Hello and welcome to the latest monthly Economic Webcast. My name is Eric LaSalle, I'm the chief economist for RBC Global Asset Management and I’m very happy to share with you the latest in our economic thinking.

 You can get a pretty good hint as to where we're going right from the title of this presentation, which is ‘Soft landing in the spotlight.’

That is to say that we have for a while now been highlighting that the odds of a soft landing have been rising. The odds of a recession have been falling to some extent. And I can say actually, as of now, we believe the soft landing, a scenario in which the economy keeps growing, is actually more likely than not.

We've given it a 60% likelihood. And so, of course, that is good news.

Our report card: Let's jump our way in. And as we always do, we'll start with the report card and we'll take a look at some of the good and the bad things going on in the world and then speak more at length about those things over the span of this presentation.

To start with, I can say that as I just mentioned, the odds of a soft landing are rising. That is now our most likely scenario. We've given it a 60% chance. Conversely, we are assigning a 40% chance to a recession. That had been the dominant scenario for a couple of years, and so that's faded to some extent.

It's not gone, but it's a reduced likelihood. In terms of positive things really supporting that view, one comment would be that manufacturing activity seems to be rebounding after more than a year in which the manufacturing sector was contracting. You don't normally get a rebound if the economy's in trouble. You can say some other recession signals have been reversing as well, which I'll get into in a moment.

And there's also the chance of a better fiscal profile in 2024 in the U.S. specifically. The default assumption has been a fiscal drag there. But between a tax-cut piece of legislation that might be passed and some room for executive orders and actually some fairly generous spending that may come from the state and local level, actually the U.S. fiscal position for 2024 from a stimulus perspective, if not from a deficit and debt perspective, might look a little bit better than the base case assumption.

So some good things going on there. On the negative side, I just mentioned that recession is still possible. And so as much as it's no longer the base case scenario, a 40% chance is a very real chance. That sort of thing happens almost half the time, as you might imagine. So we can't discount that altogether, as much as the likelihood has shrunk somewhat.

Interest rates are still fairly high. That's still the strongest argument for a period of significant economic weakness.

I can say that the inflation trend is not improving quite as quickly as it had been in the latter half of 2022 and much of 2023. That rate of improvement is slowing. We're getting a few backward steps here and there. o that is a challenge and it's actually one quite relevant then to central banks.

And so you see as an example, the U.S. Federal Reserve is less well-positioned to cut rates in the next few months. They’re thinking perhaps of this summer, but no longer thinking as seriously about the spring. And that's a similar description that we get assigned to the Bank of Canada and a host of other central banks, which is just inflation is proving a little bit sticky.

Economies are actually holding up a little bit better than previously imagined. Both of those things argue for going a little bit slower on the rate cutting trajectory.

So I'll just throw a few interesting things out there as well. More than a few, arguably. One would just be to continue to flag that 2024 is a busy political year.

The largest fraction of the world's people is voting in national elections this year. That is in significant part thanks to the fact that India, the world's largest democracy, has an election. The U.S. and other very large democracies have one. Indonesia, which has the world's fourth most people has one. So a lot of big countries have elections.

Some other important countries have them too. We're watching those quite closely.

The U.S. election, of course, attracts particular attention and it does increasingly look like it will be a Biden versus Trump affair.

From a fiscal perspective, I mentioned earlier, maybe there's a bit of fiscal help coming in the U.S. in 2024. But over a medium-term time horizon, we still see countries running really large deficits.

We have now fairly high debt levels and we think that especially as interest rates have come off the floor, that this is going to require some austerity. So we're assuming some fiscal drag emerges, maybe not so much this year, but in the coming years.

China’s in the spotlight, as always. The Chinese economy is underperforming. We're going to talk about Chinese housing in a moment.

Let's acknowledge China is suffering deflation right now, which I'll get into in a moment, largely reflecting economic weakness and a bit of a balance sheet-type recession situation.

Chinese demographics are very challenging indeed. In fact, the Chinese population could be really not much more than a third of its current size by the end of the century based on its current fertility rate projected forward.

Lastly, we will talk for a moment about U.S. education levels, which are actually falling a little bit, which isn't the usual trend. We can talk about why that is and what that might mean for the U.S. economy.

So as you can see, lots to cover off. Let's just jump into the picture show, as it were, and why don't we start just revisiting some of those growth –no growth odds going forward?

