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Hello and welcome. My name is Eric Lascelles. I'm the chief economist for RBC Global Asset Management. Very pleased to welcome you to our latest monthly Economic Webcast for the month of November. The title of this presentation, as you can well see, is Stabilizing growth plus election uncertainty.

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The first half of that is the main economic message, which is we're actually getting pretty good economic data after a period of weakness across much of 2024. So that's certainly welcome. The election uncertainty will depend on what time and what day you are watching or listening to this. And so I will be perfectly candid and tell you that I am recording this on Halloween on October 31st.

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So I am recording from the past and looking forward to a U.S. election on November 5th. You may well be watching afterwards and know the answer. And so please do get into that DeLorean and travel back in time and let me know. But barring that, we don't have all the answers here, so I'm going to go fairly light recognizing that the answer may well soon be known. But let's appreciate that, at least in the months leading up to this, and as I stand here right now, there is a high level of election uncertainty as well.

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It’s a fairly close race, which I'll get into, in just a moment. Okay.

Report card: Let's start with that report card, as we always do. Indeed we will begin on the positive side of the ledger for this report card. And so let's start with central banks that continue to cut rates.

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That's most welcome and taking away that big economic headwind. So that's been quite good. If anything, central banks are continuing to move a little bit quicker than a lot of people had assumed not too long ago.

The soft-landing odds continue to rise. And so we've felt for the bulk of 2024 that an economic expansion has been more likely than a recession.

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But we feel even more confident in that. And so I'll speak to the specific odds in a moment, but we've upgraded the soft-landing outlook again, downgrade the risk of a hard landing.

When we look at the economic data, and this is focusing in particular on the U.S., the economic data has been decent. That's actually fairly high praise.

00:02:00:12 - 00:02:21:24

The data wasn't so great for much of the year. And so we have seen evidence of stabilization. It's even the case that economic surprises have turned from pretty profoundly negative for much of this year to positive. So the data is even coming in a little bit ahead of expectations, which is nice.

Certainly if you want to be nervous about the economy, I would still say let's focus in on that labour market and see where it goes.

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But even on that front, we have generally seen some stability. There is some distortion coming from hurricane effects. But for the most part, as we look across the trend for the unemployment rate and hiring and jobless claims and the quits rate and job openings, and all of those sorts of metrics, it's looking fairly stable and not especially distressing, which is good.

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We've seen China do another, I would say, mini round of stimulus. And so that is welcome, in the context of a struggling Chinese economy, which we'll flag in the negative section in a moment.

And then I'll just mention inflation pressures do continue to ease. We're still seeing a broad downward trend in inflation. And we think there is some further room for improvement over the next year.

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So, a fair amount of positive going on.

On the negative side, rates are still fairly high indeed. I can even admit bond yields have gone up a little bit, over the span of the last month. So hurting even a bit more than otherwise, though I should still emphasize less than they were in the spring, less than they were last fall, and with the potential for those rates to fall somewhat further on the back of central banks and potentially term yields coming down a little bit. We do still have some recession indicators that are blinking red.

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Yield curves are either inverted or un-inverting in a way consistent with a possible recession. Unemployment rates may have stabilized, which is good. But they are still higher than they were at their lows. Giving some maybe amber warning as well as to the risks.

I mentioned Chinese stimulus was good. Well, Chinese economic growth isn't so good.

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It is still underperforming. And there are still some pretty serious issues there. So that needs to be acknowledged, even if my Chinese takeaway would be that I think the level of concern is maybe a little bit in excess of the situation on the ground.

Geopolitical risks are high and may be elevated somewhat further. I'll speak to that briefly a little bit later in the context of the price of oil.

As briefly alluded to already, the U.S. hurricanes, actually two hurricanes in late September and early October, are doing temporary damage to the economy, in addition to being, of course, a tragedy in and of themselves.

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And so we are finding it a little bit hard to parse the data right now. We are getting little hints of weakness here and there that we think is artificial, or at least temporary. But it makes life a little bit harder for us.

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And we won't get a lot of clarity till the December data, after what you presume would be a rebound in the November data.

On the interesting side, well, it is all about that election. And again, it is highly important and yet you may know the result, so I won't spend too much time there. But I will just spend a moment on the outlook and the policy outlook as well.

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So that's really our plan, more or less, for the next little while. Why don't I jump in and start, in fact, with that election, and we'll get that out of the way as quickly as we can.

Election result should reduce high perceived uncertainty: And so just to acknowledge again that there is a high level, at least a perceived level of uncertainty out there. I think we can pin a fair amount of that on to the election itself.

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So this is a, a measure of small business uncertainty in the U.S. and it's actually at a record high right now. I personally think it's a little bit too high. When I look at other measures of uncertainty or business or consumer confidence, I'm not seeing the same sort of effect. So I do wonder whether this is a bit exaggerated.

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But equally, who am I to question how small businesses feel? And similarly, there is some real uncertainty. There are two very different candidates for the presidential office. They have fairly different views for the U.S. and for the U.S. economy. So there are some consequences as to who gets elected. I'll just say, and again, coming from the past year, from October 31st, it's a close race.

