say wedged in the middle in the sense that there is a second round later in France – generally speaking, the two leading candidates, just to finalize the result.

As for the British election on July 4^th, this one looks very, very likely to be a complete reversal.

The British Conservative Party has been in power for the last 15 years, and it looks as though that party will not just lose but lose quite badly. The Labor Party, which has been on the sidelines for those 15 years, looks very likely to win.

I wouldn't say we should expect big, big economic changes immediately. The Labor Party has promised no corporate tax or individual tax hikes or changes of any significance over the first year. So I'm not looking for a big, big change there.

Nevertheless, there is a focus, from an economic standpoint, on drawing more closely economically to the European Union, perhaps via trade deals and other initiatives, though not unwinding Brexit as it happens, and on a number of other fronts.

So this is consequential for the UK. And overall you would say, they appear to be on track to elect a slightly less business friendly, slightly less economy friendly government. So do be aware of that.

Just a flag here, but the U.S. election is now just around four months away.

Shockingly, it is very much approaching. It’s still a close race between Trump and Biden. But Trump is now in the lead, based on what we can tell from polls and betting markets, and swing states and the like. And so, do be aware of that. We do need to be paying attention to this.

And if Trump were to win, there is the potential – again, I’m using an economic lens here – of additional tariffs, and that sort of thing, which could be a slight negative for growth. It could add a little bit to inflation as well, which isn't entirely desirable. Of course, there are other elements of the Trump platform that markets could be very pleased about, like tax cuts and deregulation – although some of that would require either a congressional sweep, which is far from certain, or other events that would enable these actions, which isn't certain.

So let's watch for that. It may be time to start preparing portfolios a little bit for those sorts of policy outcomes.

And then I'll just throw lastly into here – and no, you didn't miss anything, there isn't a Canadian election scheduled right now, though it is meant to be in October 2025, which isn't that far away. I'll just mention Canada just had a by-election and it ultimately was quite surprising in the sense that a seat that had been held by the Liberal incumbent government and traditionally had gone, by 30 plus points, to the Liberal government, actually ended up with a surprise Conservative winner in fairly downtown Toronto.

And so that’s very different than from the prior pattern and reflects polls which do show that the Canadian public is leaning very strongly toward the Conservative party and very much away from the Liberal incumbent party.

So just a flag here. Much could change, of course, over the next, gosh, 15 or 16 months. Nevertheless, there is a risk, a significant risk that there could be a change of government in Canada, perhaps, next year.

So that's something to perhaps start thinking about as well. All right.

So the point being, there are lots of election fun and games underway right now and set to continue over the next several months and perhaps over the next few years.

Okay. Onto more traditional economic terrain here.

U.S. inflation finally improving again: Let's get into inflation. Here's that improving inflation trend I mentioned.

These are monthly price changes both for all items in dark blue bars and for core inflation in gold. You can see those bars and lines are pointing downward, that's what we're looking for here. So we are seeing inflation pressures ease again after a bout of more intense pressure at the start of the year.

One thing is missing here, which is you can't actually see the May, dark blue bar because it just happened to be zero. So prices were flat in May. There is meant to be a bar there. It just happens to be zero, so you don't really see it on the chart. But of course, that does constitute quite a significant improvement.

More granular inflation data confirms cooling: Let's dig in a bit more. Lots of colors to support this digging, I suppose. And so just to reiterate that, regardless of how we slice that latest U.S. inflation report – and whether it's headline inflation or core inflation or some of the more exotic median and trimmed mean measures and those sorts of things, or even alternative metrics of inflation like the core PCE (Personal Consumption Expenditures) and the median PCE and the slices at the bottom, like goods versus services versus shelter versus food.

we saw pretty broadly based improvements. Everything looked better over the last month versus the trend of the last year and certainly versus the performance over the prior few months. You do notice one red bar still in the leftmost column. That would be shelter. And so indeed, that is still the thing that is pushing forward the most.