Updated odds for 2024 macro scenario: So for the U.S. as our benchmark bellwether economy, we are of the view that a soft landing is now more likely. We've given it a 60% chance. That had been a 40% chance a quarter ago, in case you're keeping score. And in terms of why, I'm going to revisit some of these things in chart format in the near term.

Well, the economy refuses to quit. We just keep getting economic growth that is, first of all, growing. Second of all, it’s serially exceeding expectations in a way that suggests there is just some special buoyancy there that cannot be ruled out. And after the data surprises in one way over and over and over again, you'd be a little bit foolish not to pay heed to that.

We've seen some recession signals reverse, and so I'll speak to those in a moment.

But as an example, the willingness to buy big ticket items in the U.S. has begun to revive. And so we've lost that recession signal. And something very similar has happened for a number of the other signals out there.

Inflation has fallen. Maybe not so well in recent months, but it's certainly fallen over the last year plus.

That's removed one particular friction for the economy. And then keep in mind, even with maybe the Fed and central banks talking a little bit less enthusiastically about rate cuts than they were a few months ago, this is still likely to be a year in which rate cuts happen. And it is a time in which central banks now have the luxury of not solely thinking about inflation, but also starting to think a little bit about sustaining growth and avoiding problems and that sort of thing.

And so that does increase the odds of a soft landing, that the central bank could come to the rescue if it needed to.

Of course, when you've got a 60% chance of something, that means there's a 40% chance of something else. And so in this case, we think a hard landing, a recession is still a 40% chance. That's diminished from before.

But it is still a significant number. This is, importantly, a world in which there are still two completely viable scenarios as to where the economy goes from here. We think this one has become a bit less compelling recently, but it still is certainly very real. And in terms of why that hard landing risk stubbornly persists despite a lack of recession for well over a year now . . .

Well, part of the story is that we are seeing genuine weakness in other international economies, including two consecutive quarters of decline in the UK and in Germany and Japan, which some people would call a technical recession. So some parts of the world really are suffering.

So there is something to this ‘higher rates should hurt’ story. Some special U.S. supports fade.

That is to say we think there might be a little bit less help from consumer spending this year. And even if the fiscal story holds together, there’ll be a bit less help than last year. And so that changes the equation to some extent.

Don't forget, we've seen a lot of monetary tightening/rate hiking over the last few years, and that does hit with a significant lag.

There are still some recession signals that are intact. And indeed, our business cycle work points to the very real chance that this is still a late point in a business cycle – suggesting there could be a downturn ahead.

So if you're confused, if it sounds like I'm contradicting myself, I am. This is a time in which we are getting a lot of contradictory data.

It's not a time that we can talk with great precision or confidence about the future. It's just there are few ways this could go. I think maybe the greatest service I can do is just to make that clear. It's not a time to be taking aggressive investing risks given the variety of conceivable scenarios.

Okay, let's work into some charts really supporting the optimistic side of the equation first.

Manufacturing rebounding: Here, as an example, is the ISM (Institute for Supply Management) Manufacturing index for the U.S. In dark blue, that's the main index. You can see it was very weak. It was kind of approaching recession type levels. And then something interesting started to happen in recent months. It started to tentatively rebound and that rebound has even gained a bit of momentum.

And if you look at the gold line, which is the new order subcomponent of the index, that's actually soared with particular enthusiasm recently right into positive, greater than 50 territory. This indicates that maybe that sector is starting to grow again. And so this was never quite a slam dunk recession signal, but it was signaling weakness and it's no longer signaling that much weakness.

S&P profit margin: When we look at something like the S&P 500 profit margin, you can see that historically, every time there has been a material decline in the profit margin, there has been a recession. Recessions are those gray shaded areas. And so you can see every time in the last 40+ years that we saw a significant drop, you got a recession.

We saw a significant drop. You can see on the far right that there was a decline in profit margins. Yet we have not had a recession. That is to say now maybe we're starting to see this measure start to rise a little bit, though it's bumpy. And so that recession argument is at least starting to weaken.

It's starting to waver. It's no longer clearly calling for a recession. And so maybe the signal was broken in this cycle.