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Either candidate could win. The betting markets have shifted over the last month in a way that suggests that Trump is now, I would say, the moderate favorite with about a 60% chance of winning. But that does mean that Harris has a 40% chance of winning. And I would just remind everyone that 40% chances also happen with some regularity.

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So we really don't know the outcome, but it does look slightly more likely to be Trump from this vantage point, but in a very challenging era of polls that no longer work as well as they once did. Just given that people don't answer the phone and all sorts of challenges make it difficult to get a really close read on things.

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It may well come down to the state of Pennsylvania and a few tens of thousands of votes, and I would challenge anyone to nail that with precision in advance of the election itself.

Economic implications from U.S. election: Maybe what I can do with more value is put a whole lot of colors up on the page for you. More seriously, just to talk about some of the economic and market implications that could arise when one of these two candidates wins – and with the recognition we may not know with precision immediately after the election, unless it's a fairly resounding win.

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So from a short-term standpoint – and I'm not going to speak to every single cell in this table (you'll breathe a sigh of relief to hear that) – but when we look at the short-term outlook, we don't actually have either candidate being enormously stimulative for the economy. We think it's likely that Congress will be divided. It could yet be a sweep for the Republicans in particular, but it's more likely to be divided.

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And in that context, neither candidate gets to do everything that they want to do. Therefore, we are not budgeting for the full set of proposals that are being made. We do think on the Trump side that tariffs would be bad for growth. We do think that a sharp reduction in immigration would also be negative for growth.

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But we think that the potential for deregulation and looser oil policy and tax cuts and maybe just some animal spirits, combine to suggest those loosely balance out some of the negatives.

On the Harris side, it's not vastly different in terms of the net effect, which would be of a mildly, negative economic impact, but really not a big one.

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On that front, a little bit less immigration, a little bit more regulation, a little bit more taxes, but more government spending, which is money into the economy. So it doesn't quite balance each other out.

Where things get tricky, though, is then when you pivot from the short term to the medium term, and then we actually end up with the opposite conclusion in terms of the overall effect.

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We have Trump was being slightly negative, Harris as being roughly neutral. And the logic behind that is that because the economy does potentially grow a little bit faster under Trump in the short run, it's really a roundabout way of saying maybe the deficit's a little bit bigger as more government money gets spent. And so that needs to be serviced and that slows the economy a little bit later.

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The tariffs still hurt, the immigration still hurts to some extent. Some of the tailwinds go away and we think it potentially reverses.

So we don't think one is excellent for the economy and one is horrible. There are some nuances certainly to that. And to the extent the economy grows faster or slower, it's more a function of money sloshing into the economy or sloshing out and kind of being borrowed from the bond market in a way that maybe isn't perfectly desirable.

In terms of the other variables, with inflation Trump looks more likely to be the inflationary outcome to the extent the tariffs add to inflation.

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And a slightly faster economy might add as well to inflation. And tax cuts could add a little bit too. So that's the more inflationary side.

Harris is more neutral on the stock market and for that matter, the bond market. And you can even throw in the currency market. 

The so-called Trump trade, meaning if he were to win, it's perceived to be stock market positive, bond market negative.

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So it would be higher bond yields, lower bond prices. And U.S. dollar positive as well. So that's the way the market's been trading, I would assume that's loosely the way the market would trade once there's some clarity afterwards. Flip those signs obviously in a Harris context. So stock market negative, bond market positive, U.S. dollar negative.

In terms of why Trump is potentially the preferred stock market candidate:

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The stock market cares an awful lot about deregulation and tax cuts, and doesn't care quite so much about some of the other things. And so that's why Trump comes out ahead on that front. Conversely, on the bond side, if the U.S. is running a bigger deficit under Trump, that adds to yields, which subtracts from bond prices.

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Tariffs of course, add to inflation, which can also add to yields, as can tax cuts. So that's the way the logic works there.

I would emphasize that there's a lot of uncertainty around all of this. You won't find too many analysts with the exact same take on how this might play out. You need to make just huge leaps of faith and judgment calls as to what a candidate might do and what kind of encumbrances they might encounter in a legal or political or practical perspective, and when they might do certain things and whether Congress will be aligned to support those actions or not.

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So, there is a lot of uncertainty around this. I would flag that arguably, at least from a narrow economic context, as important as who wins the election from a presidential standpoint is whether Congress is united or divided. And if you end up with a scenario where the White House, House of Representatives and Senate are all the same party, that's a scenario where a lot of money can be spent and it can drive the economy forward in the short run.

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If it's divided, that's much less likely and looks a bit more like what we have in front of us here. Maybe the other thought is just that while this would appear to be a consequential election from an economic standpoint, normally elections aren't the only thing that matters for markets, and normally they are not the dominant force that influences the outlook for the market.

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Certainly not over the next four years, probably not over the next year. There are other things that matter as well, and things that we're going to talk to in terms of does the economy keep growing and do interest rates keep coming down and any number of other variables as well? So let's pay attention to this. Let's recognize it's hard to get it precisely right in advance.

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We'll be in a much better position to comment after the election. Okay. Let's keep moving forward here.

Risk of higher oil prices: On the price of oil, first of all, it's low. The price of oil as I'm recording this is in the realm of $70 a barrel, if not even a little bit, below for West Texas. And so I'll just say that does seem a little bit low.