And there are long lags in this. It doesn't surprise as much from one month to the next. It just keeps chugging along at a pretty fast rate. It should slow over time just based on the lags involved and as home prices settle. And then much later, shelter CPI (Consumer Price Index) settles because not everyone's buying a new house every month or renting a new apartment every month or so.

It just takes time for this to be worked in. We are confident that can exert less pressure going forward, but for the moment, it is still a source of some heat.

Insurance inflation finally starting to turn lower: We have had a bee in our bonnet about insurance inflation in recent months. In fact, we wrote quite a bit and spoke quite a bit about this in recent months.

So the dark blue line here is insurance inflation. The gold line is just overall inflation. And so you can see insurance inflation tends to be a lot more volatile. That would be the first comment. The second comment is it's been really, really hot recently. You can see how that blue line on the far right had just skyrocketed. So we were seeing insurance inflation of 20 to 25% year over year, which is enormous.

But the good news was, and is, that historically insurance inflation is a lagging indicator. You can kind of see this here by looking at some of the historical patterns. You see overall inflation spike in gold. And then, over the subsequent year and a half or so you see insurance inflation spike. And it just has a lag because people are locked into one year insurance contracts.

So it takes time for those to roll off and the new prices to set in. In some cases, insurance prices are regulated by governments, often by provincial or state governments. And so on that basis, it takes time for them to allow higher price increases.

Bottom line is there does tend to be a significant lag. And so we've been postulating and speculating for a while that we should see insurance inflation start to come down a bit around now, which is important for cooling overall inflation.

Some other specific arguments included that we're seeing a slight decline in car thefts. And we're seeing car prices finally starting to fall and a few other forces like that. Finally, in the May data, we've begun to see this. So you have to squint your eyes a little bit, I'll admit. There's certainly more work still needed.

But you can see that blue line did start to inch a little bit lower. Technically, insurance prices fell by 0.1% in the month of May. They had been rising at about 2% a month prior to that. So that is an important turn and hopefully that sticks. You can see historically there is a fair amount of persistence to inflation.

When it's rising, it keeps rising. When it's falling usually it keeps falling.

Okay. Let's keep on the inflation file. So what about the risks of inflation? Well, here’s a risk.

A new supply chain complication emerges: We are seeing shipping costs, supply chain-type issues intensify again. We've talked before about the smaller jump higher that occurred. At this point last year we saw the Red Sea close to much of shipping and therefore the Suez Canal proved inaccessible.

It also happens to be the case that water levels are low in the Panama Canal. And that's limiting the size of ships and the number of ships that can transit.

But then it was starting to fade and we said, oh, it should be okay. Now it's intensifying again. You can see that upward line still doesn't look a whole lot like 2021, 2022, but it's not a joke.

It has increased maybe 40% of the way to where we ended up in 2021, 2022. I still would say, I don't believe this will have inflation implications on that order. To the extent the problems of the supply chain issues of a number of years ago were not primarily the cost of shipping. It was also just the unavailability of products, and that was sending product prices skyrocketing higher.

It wasn't just about shipping costs. In fact, shipping cost was a pretty trivial cost of the overall price of a good. Nevertheless not great news that we are seeing this increase. So there is an upside risk from supply chain issues on the inflation front. Let’s acknowledge that.

Canadian inflation stuttered in latest month: Just to pull Canada into the mix – I already mentioned the bad news in Canada – Canada's May inflation data didn’t perform well.

It actually rose again. You have to squint your eyes to see it, that blue line inching a little bit higher here. To be honest, it's a little more clear in some other charts that we don't have in this webcast, so my apologies for that.

But I just want to make this other point, which is visible here, which is let's not underestimate the progress that has occurred in Canada. If you look at inflation, excluding shelter, it's already sub 2%.

It is already where it needs to be. And so the work has been done there. The thing not cooperating is shelter inflation. That's the gold line on this chart. Within that, home prices of course have stabilized for the most part. That's not proving a problematic driver. It's the two other things. It's the cost of rent and the cost of paying the interest on a mortgage.