Lending standards: I can say something very similar here, in fact, almost identical. When we talk about lending standards, this is the willingness of banks to lend in this case to business clients in the U.S. You can see every time lending standards tightened a lot, every time that line spiked significantly, you got a recession.

Those gray-shaded areas came into play. You can see recently we had a spike, quite a significant one, if not quite as large as the last few recessions. Any time we've seen a spike that big in the last 3+ decades, there has been a recession.

We did not get a recession this time, at least not yet. And we are starting to see those lending standards ease up again.

You can see that downward slope, normally the downward slope is happening as you're ending a recession, as you're emerging into a recovery. And so a bunch of recession signals are ceasing to tell us that a recession is coming. It's not right in the sense that they've never done this before. This is a bit of a frustrating experience, but that's what they're telling us.

We need to pay some heed to that.

U.S. RV shipments: I can give you another one, in case you're a sucker for punishment. You can see RV shipments, this is recreational vehicle shipments. This is a funny chart, because it used to be annual data and then it became monthly. So it gets jittery in recent years.

Nevertheless, the story was one in which you always had two years of declining RV shipments leading into a recession. And every time you had two years of decline, you got one. Well, we got our two years of decline and we didn't get a recession. And now you can see that dark blue line is working its way back higher. And so seemingly RV shipments are growing again.

And we just didn't get the recession that had been signaled. So there are a lot of seemingly failed recession signals at this point in time.

Monetary tightening cycles: This is a bit of a blurry point. This is sort of a partial transition toward the things that are still looking not so good. So this is a history of the Fed funds rate, of what the central bank was up to in the U.S. going back over 50 years, pardon me, over 60 years, in fact.

You can see historically central banks raise rates and then you get a recession. It's a pretty recurring pattern. A couple of times we get rate tightening cycles without recessions. But I think the math – and I'm just going from memory – is that 10 of the 13 tightening cycles culminated in recession. Usually you get a recession if not quite always.

So that would argue there should be a recession, though we haven't seen it yet. I would just note there's some nuance to this. The nuance isn't just it failed three times. The nuance is maybe the last three cycles, the ones described in blue, the furthest to the right, those weren't really purely rate tightening cycle recessions.

As an example, were central banks raising rates into the pandemic recession? They were. But the pandemic recession wasn't because of that. It was because of the pandemic and the lockdown and so it was a bit of a coincidence.

You look back to the global financial crisis. were central banks raising rates? They were and there was even a connection, which is a housing bubble was bursting in the higher rates no doubt contributed to that.

So I wouldn't want to suggest there was a complete disconnect. But ultimately it was a global financial crisis. And there was a gap between who owned assets and who made the decisions on them, and securitized products were quite problematic and banks took too much risk. And a number of things happened. Interest rates went from a low level to a moderate level.

There were excesses built into the economy that came tumbling down and indeed banks even failed on that basis. And it wasn't just rates going higher.

Similarly, if you look at the early 2000s, since that was the dot com recession, well, you know, it was in significant part a dot com recession. There was a tech bubble that burst, and 9/11 then added some more economic damage later in 2001.

Higher interest rates certainly were part of the broader equation. They were maybe a symptom of the fact that the economy had been growing a long time, was getting old, was getting fragile, but it wasn't really higher rates that made the recession. You actually have to go back to the early nineties, if not earlier, to really find a recession that was pretty classically driven: rates went up, maybe to address inflation, and the higher rates killed the economy.

It has been a long time since we've had that kind of recession. And not to say that therefore it doesn't work like that anymore. But you know, the chances that the way the economy works has changed over over 30 years are more significant than the chances that it’s changed since, you know, 2020 when we last had a recession.

So it's a little less clear that higher rates make a recession reliably when it's actually been quite a while since we got one that was clearly driven by rates.

Okay. Hopefully I didn't confuse you too much on that.

Bond rates still high: Let's not forget in all of this that interest rates and bond yields have increased a lot.

There was a nice little decline there in late 2023, in early 2024. We've started to reverse that. The point is just yields are at this point quite high by the standards of the last several years and indeed by the standards of the last 16 years or so. And so there is still pain that comes from that.

And that pain theoretically arrives with a drag. So even if we get a soft-landing scenario, we are budgeting for below normal economic growth. Just not a recession. Either way, we think there's some pain that comes from higher interest rates.

Weird international disconnect: I want to flag this this, again, another chart that might just confuse more than it educates.