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And so I would flag the risk that oil prices could be somewhat higher, not radically higher, but somewhat higher. We do believe economic growth will persist, which is a source of demand. We think Chinese concerns are to some extent real, but maybe a little bit overblown. And so, again, China may not, see the sort of reduction in demand for oil that some people fear.

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There certainly are geopolitical tensions out there of relevance to oil in a Middle-Eastern context, in a Russian context as well. Then – and this is very much a different story, but just looking out to the long run – I think everyone's aware that there's this scenario, a pretty likely one, in which the global demand for oil maybe peaks sometime loosely around the end of this decade.

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And so it's easy to construct narratives of falling oil prices if demand is going to start falling. But just keep in mind that, at least in our view, supply may well fall more quickly than that. And so in that sort of scenario, you could have prices rising not falling. Lower demand, but even lower supply is also a recipe for higher prices.

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We would guess that over the long run, oil prices could inch higher, not lower. But maybe the point to that is okay, so there's some upside risk to oil prices, and maybe they're more likely to be $80 a barrel than $70 a barrel in six months’ time. But I wouldn't anticipate a sustained supply shock.

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Obviously, there's the risk of that. One might acknowledge, the conflict in the Middle East in particular, and with questions around whether Iranian oil infrastructure could be targeted and so on. We're not looking for that to begin with as a base case. And we're also not looking for that sort of risk to be a persistent force on the price of oil.

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For one, we've  seen Iranian oil infrastructure not targeted, despite a number of tit for tat responses between Israel and Iran. When we think about sanctions in a scenario in which sanctions were applied to a greater extent, keep in mind Russia had all sorts of sanctions applied to it. Russia is still producing just as much oil as before.

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It found markets in China and India and in other places. And so I'm not convinced that we would see any country offline for too, too long. Do note that, the U.S. shale sector is the ultimate swing producer. It's nimble. It can add, it can subtract production fairly quickly, and so on that basis it just doesn't make sense to expect the kind of oil shocks that were experienced in the 70s and the 80s and so on.

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It's a faster-moving, nimbler market that doesn't get stuck in in bad prices for too, too long. And for that matter, OPEC has quite a lot of spare capacity. If there were to be a production outage somewhere, OPEC has the ability fairly quickly to fully fill that hole, if that makes sense. And, you know, ultimately, I think it's also fair to say that maybe historically, oil producers haven't minded when there's been an oil shock and an opportunity to earn a lot of extra profit over the period of a year or two.

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I'm not sure that's the way these countries and companies are thinking these days, just in the sense that we are potentially at an inflection point. And if you were to suddenly find yourself with very high oil prices, that could well be the tipping point that pushes a lot of people into electric cars and into other sorts of technologies in a way that could permanently destroy demand.

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So I think the OPEC nations and other oil producers recognize maybe you don't want those high prices. The sweet spot is high double-digit prices. And that's our best guess for the future. We don't think that any kind of shock is likely. And if it were to occur, it would probably be fairly short lived.

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Of course, that's all in the risk space as opposed to the reality space.

Soft landing odds are good and rising, though not guaranteed: In terms of the economy itself, we still think in a scenario context, we still debate the soft versus hard landing, as does everyone. I'll just say that relative to a month ago, we have again upgraded the soft-landing likelihood. We are up to a 75% chance. It was 70% last month.

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It was, I think, 60% a couple of months before that. So it's been steadily rising. It's mostly because central banks are cutting rates and taking away that economic pain. It’s in part because we're just still getting pretty good economic data, as mentioned before. And as I'm going to go into in a minute, U.S. Q3 GDP just came out, it was almost 3% growth.

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It's still doing just fine despite those high rates. Because of that there's also room for a further deceleration without it being a recession. So the economy could struggle and it could slow, but it wouldn't be a recession because we've got enough of a buffer between growth and decline.

When we look, from a timing perspective, normally, on average at least, you would have already had the recession, if we were going to get a monetary tightening recession, if those rate hikes were going to induce a recession.

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The first half of this year was the moment of maximum risk. And so the risk doesn't then vanish on July 1st. But it's been shrinking to some extent. And then we do see a number of recession signals that are reversed, like lending standards and global trade, and a variety of other indicators. So we're looking for growth, just modest to moderate growth in the near term.

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We don't think it's going to be any great shakes through the middle of next year. We then hope for a little bit more growth, a bit of an acceleration as we move further from the era of particularly high interest rates.

If you're good at math, you would recognize there was 25% missing there. So hard landing is, of course, the other risk.

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It's a 25% chance, we think. That's a falling risk. It's higher than normal still, but it's a falling risk. And let's just recognize the risks there are that monetary tightening hits with a lag. Lots of people are still rolling into higher mortgage rates for the foreseeable future. So we can't say that pain is completely gone, nor that debt delinquencies are done rising.

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And there are some recession signals that are still out there, like inverted yield curves and higher unemployment rates. So there's a risk. We think it's shrunk. We think it's manageable. It's not at all the most likely outcome. If we got a recession, it's easy to talk tough from a distance. But I think I could say that this would be our attitude even if this transpired.

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A recession would likely be short and shallow, and we would hope to view that as a buying opportunity. Go buy some things on sale in financial markets, if any kind of asset price became depressed. So that would be an opportunity, if anything.