Of course, the interest on a mortgage is a function of interest rates. So if that's the inflation problem, that's not going to stop the Bank of Canada from cutting rates. In fact, cutting rates should help with that. So that's not holding the Bank back. And we can expect that to get better as interest rates start to fall.

The thing I'm worried about is just rent inflation. Rent inflation is still rising. In fact, it even accelerated a little bit in May. It's up to 9% year over year. We've actually run models on this recently. I can't say they're perfect. In fact, they're very much not perfect models. They only explain about a third of what's happening with rent, which is frustrating.

In other words, rent is hard to predict or understand exactly. We certainly have looked at interest rates as a driver. People maybe who own a condo and rent it out would have to jack up the rent when their own mortgage payment goes up. That certainly is an influence.

We feel good about the idea that interest rates are starting to come down. It may take a bit of pressure off that.

Certainly home prices are a big driver as well, as you would imagine. This is a substitute form of lodging. Home prices have more or less flattened in Canada. That would argue we can expect some deceleration as well. In fact, the model does argue that rent inflation should remain robust but ease somewhat over the remainder of this year and into next year.

So that's nice. The third variable in the model that we've run, though, really takes a look at population growth. And of course, population growth is really, really fast in Canada. That's your best argument and explanation, for that matter, for why rent is so high and why home prices have not fallen more significantly, and so on.

Interestingly, the model doesn't find population growth to be all that important. So I can't say that it's central or arguing for particularly higher rents. I think that's because historically, population growth in Canada has been fairly smooth and so it just didn't filter in all that much. Clearly, it's been much faster recently and so that's, I guess, where our fear is.

The model says that rent inflation can come down. We're a little bit nervous that it may underestimate the importance of all those extra people who have come into Canada in recent years. And that's something that needs to be watched, rent inflation in particular.

PriceStats daily inflation data suggests further improvement: And then just to look forward at least a very small amount of time, these are lovely real-time inflation metrics from PriceStats. Those dark blue lines, that is what the PriceStats internet-based daily inflation proxy estimates should be happening to official inflation. And you can see very clearly both for the U.S. on the left side and for Canada on the right, very clearly, profoundly downward lines.

So those dark blue lines falling, they suggest that proper monthly inflation – the line in gold – should follow lower. In other words, inflation co-operated in the U.S. in May, but didn't cooperate in Canada in May. It should cooperate in June for both countries is maybe the way to think about this. So we do believe there's room for inflation getting better, even as we fret about shelter costs and that sort of thing.

The world’s central banks are pivoting gradually from hikes to cuts: That brings us to central banks, logically enough. And so, central banks, of course, somewhat heartened by the improvement in inflation, not just in May but in general over the last couple of years. We have gone from a lot of the world central banks raising rates (in gold) to a significant number, though not a lot of the world’s central bank's cutting rates in blue.

So that's where we are, pivoting from a rate hiking environment to a rate cutting environment. We think that's, indeed, what is happening.

The era of developed-world rate cuts begins: I can say that when we dig into the developed world, as I alluded to earlier, we are now seeing rate cuts. I think I used this exact table last month. The difference is, Canada and the eurozone have now cut rates.

Last time we said they may cut rates. So, we are seeing a rising number of prominent central banks ease monetary policy. The UK might cut in August, the U.S. perhaps in September. Japan is doing something very different. Australia, by the way, looks to be doing something very different as well. That's something that we're spending some time trying to better understand and might share with you, perhaps, in a month's time.

But the point here is some important central banks are cutting. Others are seemingly on track to cut rates. So we are expecting some rate cuts.

Bank of Canada delivers first rate cut, with more to come: Let me move to the next chart to make this claim. I would say that we're not expecting heroic easing. So there's the U.S. in blue, there's Canada in gold. There's Canada's one glorious rate cut, just tilting a little bit lower on the far right there.

Bank of Canada cut from 5% to 4.75%. July is still in play. The market has about a 40% chance of a further rate cut in July. I think it's a tougher one to pull off having just had an unhappy inflation print. They will get another inflation print though just before this decision gets made. So July could still be a cut for Canada.