But this is true for the UK. It’s true for Japan. It's true for Germany. It's true to a lesser extent for Canada. There is a real disconnect. And the disconnect really extends in two directions.

One is just the U.S. economy has been the exceptional one. It just keeps soaring along.

Other countries, however, have suffered to some extent.

They have felt weakness. Canada has had a couple of quarters of decline over the last year, as much as you can't quite call it a recession. In the UK, which you see here, in Germany and Japan, their economies have shrunk in each of the last two quarters. That's what those downward dark blue bars are.

And so some people call two quarters of decline a technical recession.

I would say it's the opposite of a technical recession here. I would say it's a rule of thumb or a simplification of recession. A technical recession to my eye would be the economy shrinks by a significant amount, not just a tiny amount. And the labor market suffers and corporate profits fall. And there's a recoil in markets.

Usually all those things are happening at the same time and we're just not getting those other things this time. So you can see in the UK two quarters of GDP decline, not a whole lot of growth over the prior year and a bit either.

You can see that light blue line, which confusingly is the unemployment rate, inverted, converted into standard deviations again, just to confuse you.

But I think the reason we did that is just to say that high is good and low is bad. And so GDP is low, it's bad. The labor market right now is high. It's good. In fact, the U.S., the UK unemployment rate is a full standard deviation below normal. In other words, it is unusually good right now.

It's weird to have a really good labor market and a really bad economy at the same time. And I wish I had a punch line here where I could say it's because of X or because of Y. I mean, mechanically I uess it's because productivity is falling. And so you have more workers doing less work somehow.

But that doesn't seem like a long-term sustainable type of situation. But mechanically, I guess that’s what's happening – though it’s a bit of a chicken-or-egg question there. It's just a bit of a mystery.

As it stands now, we've seen the economic weakness, but it just hasn't bled its way through, curiously, to the labour market, to the stock market, to corporate earnings and that sort of thing.

So we're left with this small mystery, and we may ultimately emerge from this and look back and say, this economy shrank, but maybe it didn't quite hit the threshold for a true proper recession. So we sort of dodged a bullet. And yet the economy didn't do all that great at the same time.

It's very, very strange. It's really all I can say.

Okay, let's move from that strangeness. Hopefully I can explain this next one a little bit better.

U.S. Conference Board leading indicator: So when we look at economic indicators, again, we're looking at all sorts of recession indicators. In particular, one of the stronger ones right now is in front of you, which is the Conference Board in the U.S. It’s a leading indicator. Every time it's fallen significantly, there's been a recession.

And you can see on this line chart, every time the line falls by a material amount, you get one of those gray shaded areas. Those are the recessions you can see very clearly on the far right that we've seen a drop here, haven't had the recession yet, but it's still falling. So this is one that's still giving a recession signal and has not falsified itself or undone itself yet.

So this one is still saying there should be a recession out there somewhere. That risk is still real.

Similarly, looking at this measure, this is the U.S. unemployment rate over a very, very long period of time, dating right back to World War Two. And you will see a very clear pattern here which is where the unemployment rate bottoms before recessions.

You really don't find too many other times when the unemployment rate is flat other than right before recessions. It then usually starts to rise a little bit and then you get a recession.

And what we have seen in the last year is, again, on the far right, the unemployment rate clearly bottomed. The unemployment rate has now turned actively, has risen a little bit.

It's bopping back and forth now, but it's up off its low. And so every time we've had something like that in the past, there has been a recession, ultimately, and we just haven't had the recession yet. But this signal is still there.

U.S. unemployment: I would say this one has a better theoretical underpinning than most. The idea is just when the labor market is tight, it is a very slippery place to be operating.

It's hard to keep the economy going when wages are moving quickly and there aren't many unemployed people and so on. Normally when you hit that point, you just inevitably start to slide in the other direction and you essentially have a recession that takes you back to square one and then the gradual decline starts again. And so this one is still saying that there is an elevated risk of recession.

Recession signals mixed: We put a lot of these ideas together ultimately into this table. And it's quite a dog's breakfast. But ultimately, I think we have in the realm of 13 different inputs now that are just simple recession signals. So we try to assess what they're saying. And it's a pretty mixed story right now.

There is a significant fraction that are still predicting recession. The first three are all variations on an inverted yield curve. That's a classic predictor.