Okay. Let's talk about the underlying economic picture here. So I said it's looking pretty decent.

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Economic surprises are positive again – growth stabilization: Here's one good way of seeing that. So these are economic surprises. That blue line is the U.S. and the gold line is the world. And it looks roughly similar, which is we spent most of 2024 with negative economic surprises at a minimum since last spring. And so data was disappointing. It was broadly weak. And really in the last couple of months we've seen quite a nice-looking rebound.

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So we're back to positive surprises, which again is sort of a proxy for saying that the economy is alive and is still growing. Just other ways of looking at the economy here.

Economic news sentiment is upbeat and rising: So this is economic news sentiment. This is a great thing the San Francisco Fed does. And it's parsing newspapers and finding economic articles and judging using computer intelligence, artificial intelligence as to whether the news is good or not.

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And so you can see that, on average, the economic news is not just good, but it's actually been accelerating, getting better. And it’s actually now the best that we've seen going back quite a number of years. So that's quite helpful and at a minimum suggests there's no secret recession brewing right now.

But more broadly I would suggest, if anything, we need to be talking about an economy picking up a little bit as opposed to slowing.

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Consumer sentiment is rising: Consumer sentiment has not been high. These are two very different metrics. By the way, the dark blue line actually takes tweets from X, formerly Twitter, and gives a sense for the economic sentiment that's coming from those tweets. The gold line is a more classic consumer confidence metric. Consumer confidence is weaker. The tweets are seemingly more optimistic.

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But actually it's sort of a similar trend, which is we can see on a trend basis we're getting some improvement in consumer confidence. And it's looking quite good by one metric. And it's looking not too bad by the other metric. So no signs of big trouble in any event.

And then the Beige Book console, yes, the most boringly colored book.

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Beige Book: holding roughly steady at modest level: But this is an anecdotal take on how American businesses are feeling. And so they're not feeling super great. They haven't been feeling super great for a number of years now. We're not seeing a collapse. If anything, the latest reading is a tick higher than the prior reading. This reading is done eight times a year.

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And so, if anything, we're seeing sort of an okay economic view, and it's becoming a little bit better than before.

Then we can see a few other things. This is sort of getting further outside the realm of pure economics.

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Global flight activity starting to revive after lull: But we look at global flight activity. One thing we've been a bit nervous about earlier in 2024 was we'd had this long, happy recovery, and then it was starting to tail off and we thought, okay, well, you know, maybe that's just because it got back to pre-pandemic levels, but it's falling.

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That was giving us some cause for concern. You can see actually the latest data now shows something of a revival. So it seems like people are feeling okay and still spending those travel dollars.

And then here's where we have slightly weaker data. So global purchasing manager indices, which are, you know, usually a pretty decent read of the economy.

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Conversely, global PMIs are weaker, but they are still within the range of normality from the past few years: So I'm just showing you something like four good things. So let's acknowledge one not-so-good thing here. The data doesn't always agree. Purchasing manager indices globally at least are in I would say slight retreat. They're weaker than they were a few months ago. But you know, on the aggregate, they're still very much in the realm of the last few years.

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There's still nothing that we're seeing that suggests we're deviating from the moderate growth trajectory that we have been on over the last few years. And so we think things are still okay. But let's acknowledge not everything is turning up all at the same time.

Bond yields have declined helpfully (recent backup reflects shifting central bank expectations and election outlook): So I've mentioned bond yields earlier. And so, you know, the big story is one in which of course bond yields rose massively from 2020 as inflation struck and central banks raised rates and so on.

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But the more recent story has been that now central banks are cutting rates and those bond yields are coming down. So those yields are now lower than they were at their peak, say a year ago. So that's nice. However, you know, I'm sure you've noticed and I've certainly noticed that the latest trend just over the last month or month and a half even has been back up.

00:20:58:25 - 00:21:17:03

So you can see that upward arrow on the far-right side. I would emphasize it's still a lower number than it was in the spring. It's still a lower number than it was last fall. You know, this isn't the only game in town to the extent that this is the long end of the bond market. The short end is where the fed funds rate is and so on, and that is undeniably lower than it was, and so on the net, interest rates are friendlier than they were before.

00:21:17:03 - 00:21:33:12

But yields have gone up somewhat recently, and really reflects markets pulling a bit of the rate cutting out of the equation right now, to be honest it got ahead of itself. And we felt that had gone too far in September. So it's pulled back somewhat on that.

00:21:33:20 - 00:21:50:28

Maybe a bit of the yield increase is also an election outlook thing. Not so much uncertainty, that would normally actually drive yields down on average. But the view that a Trump win had become somewhat more likely and a Trump win is perceived as being bond yield positive. We'll see if that's actually how things play out.

00:21:51:00 - 00:22:04:27

But that's the perception going into it. Again, my message would be, okay, we're getting a little bit less help from interest rates than we were a month ago and so that's not super great. But I do still think that there is a self-correcting mechanism here, which is really the main reason yields are higher is because people are more optimistic about the economy.

00:22:05:05 - 00:22:19:21

The economy then starts to struggle, the yields will go back down and you end up in a sustainable place for the economy. Our view, I guess I should say right now, was that yields were too low. In September, I would say we're now in a position where we think that they are verging on too high.