I'm going to say I think it's a bit more likely they pause there and they cut in September. But the point here is that rate cutting is probably going to be pretty gentle. We're thinking rate cuts, not in large quantities, not necessarily consecutively, perhaps spaced out a little bit.

Central banks are just recognizing there's not an emergency here. Economies aren't tumbling into recession. But equally, of course, there are pressures to cut rates because there is pain from higher rates, particularly in a rate-sensitive country like Canada, less so in the U.S.

Just to celebrate, as inflation becomes less high, you don't need interest rates to be quite as restrictive as before, though certainly no one's talking about rates becoming neutral or outright stimulative.

That would be another discussion for another year or two, realistically.

Okay, let's just run through some general economic data here.

Real-time economic sentiment is looking just fine: So this is the part where we say, okay, the economy arguably has decelerated a little bit. This is a measure we've actually shared with you a few times in recent months. It's a Twitter or X now Economic Sentiment Index.

That's the dark blue line. It's choppy, bounces around. But I think the main takeaway here is we're not seeing any great swoon. And we like to look at this because some of the monthly confidence numbers have been weaker. In fact, you can see that gold line did show a pretty notable drop in the latest month.

I would just say higher frequency data doesn't fully support that. We still think consumer confidence is holding together. Certainly there is reason to think that consumers may be more cautious over the next few years as they feel the burden of higher rates and higher inflation, and maybe slower job growth and so on.

But we feel okay about the consumer still and we think that consumer confidence isn't quite as bad as some of the traditional monthly indicators would argue that it is. Now, certainly there's some contradiction in what's happening in the economy. This is maybe nicely demonstrated here.

Business conditions send mixed signals: So you can see the blue line is the ISM (Institute for Supply Management) manufacturing index.

That is a proxy for manufacturing confidence and expectations. The gold line is a services index, the equivalent really for the rest of the economy, you might say. Maybe I'm overstating this, the main point here maybe is that the lines aren't that far apart. But, you know, we have a service index that's higher and has bounced a bit recently and maybe crucially remains above 50, which means that it's in growth mode.

And we have a manufacturing index that remains below 50 and has actually gone down a little bit. And so you're getting different signals from different places. If you look just at manufacturing, you'd feel pretty worried and it you looked at just services you'd feel, okay, if not fairly good. So there is a lot of contradiction in the economy right now.

I wish it was all straightforward and everything was pointing in exactly the same direction, but it's not. We have to live with this. We're getting different signals.

On the whole, we think we're seeing enough evidence that the economy is still alive and is still growing. I certainly acknowledge I'm never pleased when some of these indices are below 50, but I will say that manufacturing index has been below 50 for the better part of the last year and a half

and we have not been in a recession for the last year and a half. And so I would say manufacturing is dragging behind and failing to keep up with the rest of the economy. But I'm not convinced it's telling us that we're in big trouble. Actually, when you look at that blue line, I would say as much as the latest tick is down, I would say on a trend basis you could still argue this thing is actually reviving as opposed to decelerating.

So we think things are okay here, but it's not a perfect economic environment.

Labour market weakening slightly: We can see the deceleration maybe most clearly here. I should have maybe started with this chart , which is weekly jobless claims. It’s a nice indicator because it's weekly, so it's very fresh. It’s a nice indicator because it looks at the labor market.

That is the nexus of a lot of economic decisions and you can see there is now an upward tilt. So we are seeing jobless claims inching higher, which signals an economy that's not performing especially well. I would note that this could yet be a red herring. You can look back to the summer of last year and there was an increase. Then there was a decrease and it turned out nothing had happened.

So it's not impossible that we are seeing something like that, that is ultimately meaningless. I should say this chart doesn't tell you the whole story because you're just looking at four years’ worth of data. But if you were to look at a decade or two worth of data, you would understand that jobless claims of even closer to 250,000 new claims per week is still really good.

I remember prior cycles when being in the low three hundreds was considered amazing. And that was a sign of a super healthy economy. So we have an economy that's becoming a bit less white hot. I wouldn't say this is a sign of particular trouble. And normally when you have a big problem like an economy's tumbling into recession, normally those jobless claims are just spiking higher in a big way.