You do have a rising, though, small subset that are saying ‘no.’ Jobless claims had been rising. They're not anymore. Lending standards had tightened. As I mentioned, they've now eased. Oil prices had spiked –

this is now going back two years. In fact, it spiked so much that you had a recession every time after that happened and then we didn't get a recession. And the oil prices have come back down and sort of negated that signal. So it's a real mix. I would still flag that the default state for all of these things is ‘no.’

The fact that the majority are saying something other than ‘no’ indicates this is definitely an elevated recession risk environment. All the same, though, these indicators have been trending their way a little bit away from ‘yes’ and towards ‘maybe’ and toward ‘no.’

So the risk of a recession has been coming down to some extent.

Business cycle update: Then with our business cycle work, every quarter we update this scorecard. I’ve often said in the past we have almost 100 variables. I actually counted and it's actually a little bit more than 60. So I've been exaggerating the sophistication of this model.

But more than 60 variables go into this and they're basically asked, ‘Where do they think they are in the business cycle? Is it early? Is it late? Is it something else?’

And they all have a grand time disagreeing with each other. And that's part of the charm of this.

So there are a few indicators that think this is an ‘early cycle’ moment, even though it's probably not. But you can make really two main conclusions from this.

The pessimistic one is that the three most likely interpretations are this is an ‘old cycle.’ Whether it's ‘late cycle,’ ‘end of cycle’ or already the start of a recession, it's pretty far along and so vulnerable.

That is the single best guess of the business cycle scorecard. And so as per the elevated recession risk comment, but fascinatingly, we have seen that ‘start of cycle’ component on the far left start to build. It's been building subtly for a few quarters and then it really leapt forward in the latest quarter. It sort of doubled its allocation.

And you now have, almost as strong an argument for ‘start of cycle’ as any one of the other three popular points in the cycle. Though, I would emphasize again, you can sort of merge those three on the right together and say best guess is still that it's a late point. Therefore there's a downturn that could be ahead.

But some indicators are saying we're past that and we're on to the next cycle and we can expand from here. That would very much be a soft-landing argument. So it is a mixed billing.

I don't think we're going to crack this this debate today. Let’s move on from that. So, again, soft landing, most likely hard landing, not impossible.

Monthly inflation: Let's move on to inflation for a moment. The inflation trend has broadly been a constructive one. This is a very choppy monthly trend chart for U.S. CPI (Consumer Price index). You can see we're not seeing monthly prints that are as bad or as high as they were, say, in the middle of 2022. We have come a long way.

Slightly disturbingly, though, you can see that there's a mild upwards slope to the monthly prints over the last few months. And so headline CPI, core CPI, have been running a little bit hotter as we work our way into early 2024 than they were, say, in the middle of 2023. And that's not perfect.

Part of that story, a fair chunk of that story, technically almost three quarters of the increase in prices in January, was shelter costs. A lot of it is shelter. Shelter, we know, is a lag variable that should settle down. We can see that rent costs in the U.S. are coming off and so on. So that that should start to cooperate somewhat better.

But equally, you know, non-shelter services are still moving fairly fast. I guess the story is one in which, you know, inflation's found its way down to about 3%, but it's getting a little stuck there. It's not an automatic conclusion that we get to smoothly work our way to 2%. As we've shifted our forecast from a hard landing to a soft landing, we have upgraded our inflation forecasts.

It's not as easy a path down to 2% or even 2.5% inflation. We think it takes longer. We think it's a bit choppier. February real-time numbers are looking a bit better. So maybe we get a slightly improved picture there that at least breaks this upward trend that's been taking place.

We can take solace in the fact that natural gas prices in North America have fallen by more than half since late last fall.

That's a helping hand to be sure. There are some things going the right way. But, you know, just the resilience of economies right now is such that it is a bit trickier for the economy, for inflation, rather, to come back down.

But at the end of the day, we do think inflation can settle from here. We think it's a multi-year journey, but we do believe inflation is more likely to fall than to rise, despite some undesirable trends recently.

Central banks: That brings us to central banks. I think we've shown a chart like this before. It's one of my favorite charts. It shows the world’s central banks and what they're up to. And so the world central banks were doing a lot of rate hiking over the last few years, but that has pretty much come to an end with only a handful of exceptions.