00:22:19:21 - 00:22:38:23

And so the risks now tilt toward those yields coming back down a bit. Okay.

Beneath the hood: economic divergences: Beneath the hood, let's just talk about a few things. We talk a lot about GDP and employment and things, but we don't always get into the more granular element. Not every company is the same and not every person is the same. And so let's just do at least a first-level dig beneath that.

00:22:38:23 - 00:23:00:00

1. First of all, from a geographic standpoint: the U.S. economy versus everybody else in the developed world, the U.S. has been, you know, the exceptional economy fairly reliably over the last few years. But, you know, it was much better than everyone else in 2023. The gap shrunk a lot in 2024. The U.S. was looking much more like the other countries.

00:23:00:03 - 00:23:18:18

But it has opened up somewhat again in the last few months. The U.S. economy is really cooking again. Other countries are just doing okay. So there is a gap. The U.S. is the exceptional economy for the moment. I would speculate that maybe that gap starts to shrink again since the Fed probably ends up cutting rates less than some of these other central banks.

00:23:18:18 - 00:23:37:28

So maybe that pulls everyone back together. But for the moment, the U.S. economy is stronger than most of the rest of the developed world.

2. From a business size perspective, large businesses have been outperforming small businesses. That's been visible in the stock market with the mega caps even beating the other large businesses, but also large businesses often outperforming smaller ones.

00:23:37:28 - 00:23:57:21

We've seen low levels of confidence in small business surveys, better confidence in larger surveys. I would speculate maybe this gap shrinks somewhat as interest rates fall. Do note that small businesses are quite interest sensitive. We saw the pessimism really mount when rates went higher. We've seen a little bit of evidence of that shrinking as rates are going back down.

00:23:57:21 - 00:24:18:10

If rates keep falling, that could help to narrow that gap, we would say.

3. Within the economy itself, you know, two of the biggest drivers, maybe with trade and government spending being the third and fourth, but two of the big ones are CapEx business investment, and consumer spending. And so the CapEx side, has tended to be strong in the U.S., and the consumer spending side has been somewhat more moderate.

00:24:18:12 - 00:24:35:20

It may well persist, you know, if a Trump win could boost CapEx spending with tax cuts and deregulation and things. So it's possible this trend persists. But in general, the thinking would be as interest rates come down, you would think that would encourage the consumer and maybe get consumer spending contributing a bit more again as well.

00:24:35:26 - 00:24:54:06

4. In terms of, I guess, tiers of purchases, no name versus name brand, or trading down has been a theme where people shift from more expensive stores to less expensive stores and brands. And so that's certainly been a trend. For the moment it persists. We would speculate maybe there's room for some reversal there.

00:24:54:11 - 00:25:13:23

We think, economic activity could start to pick up in mid-2025. And that might then encourage a greater appetite for more expensive products again.

5. Lastly, from an inequality perspective or an income distribution perspective, you know, high-income households have fared better than low-income households. Of course, to some extent there's a constancy to that.

00:25:13:23 - 00:25:36:10

Having more money is just a better place to be than having less money. But we're referencing to versus the experience a year ago or a few years ago, and we've seen lower-income households particularly struggle in the context of higher interest rates. They are, in some cases more levered, but probably most importantly, just have less of a buffer to deal with this extra, undesirable, maybe unexpected expense of higher interest payments.

00:25:36:10 - 00:25:53:12

And so we've seen low-income households struggle. I'm not sure this is going away. Instantly. But again, the falling rate story is one that should, in theory, reduce the gap between the two.

So just a few a few thoughts that we don't always get to beneath the surface.

A couple other things for me. So one is just hurricane effects.

00:25:53:12 - 00:26:15:04

Jobless claims argue U.S. labour market isn’t in too much trouble (latest spike due to hurricanes): We are seeing the effect of the hurricanes and the jobless claims. If you squint your eyes in that circle on the far-right side, it suddenly did spike visibly over the span of a few weeks as people just couldn't get to their jobs and power was out and trees were down and people had to deal with problems, in some cases with their own homes in the likes of Florida and Georgia, North Carolina and some other states as well.

00:26:15:07 - 00:26:30:18

But we're seeing that reverse. So, as expected, the hurricane effect is proving, we think, to be quite temporary. And the economy should revert to normal. It's a bit tricky, though, because the monthly numbers, these are weekly numbers. So we can get through the problem pretty quickly. The monthly numbers are going to be blurred for a while.

00:26:30:18 - 00:26:51:01

October numbers should be a bit depressed. The payroll figure and others, the November number and beyond should then have some rebound. The December number then gives a clearer picture of what's going on.

The other thing we can say here is just tentatively, it doesn't look like the labour market is particularly deteriorating. Jobless claims are low. Jobless claims absent the hurricane are going roughly sideways.

00:26:51:04 - 00:27:08:24

High household savings rates represent untapped spending potential (except in U.S.): Let's talk about savings rates for a moment. And so I'm first going to make a distinction between the U.S. and everyone else. And so ex U.S. household savings rates in much of the developed world are unusually high right now, significantly higher than they were in the three years before the pandemic. So you can see the current and the pre-pandemic household savings rates.