And we're just not seeing that right now. So we think this is part of the settling process whereby the U.S. economy in particular becomes a little bit less heated, but likely and hopefully, manages that soft landing.

Okay. A couple other things here.

Mounting corporate concerns about low-income consumers: So one would be we do see some concern about consumers out there. We've expressed our own concern in the past.

We do see some households that are suffering to some extent. You can see an example of this here. This chart shows S&P 500 companies and how often they are addressing the idea of low-income consumers, how often they're thinking about them and publishing in their transcripts and quarterly reports and investors calls. You can see a whole lot more than they were as of just a quarter or two ago.

So lots of focus on that group. That is the group that most obviously is struggling and is the least capable of handling higher interest rates. They are often the first to lose their job, if there are any job losses, as there have been a limited number recently. So that is a reason for concern and an area to watch.

And we do see some higher delinquency rates there.

I'm going to pivot here from the U.S. I should say S&P 500 companies, which ultimately are globally focused. But you could say domiciled in the U.S.

Canadian consumers spending cautiously at individual level: We're just going to do a little run through Canadian consumers because Canadian consumers are more indebted than the U.S. They are particularly interest rate sensitive by virtue of that.

Also, the way the mortgage market is structured, housing affordability is worse. It's definitely a consumer base to pay particular attention to.

So what can we say about that? The first thing is are people are not spending enthusiastically. If you control for inflation and you control for population growth, we can say real retail sales per capita have actually been falling.

So the average person is buying slightly fewer goods, per month, you could say, than a year ago and then a few years ago. So there is definitely some retrenchment that's happened. It's been masked somewhat by the fact that prices are higher. So you might still be spending more, just getting less.

It's certainly masked by the fact that Canada's population has grown up a lot, which means that, again, retailers might be enjoying higher sales, but it's not because individuals are spending more.

It's because there are more individuals. So we see some softness there. And it's not a totally normal experience, but equally not one that surprises us, particularly given the pain of higher rates.

One recurring theme in the next few charts is that we do see the necessary adjustments being made. People are servicing their debt more as interest rates have gone higher.

They're spending more on interest as a result. They are spending less on consumer spending. They are spending less paying down their debt in terms of principal payments. And so there's been a reallocation toward paying interest, as an example.

Higher rates are hurting some households: You can see here some signs of modest stress. So delinquency rates in Canada are rising for mortgages, though only minimally, lines of credit, credit cards and auto loans.

We do see some increase. Makes sense that lines of credit delinquencies are rising more than mortgages-delinquencies. They tend to have a floating rate, so you get hit immediately. For mortgages, it's a slower rolling process.

For credit cards, it makes sense too. That is where people have leaned on in recent years. We see higher auto loan delinquencies as well.

But the thing I would say, unlike the U.S., Canada is setting – for auto and credit card loans – not new highs, but new decade-highs in terms of delinquency rates. We are really just sort of back to around where we were before the pandemic. So I can't say that it's over the top at this point, but it is still rising.

I would think even as the Bank of Canada starts to cut rates, that it could keep rising at least for a little bit longer. So it will get somewhat worse before it gets better.

Canadian household savings rate has fallen but is still high: We do see Canadian households behaving pretty reasonably, though. They are doing what needs to be done, at least. So, when you look at the household savings rate, I mean, it's been kind of crazy for a number of years.

It got very, very high during the pandemic when people were locked up and had no way to spend. It then dropped quite sharply. But I think the key point for Canada -- and this is a distinction from the U.S. – it ultimately settled at a pretty high level, settled at a level that was higher than where we were before the pandemic.

If anything, it's rising a little bit. This does give a bit of a buffer, which is nice. I think personally what it reflects is that people are feeling stressed from higher rates. They’re feeling like this isn't the time to spend, it is a time to consolidate debt and it is a time to save. And so I think that's precisely what we're seeing.