And now the era of the blue line starts to take over. You can see on the bottom right that we're seeing more central banks cutting rates, and it's disproportionately emerging market central banks. They led the way, to their credit. And so we should pay heed to them.

The dark blue line here, that is the difference between the two. It shows that we are now in a rate-cutting world as opposed to a rate-hiking world.

That said, it looks like it will be a fairly cautious beginning in the developed world at least. What had been expectations for spring rate cuts has become expectations for summer rate cuts. Again, with inflation proving a bit stickier, with economies proving a little bit stronger, the argument isn't as compelling. I would still think we can see some rate cutting.

A lot, though, depends on how the economy plays out. If you get a soft landing, you probably get rate cuts, but not very may. Maybe two to four at absolute most.

If you got a hard landing, if the recession does happen, that's where you can say, listen, four is the minimum. Maybe you get eight cuts, maybe you get more based on the historical speed at which rate cutting occurs.

So there's a range of possible outcomes here. For the moment, we're thinking it could be fairly modest rate cutting, but still rate cutting that does contribute to lower short-term rates, to incrementally lower mortgage rates, to slightly lower longer-term yields as well.

China’s economy: Okay, let's talk China. I have a few China slides queued up here, so let's run through these.

To begin with, this is the overall Chinese economy, just some key components of it. I want to make the point the Chinese economy is still growing. The Chinese manufacturing sector is doing okay. Chinese exports are rising reasonably well. It's becoming trickier for them to sell to the U.S. and the developed world. But they are cultivating very strong ties with what's called South-South trade.

They're trading with other emerging market countries, including Latin America and Africa and certainly Asia and so on. And so China is growing, and parts of the economy look fairly normal.

Retail sales are growing. Now, retail sales growth isn't entirely normal in the sense that consumers have a lot of their household wealth tied up and housing is weak.

So they're not spending with quite their usual enthusiasm. But we're getting some increase in retail sales despite that, despite a shrinking population, etc.

What really is the drag, though, you can clearly see it here, is the housing market. Property sales have just plummeted and home prices are falling to some extent. China has functionally insolvent builders and all sorts of excess debt that it probably shouldn't have.

And it's going to take some time to fix this. This is not a quick solution. This is sort of a balance-sheet recession kind of situation that takes time to work out of. The historical lesson is you want to recognize losses as quickly as possible and make markets liquid as quickly as possible. That was the Western world's lesson from the global financial crisis.

That was maybe Japan's mistake in the 1990s when it had a similar problem of its own. We will see what China does here.

So far, it looks a little bit more like a Japanese-type path, which is concerning because there are other parallels between China and Japan in terms of demographics and deflation and housing bubbles and so on.

I wouldn't be quite that pessimistic on China, however. I think they have the capacity to solve this, but it will likely be quite a muted housing market for quite some time. And it is concerning that the Chinese government is skeptical of the private sector, which is normally where you get most of your productivity and so financial wellbeing gains from.

So for the Chinese economy, we forecast growth this year. We think it grows around 4.5%. That's bad by pre-pandemic standards. It's not bad by current standards. It's thanks to some fiscal stimulus, including some more we think will be announced in March. Beyond that, we think China's speed limit will be more like 3- 4% per year.

And so China will not be the rapid mover that it once was.

Chinese deflation: Now, Chinese inflation is nonexistent. We've seen, first of all, China basically dodged the inflation spike in the rest of the world. And China didn't do the monetary stimulus or the fiscal stimulus or some of the other excesses that other countries succumb to and that contributed to the excess inflation.

In fact, China, to an extent, has the opposite problem, which it has since tumbled into slight deflation. So prices are falling there. I've seen some people express concern, “Could this hurt the rest of the world?” I don't think so particularly. I don't think that's the main challenge to think about. I would just say it's a reflection of Chinese economic weakness and it is a reflection of the fact that China has maybe excess supply and not enough demand.

That's classically how you get to deflation. I'm not convinced it's a permanent phenomenon. China has room to cut rates. China can do some fiscal stimulus. There are some solutions that can be found here.

China can just import some of the world's inflation from elsewhere. The currency can soften and create some extra inflation and improve the country's competitiveness at the same time.

So I'm not convinced this sticks, but I will say China is on a pretty slow inflation trajectory and that that story probably persists.