00:27:08:26 - 00:27:27:19

This is a percentage of disposable income. And so it's kind of worth interpreting this and I guess there are a few ways to go. Why are the savings rates higher? I think it's to some extent a function of uncertainty and people being a little bit nervous after this inflation shock and just wanting a buffer should other crazy things happen.

00:27:27:22 - 00:27:48:14

It's also a very practical thing though, which is people are opting to spend less and to pay down their debt more because interest rates are higher. Debt loads are now more burdensome. And so people are doing the right thing and opting to fix that problem, even if it means pulling back on their spending. Of course, that's not great for short-term economic growth, but it's the right thing to do.

00:27:48:14 - 00:28:11:19

And maybe it's the best outcome for long-term economic growth.

I will say this as well, which is that as we move through this period of high rates and perhaps into a period of more moderate rates over the next year or two, you would think there would be room for some of these high savings rates to start to come back down a little bit, particularly in Canada and in the UK, where they're running multiple times higher than they were before the pandemic.

00:28:11:21 - 00:28:30:21

And that represents your untapped spending potential. If you're saving a large fraction of your income, first of all, you are accumulating wealth or paying down debt in a way that unleashes you, in theory, down the road with more assets or just a better net wealth position. But equally, just the very process of reducing a savings rate would allow for spending growth to outpace income growth.

00:28:30:21 - 00:28:46:11

I'm not saying that's going to be the key theme for the next year. But I would think over the next few years there might be room for spending to outpace income, essentially, at least on a growth basis in some of these countries as conditions normalize. So that's a nice thought. The other one is just, well, what's going on with the U.S. here?

00:28:46:11 - 00:29:02:04

They have done the opposite thing. They have a lower savings rate. Some of that might be a measurement issue. They happened to have an unusually high savings rate just before the pandemic. And you know, historically they have not always been that high. So maybe it's a bit distorted there. But I would just say more generally that the U.S. has lower household debt.

00:29:02:08 - 00:29:17:01

The U.S. is less interest rate sensitive. As a result, high interest rates have not forced the same amount of additional savings to deal with that problem. And so that just hasn't been as big of an issue. As we look forward, that means in theory there is less room for outsized spending growth in the U.S. than elsewhere.

00:29:17:04 - 00:29:42:03

I would still say there looks like there's decent room for spending growth. We're still seeing OK hiring. We are seeing pretty good wage growth. And that's the sort of recipe that would lend itself to decent spending growth. There as well. Okay. Let's talk central banks.

The world’s central banks are now cutting rates: I think as was well appreciated, central banks have gone from fighting inflation and raising rates to no longer doing that and cutting rates, so that dark blue line is now firmly in negative territory.

00:29:42:06 - 00:30:01:23

A large fraction of the world's central banks are cutting rates. And so they feel that inflation has declined enough to do that. And in many cases, economies are also running either at or even below their potential. And so the interest rate side is no longer screaming for high interest rates as well. So we're getting those rate cuts, the North American environment certainly is part and parcel to that.

00:30:01:23 - 00:30:24:09

So you've got the Fed having cut rates at least as I'm recording this once by 50 basis points, with another decision quite soon. I would guess that that would be a 25 basis point move.

North American policy rates falling: You have Canada in gold on this chart, which has moved sooner and also by materially more. So Canada is now down by 125 basis points as I'm recording this with a big 50 basis point rate cut quite recently.

00:30:24:12 - 00:30:41:22

We'll see what the December decision brings. I would guess as a placeholder that it could be another 50 basis point rate cut. The market's debating 25 versus 50. The data will ultimately determine what happens. But as it stands now, Canadian inflation is below 2%. The Canadian unemployment rate is higher than you would describe as being a normal rate.

00:30:41:27 - 00:30:58:23

Both of those things support, in theory, outright monetary stimulus. And we are quite some distance from a stimulative interest rate. And so I think the Bank of Canada can afford to move fairly briskly. And so I would guess a 50 basis point rate cut for December. And we'll just see how that actually plays out. But the point here is there is room for more easing.

00:30:58:23 - 00:31:17:13

That easing can probably continue across a fair portion of 2025. In a Canadian context, I wouldn't be surprised at all if the policy rate worked its way into the twos. In the U.S. I would think it can work its way into the threes, perhaps the low threes. And we'll see some reevaluation then, or we'll get a sense for the economy as to how much more could happen.

00:31:17:15 - 00:31:34:09

As of a month ago, as I mentioned earlier, we thought that the market was pricing in probably a little bit too much cutting. I don't think that's quite as profoundly the case, right now.

Fed rate cut expectations have been scaled back somewhat: Let me put this chart up here and speak to that. And so for the U.S, this is the expected trajectory of the fed funds rate and how it's changed over time.

00:31:34:11 - 00:31:50:23

You go back to the spring, that gold line suggested the market didn't think there would be much rate cutting at all, which was quite something. You then go to September, which is the light blue line at the bottom and the market priced in a whole heck of a lot of cutting and was expecting quite a low policy rate at the end of the tightening process.