People trying to pay down debt and so on. But ultimately, the point is we do see a higher-than-normal savings rate, which is a bit of a buffer, both because people are accumulating wealth and also because if they needed to, they could spend a bit more without bumping into absolute constraints.

Debt servicing costs rising for Canadian households: I mentioned this a little bit earlier. We've got this broken into two bits here. So the blue line is overall debt service payments as a share of household income. Fascinatingly, they are actually no higher than they were before the pandemic right now. So far it's not that more money is flowing out the door for mortgages and so on than before, on average.

Clearly for people who've renewed their mortgage perhaps it's much, much higher. But on average it's not. What has happened is a shift in the composition. And so the gold line shows you that, the amount of money being spent paying the interest on debt has gone up a lot. It is a lot higher than it was before the pandemic.

It is the highest that we've seen going back to the mid-90s. Of course, the mid-90s being a period that included the last housing bust in Canada. So take heed of that. People paying a lot more in interest just by extension. The residual to these two lines is people are paying less on the principal front.

So people are not prepaying their mortgage to the same extent. They're not paying it down as quickly. Lots of anecdotal reports of mortgages being extended out to 35 years from 30 years and the like, and so not a perfect situation whatsoever. But people are making adjustments that need to be made so that they can remain solvent.

Let's spend a moment on Canadian housing, and then I'll spend a moment on Canadian provinces and we'll finish up with weight loss drugs.

Powerful forces push and pull on Canadian home prices: So on housing, just to acknowledge it's a tough one to get right here. If we're thinking about Canadian home prices, there are some powerful forces pushing up and down. There are some powerful questions that we don't have great answers to.

If you want to be an optimist, you would note high immigration. You would note, supply constraints/a housing shortage and those could well justify higher prices.

If you want to be a pessimist, you would note affordability for housing is very poor. Mortgage rates are resetting into higher rates, not just over the last few years as policy rates rose, but over the next few years, in a pretty profound way, as people with really low mortgage rates locked in in 2020 and 2021 are forced to renew after five years.

So a lot of powerful opposing forces. Our best guess is that home prices go roughly sideways from here, which is soft by historical standards. It would be consistent with that 1990s housing bust where you had a sharp drawdown in the early 90s and then a multi-year malaise. And so we're assuming it's still malaise mode.

The one question mark is just homebuyer psychology. How many home buyers are sitting, waiting? How much pent-up demand is waiting to be unleashed by lower rates? I can say we have now seen one rate cut. Based on what I'm reading – and this is really just an assessment of what realtors are saying – there has not been an explosion of pent-up demand released.

And so does seem to me that home buyers do have something of a different mentality today, which does support the view that home prices will remain soft. But that's not certain.

You know, we had a 20-year housing mania, you might say. So it's not impossible that kind of attitude returns in particular as interest rates start to fall.

Canadian economic growth varies significantly by province: Okay, just a quick note here. These are not official numbers. There is no such thing as monthly provincial GDP in Canada. This is us trying to create a proxy for this by stitching together the information that we do have. We look at monthly retail sales and monthly employment and monthly trade and some other things that we can collect at the provincial level.

And we just sort of smush them together. So this is not an official GDP print. I'm dubious that Alberta, Nova Scotia are really growing more than 4% a year. I'm not convinced Saskatchewan is running less than half as fast as Alberta. So there's a lot of choppiness to these numbers, but I still think it's worth checking in every once in a while.

I think we can sort of square some things in our mind here, which is to say that Alberta and Nova Scotia are growing pretty fast. Nova Scotia in particular has had a population boom and a building boom. Alberta is objectively doing better than a lot of the country. Its housing market is still moving forward in a way that much of the rest of the country isn't.

Oil prices are fairly high, and there is an inflow of people into Alberta, in some cases from more expensive parts of the country elsewhere. So I think there's some legitimacy to the ranking if not to the exact numbers.

Conversely, Ontario and Quebec, the big provinces, are moving a little more slowly than the average and maybe growing at a sub-2% kind of rate – and so not quite benefiting to the same extent.