Chinese population: The other China thought is a fascinating one. We've known that China's working age population has been falling for years. China's overall population started falling last year. It's just begun to fall.

It's obviously very much a speculative exercise to sort out just where the population goes from here. But gosh, you know, the U.N. makes an attempt. They have various scenarios, various variants, they call them. The constant fertility rate variant, you can see even if the fertility rate were to hold up at recent levels, the Chinese population plummets from 1.4 billion down to under 600 million by the end of the century, which is quite astonishing.

It's a collapse of more than half of the population. I think that underestimates the extent to which China's population will actually fall. We can see what's been happening to the fertility rate since the U.N. put this together. They do it every second year. It's coming up on two years. The fertility rate has just fallen completely out of bed since then.

It's fallen to 1.0. So each generation is less than half the size of the prior generation. I would say pay heed to that. It's the bronze or beige line at the bottom of the chart. I wouldn't be surprised if that ultimately proves prescient.

China's population in that scenario is just 488 million people by the end of the century.

Just an utter collapse. Of course, China doesn't do immigration particularly, and so there's no escape valve there. The country's so big that you really couldn't even import realistically enough people to move the needle on that front.

It's sort of fascinating to compare China to the U.S. Not that the U.S. is great shakes from a demographic perspective, but the U.S. population will probably approach 400 million by the end of the century. So that’s almost the same size population as China, which of course isn't whatsoever the case right now.

China is more than four times ahead of the U.S. right now. India is, too. But that's not the main thrust here. So that's quite challenging.

I wouldn't want to overstate the effect of that on the economy. Obviously, it's significant. I would note that historically when China was growing at six and eight and 10% a year, it was getting sort of 1-2% of that from demographics.

It was getting the other four, six, or 8% from productivity growth. So you can be in a world of a shrinking workforce and still enjoy pretty fast growth if you're really clicking along from a productivity perspective.

But China is getting richer. China has turned its back on the private sector to some extent. And so it's hard to imagine the productivity side completely saving the day.

This is, again, China moving much more slowly than before. From a geopolitical perspective as well, you can make comments about the extent a population says something about military might and something about appetite for resources and therefore a need to control other states and so on. It does render China in a somewhat diminished light. Okay.

Declining human capital in the U.S.? I'm going to finish with this totally different subject. Looking at the U.S. may be casting a bit of shade on the U.S., I suppose in a different way, which is somewhat concerning. U.S. human capital arguably is starting to fall off.

You don't know what that means. Human capital is like physical capital, but it's, you know, the ability that exists in all of us.

And so the education level of Americans is actually slipping a little bit. You can see this in any number of ways, but this chart conveys it reasonably well. There has been a material decline in the percentage of Americans who go straight to college after high school. It's fallen from 70% of the population to 62% over the span of just the last eight or so years.

We can see this in other metrics that it’s not just people taking a gap year or some technicality like that. It does seem as though there's been some decline. So education levels are falling, you know, and human capital in theory falling as well.

In terms of why this is happening, we think a little bit of it is the pandemic in terms of people just didn't want to pay a lot of money for a virtual class.

And if the labor market was so hot post-pandemic, it just maybe didn't make sense to go to school. Some people could earn a good income straight out of high school.

Some of this will fade with time, we think. But you know what? Probably not most of it. You can see this trend began before the pandemic, and it's continued after the pandemic.

And in the U.S., at least, a fair chunk of it appears to be just that the cost of tuition is incredibly high right now. Maybe the U.S. will pivot and change the way that tuition is charged or how education is paid for, and maybe that will change the equation. But in the meantime, this does represent a slight drag on U.S. productivity and a slight drag on the U.S. economy.

The U.S. has always been exceptional in the sense that it attracts some of the best and brightest and Nobel Prize winners and entrepreneurs and CEOs and things. So maybe that superclass of human capital can continue pushing the overall economy forward. But the average American is becoming a little bit less educated, and that's not a great trend.

Well, I guess I'm finishing on a slightly sour note, but such it is. So it's all it is. I'll just say thank you so much for your time. If you found this interesting, consider following us online on formerly Twitter, now X or on LinkedIn. Or you can go right to our website at RBC GAM dot com and visit the insights tab.

And I'll just say again, thanks so much for your time. I wish you well with your investing. I hope you found this interesting and please tune in again next month.