00:31:50:26 - 00:32:11:12

Today, you are now in a position where there's still a fair amount of cutting expected. That's the dark blue line. But it's not as extreme as September. And so I think where we are now probably makes more sense. Might be a little bit high to my taste, since I wouldn't be surprised if yields fell a little bit from here and if central banks could maybe cut a bit more than the market is currently pricing. But it's probably closer to the truth.

00:32:11:14 - 00:32:31:05

The one thing I would say, and you can see it very clearly in this chart, do recognize markets have swung. They've gyrated pretty excessively from no cuts or very few cuts to lots of cuts to very few cuts. And so really moving more than it should. There have been, at least in retrospect, several opportunities in which to lean against extreme market expectations.

00:32:31:05 - 00:32:49:20

I think that's a useful way of thinking about things. If you end up, as we had in the spring with the market thinking the fed funds rate was going to bottom above 4% and never fall any further than that, that does feel a bit crazy. It was hard to justify. You can see conversely, rather, the light blue line thinking that the fed funds rate was going to race its way down into the twos in very short order, with an economy that’s doing pretty well, even when the policy rate was in the fives.

00:32:49:21 - 00:33:07:02

That was probably a bit much as well. And so I guess we stand ready to lean against any excessive market pricing going forward.

Gold prices hit record high on central bank buying, Fed cut expectations, heightened geopolitical risks: Let's talk about the price of gold for a moment. So it is up, up and away. I guess a gold medal for gold would be the way to put it.

00:33:07:02 - 00:33:24:26

And so we've seen quite a rally over the last couple of years. Gold, loosely speaking, is in the vicinity of record territory on the average day right now. I would emphasize we don't think this is because of inflation or inflation expectations, because those are actually pretty tame according to other things we can see in the market.

00:33:24:29 - 00:33:40:10

We think it is more to do with central bank buying. So central banks have seemingly shifted some of their portfolio away from bonds and toward gold. And I think it makes sense to the extent that a lot of countries are running a high debt load. And so that sort of argues against holding quite as many bonds as before.

00:33:40:10 - 00:34:01:19

Similarly, just recognizing the weaponization of the dollar. Russia had a lot of currency reserves and many of them were in the U.S. dollar. And now Russia does not have access to those reserves because they are locked up in other central banks’ vaults. And so it has made some central banks think, well, maybe we just want to hold some gold in our own vault and keep life simple.

00:34:01:19 - 00:34:17:23

And so that has been a source of important demand. And you might expect that to continue. I think Fed cutting expectations and actual central bank rate cuts play into this only indirectly, though, in the sense that keep in mind, if you own gold, at least physical gold, you're not getting any kind of coupon or dividend payment.

00:34:17:23 - 00:34:31:29

And so it's sort of costly to hold if there's a bond that you could own with a high interest rate. So as interest rates have come a little bit off, you can argue, well, the punishment for holding gold all else equal is somewhat diminished. And then the other thing I guess you could say is, well, maybe geopolitical risks are high.

00:34:31:29 - 00:34:52:16

And so that would make sense for higher gold prices. I struggle a little bit with that though, just in the sense you could argue that oil prices should be even more directly affected by geopolitical risks, particularly when they're Middle Eastern and Russian focused. And yet oil prices seem very calm. So, I walk away thinking it must be centrally those central banks that are doing the buying, it's just added an extra buyer onto global markets.

00:34:52:16 - 00:35:13:03

And so it certainly set gold prices higher. And that's of course relevant in particular to Canadian investors. The Canadian stock market by some metrics is 10% plus gold companies. There is a very significant orientation on that basis.

Now a few other Canadian thoughts here. And then I'll switch to some global demographic views. In Canada it's been a challenging economic time.

00:35:13:05 - 00:35:33:08

The economy has been hurt by high interest rates. We are seeing the business outlook though start to improve.

Moving past peak Canadian economic pessimism? Businesses are feeling, I would say, less pessimistic, maybe not optimistic, but less pessimistic. And that makes sense. Interest rates started falling here among the first of all the nations. And the rate cuts have actually been the biggest among the major developed nations since that easing began.

00:35:33:08 - 00:35:52:01

That is taking away that source of pain. And businesses are starting to feel a little bit better.

Massive Canadian immigration now slowing, with significant uncertainty over how sharply: I do want to spend a moment on Canadian immigration. I mean, it's been unbelievable and virtually unprecedented over the last few years, the rate of population growth. And so it was up north of 3% year over year, which is just a huge, huge number.

00:35:52:04 - 00:36:13:05

No other major developed country has achieved that kind of cent growth rate in recent years. The government has recognized that this hasn't been the most popular of developments. It's created some real indigestion in housing markets and labour markets and in particular youth unemployment and elsewhere. Also, some of the forms of immigration targeted, in retrospect, maybe weren't the greatest, focus.

00:36:13:05 - 00:36:40:10

Now we are seeing a significant pivot. And the government of Canada is changing the rules in many cases back to where they were or closer to where they were a few years ago.

• The number of permanent immigrants to be admitted per year is set to fall by about 20 to 25% from in the realm of 480,000 a year, down to in the realm of 360,000 a year.
• Temporary resident changes, which have a more consequential effect, because that's where most of the growth came from. We're seeing cumulatively over two years, a 45% reduction in the number of new international students admitted.