Again, we think there are some differences here, not to say that they're structural or remain where they are forever. But it’s interesting to get a peek into the provincial level here and there.

Weight-loss drugs may have far-reaching consequences: I'm going to finish with this: weight loss drugs. I wish I had nicer looking charts and less text, but this will help guide me anyhow.

Here we are at a time of what I would say is exciting technological change. A lot of that excitement revolves around AI and generative AI and natural language models. I think it's fair to focus mostly on that and to speculate about the next general-purpose technology and faster productivity growth and so on.

But I do want to say there are other exciting technological changes underway as well. Some of them are in the health care sphere, including mRNA and CRISPR gene editing – including perhaps eventually protein folding and some of the innovations that can emerge for human health from that. But there is also something that's already arrived and that would be these GLP-1 weight loss drugs.

There are several on the market now and they appear to be successful at reducing obesity and reducing weight in a way that prior drugs and approaches and surgeries were not always as successful. This is a big medical issue. This is something that affects 42% of Americans. That's the fraction of Americans who are deemed obese, a significant fraction of the world for that matter.

There are all sorts of benefits, potentially, that come from these drugs. And so less obesity is one. That is considered a disease and so to reduce that disease is certainly desirable. You can imagine some quality-of-life increases, maybe some extra longevity that comes from that. Perhaps not surprisingly, studies are now suggesting that these new GLP-1 drugs reduce weight-adjacent illnesses like diabetes and heart attack and strokes.

This is important, it supports medical advances indirectly in these other major fields.

It also appears – this is a bit more speculative and still in the realm of animal trials – but it appears that GLP-1 drugs also reduce cravings for other things. The drug works by reducing the cravings for food, which helps with obesity. The drug also appears to reduce cravings of all kinds – including cravings for drugs, alcohol, nicotine. There are a number of problems that could be partially resolved via this sort of drug.

So we can speculate about greater longevity for humans at the societal level and a higher quality of life, perhaps, to the extent that there are fewer illnesses and diseases associated with being obese or overweight.

 In terms of market implications, and keep in mind, I'm an economist working for an asset manager, obviously we may see big profits for the companies making these new drugs, with losses potentially for food companies.

The average person on these medications consumes 40% fewer calories. They're just not hungry. And so that's a hit, certainly, to food companies. Traditional weight loss companies may be at risk here, as well as drug makers that are targeting the heart or diabetes and things like this.

If there's less incidence of that, that's of course negative for them. So all sorts of swirling consequences there. Maybe profits for companies still in the pharma space that target old-age diseases where people are living longer. Right. You dodge the illnesses or the premature death that might come from obesity or obesity-adjacent diseases.

But something does get everybody in the end and so it might be a different set of diseases that people are spending on in health care. People may be becoming more active and perhaps that's a big boon for leisure products and leisure companies and athletic companies and so on. So interesting market implications.

And then from an economic standpoint, plausibly lower health care costs. So you can debate that again. Maybe you have higher pension costs for governments. If people are living longer, that's money the governments are spending. So there are some fiscal implications that could come out. I don't know if I could say they're net good or net bad just yet, but implications, nevertheless.

Maybe there’ll be a higher labor force participation rate as as people are less encumbered and perhaps more able to work at the margin. Possibly we’ll see a more productive labor force. There was some research suggesting, actually, that mental faculties can be increased in some people by use of these drugs. Critically, I should say, this is only for people whose mental faculties have been impeded by the side effects of things like certain types of diabetes.

So maybe a slightly more productive labor force. With a lot of the exciting new technologies coming down the pipe, maybe you get a slightly stronger economy emerging out of this. Of course, that loses sight of the main point, which is a healthier, population as well.

Well, gosh, hopefully you found that interesting.

I certainly do find this sort of thing fascinating. If you do, feel free to follow us online. That's our Twitter or our X handle. You can follow us on LinkedIn, where we also publish regularly. And of course, we do put all of our work up on the rbcgam.com website and the Insights tab, so feel free to follow along.

I'll say thanks so much, as always, for your time. I wish you very well with your investing and please tune in again next month.