There’s still considerable uncertainty about the economic outlook from here. It is, after all, uncharted terrain. We’ve never had a post-pandemic recovery to compare this one to. But our best estimate is that economic growth will decelerate somewhat, both through the second half of this year and into 2022, though still be good by historical standards, I should emphasize.

In terms of the second half of this year, we can already see some evidence of deceleration, both in some of the real-time indicators we look at; also, in some of the more traditional economic indicators. Obviously, the Delta variant is circulating more intensely than in the past, and that has already had some economic impact. And, frankly, it would have been hard for the economy to continue growing as quickly in the second half of the year as it did in the first half, just based on how fast growth was during that first half of the year.

As we look a little further ahead into 2022, we expect a bit less natural economic buoyancy. Economies will just be closer to their potential, so racing less quickly toward that potential. And we also budget for a bit less help from fiscal stimulus; a little bit less help from monetary stimulus as well.

But, in all of this, as much as we’re talking about a bit less growth, as much as our forecasts are actually a little below the consensus, we’re still talking about an economic recovery. That’s still on. We believe it’s still fast growth on an absolute basis. And actually, in terms of specific numbers, it’s almost 4% GDP growth for 2022 for both the U.S. and Canada, and actually, many countries out there in the developed world.

Central banks are now hinting at tighter monetary policy to come over the next year or two, and that has created some anxiety in markets and among market participants. We all remember the prior cycle when there were a few taper tantrums as central banks similarly removed stimulus.

I would say, though, that the risk of a taper tantrum is significantly less this time, for a number of reasons. And so, the first comment is just that monetary tightening, raising interest rates and that sort of thing, it’s not inherently bad for markets. In fact, so long as there’s not a policy error happening, it’s actually theoretically good. The goal of these rate hikes is to keep the economy growing without overheating, keeping it on its optimal growth trajectory. And so that’s not actually inherently a bad thing. So there’s the logical side.

I would say, in addition to that, markets and central banks have both learned a few lessons from the last cycle when there were taper tantrums. And so, for instance, central banks are clearly signaling in advance this time, and so there’s less reason for financial markets to be spooked. And actually, we’ve already seen some central banks start to drift in a tightening direction, including the Bank of Canada, and markets have broadly been fine.

Another important reason is that central banks are clearly distinguishing tapering from rate hikes this time. Tapering just means buying fewer bonds. Still buying bonds, still actually even delivering stimulus, and that’s really in the offing for the next six months to a year of no one seriously considering actual rate hikes just yet. And so it’s a very slow process, and so the risk there I think is diminished as a result.

And then lastly, and maybe related to that last comment, is just that central banks are not this time removing stimulus prematurely. In the end of the last cycle, there were several bouts of stimulus because each time previously the central bank had tightened too soon, we’re seeing central banks really go slowly here. Inflation’s already high. Unemployment is moving significantly. They’re still not acting. And so I think the risk of a taper tantrum is greatly diminished. It’s not zero, but it’s not a central risk for next year.

Inflation is extremely high right now, but we think it’s in the realm of peaking already. And, in fact, when we look at real-time indicators of inflation, many of those have already come off a little bit. When we turn to commodity markets, with commodity prices having driven the recent spike in inflation, many of those are stabilizing or even falling.

And, for that matter, when we look at the monthly rate of inflation, and so we step back from the annual figures, they’re up in the 3s in Canada and into the 5s in the U.S., and we see the monthly rate of change already decelerating to some extent. So we think we’re already peaking.

However, that isn’t to say we’re about to return to completely normal inflation. And so we still see some distortions out there. We see that demand preferences have changed, and those have not completely reverted. People buying, for instance, more electronics and these sorts of things during the pandemic now shifting over to services and eating out at restaurants and things like that more. And so putting price pressures on some of these products.

And we also see supply constraints that are still out there. And so, for instance, shipping costs are running around 5 times higher than normal because so many more goods are being shipped in different directions, and backlogs are still quite significant. We see chip shortages. People bought, again, far more electronics and these sorts of items, and so there’s a shortage there as well that’s putting upward pressure on products that use those chips.

And so, these things haven’t been fully resolved yet. They’re probably not going to be fully resolved overnight. And so, for the next year or two, we will probably still see some elevated costs for certain [types] of these products. And we can see, for instance, that companies are still struggling to find sufficient workers in many cases as well. And so all of that does add up to still elevated inflation over the next year or so. However, if, given the luxury of looking beyond the next year, we do then think inflation starts to settle back down. And we really don’t have serious inflation concerns over the long run.

Opinions differ quite significantly on where we are in the business cycle. It’s not actually something we can observe directly. But the work we do continues to argue this is still a fairly early point in the business cycle.

And so, yes, the recovery has been remarkably fast, perhaps pointing to a later stage. Yes, there are hints now that we’re getting closer to the midpoint of the cycle. But ultimately, our best assessment is still, this is an early phase of the cycle.

And in terms of things pointing to that diagnosis, well, one would be that central banks haven’t started raising rates yet. And so, that’s usually where you are early in a business cycle. Similarly, bond yields are still very low; again, something that’s usually the case only early in the cycle.

We still do see, despite all of the progress that’s happened, some significant economic slack out there, meaning there’s more hard work to be done before the economy is at serious risk of overheating. And for that matter, related to that, I can say, unemployment rates, lots of progress has been made, they are not yet normal. And so again, there’s further improvement that can occur; more advancement of the business cycle as that happens.

And, as we look at some of the recession models that we run and the odds of a recession over the next year, those models are saying the risk is quite low still over the next year. And the risk is usually quite low at an early point of the cycle.

In terms of the implications of being early in the cycle, well, on average, the stock market and risk assets performed well at an early point in the cycle. Though it’s not a guarantee, we do think there are a number of years of additional economic growth to come. Because it is early in the cycle, there should be some further progress to happen.

It may end up being a shorter cycle than in the past. Maybe it’ll be a 5-year, not a 10-year cycle, because of how rapid the recovery has been so far. But we don’t think it’s done just yet, barring some sort of unanticipated shock.