00:36:40:10 - 00:37:06:29

• Also really a reversion to the prior rules on temporary foreign workers, making it more difficult to bring them in. If you believe the government's own forecast, they have the number of temporary residents outright falling by almost half a million people in each of the next two years.

00:37:07:01 - 00:37:26:03

Just crunching the numbers and looking at this chart here, looking at those light blue bars, they forecast that the Canadian population will actually shrink slightly in each of 2025 and 2026. And aside from one weird pandemic-induced quarter in 2020, we have not had a declining population in Canada since World War Two.

00:37:26:04 - 00:37:43:05

That’s at least the data going back to 1946. So this would be quite unusual. I would say our attitude is that we are not quite convinced that it will be that extreme. Our very rough-hewn forecasts are those gold dashes. And so, we think that certainly population growth is set to slow and is set to be quite slow indeed, in 2025 and 2026.

00:37:43:05 - 00:38:11:02

We would still assume that there will be some growth. The logic there in part is we're not quite convinced that some of the temporary programs come off as quickly as imagined. We also assume that there is not a commensurate, but a smaller but significant leap in refugee applications and the number of undocumented residents, people on expired visas who just decide to stay. So that might prevent the population from shrinking outright.

00:38:11:04 - 00:38:33:26

Either way, it does point to less workforce growth. Maybe a productivity revival. Maybe some of the recent indigestion has hurt Canadian productivity. So getting through that might well help. And presumably a bit less housing stress as well. You can talk plausibly about housing construction outpacing incremental new demand as opposed to the opposite, though there is still an underlying housing shortage.

00:38:33:29 - 00:39:01:07

Okay. Two quick last ones for me. Thanks for your patience.

Long-term global population forecast downgraded further:  The United Nations (UN), every two or so years, comes out with its updated long-term global population forecasts. I wanted to share that with you. The big change was actually from 2019 to 2022, when the UN went from forecasting a population that never peaked, at least within the time frame of the year 2100, to one that suddenly was peaking in the year 2086.

00:39:01:07 - 00:39:20:00

This notable change in this reduction in the population forecast, the latest adjustment between 2022 and 2024. It's a dark blue line. It's down again. So the global population is now expected to peak at 140 million people just over 10 billion. It's expected to peak in 2084 instead of 2086.

00:39:20:00 - 00:39:42:23

Some downgrade as well. I will just say, we'll take the under still on this. Even with those adjustments, we're not convinced the world's population hits 10 billion. We suspect it peaks earlier than this as opposed to later. The logic mostly revolves around fertility rates, which are really coming off and took another nosedive during the pandemic and have shown very little inclination or evidence of rebounding since.

00:39:42:23 - 00:40:02:29

And so we think that actually the numbers could be worse. And so I leave entirely to you whether that's good or bad from a societal perspective, I'm sure there are good and bad things associated with it. From an environmental perspective, it's probably an unambiguous good thing. From an economic perspective, it's probably not so good a thing to the extent that economic growth comes fundamentally from more workers, plus more productivity.

00:40:02:29 - 00:40:24:15

And so you're sort of losing the more workers side of things. You're subtracting incrementally off your long-term growth forecasts as this plays out.

Chinese and U.S. population to continue converging: I'll finish with this, which is just a fun thing to look at, which is the ratio of the Chinese population to the U.S. population. And so sort of doing it as an idea that we're in this multipolar world.

00:40:24:15 - 00:40:46:15

The U.S. and China are the two dominant entities. It's not all about population, but it's not a coincidence that they have among the largest populations in the world. You do need a certain industrial and military might, and that is at least partially informed by one's population, though very significantly informed by productivity as well. And so you look at that, we're already well past the peak difference, the ratio between the two.

00:40:46:16 - 00:41:03:07

At its peak, China had more than four and a half times as many people as the U.S. That's down significantly already. But it's kind of amazing to project to the future and in particular to see how the forecast got changed just in the last two years, from the gold line to the blue line.

00:41:03:10 - 00:41:22:17

And so, two years ago you ended the 21^st century with the Chinese population twice as big as the U.S. The new forecast is one and a half times. There's a lot of uncertainty here, a lot of guesses being made about fertility rates and other things. The UN actually assumes China's fertility rate rises over the next several decades, which really doesn't have a lot of precedent for other countries doing.

00:41:22:17 - 00:41:39:19

You might raise your eyebrows at that. And so I would say there are scenarios in which it's even closer. You know, this is unlikely, but if China were to follow the low scenario for fertility rates and the U.S. were to follow the medium scenario, and again, no real reason to say one's low and one's medium, this is a bit of a cheat.

00:41:39:21 - 00:42:01:23

But nevertheless, that would actually end up with the U.S. population bigger than China's by the end of the century. So that's unlikely. But they may be much, much more similarly sized to one another. And in particular, Asian populations are tracking lower, whether it's Japan or China or Korea. Certainly some of the developed regions like Singapore, fertility rates have fallen particularly sharply there.

00:42:01:26 - 00:42:23:05

Okay. I will stop there. As always, if you found this useful or interesting, please do follow along on X (formerly Twitter) or on LinkedIn or best of all, via our research website, which is rbcgam.com/insights.

And so I'll just say thank you, as always for your time. I wish you well with your investing. And please consider tuning in again next month.