Eric Lascelles - Managing Director, Chief Economist and Head of Investment Strategy Research

Hello and welcome to our latest video #MacroMemo. I'm happy to share with you our latest thinking on a variety of economic subjects. Indeed, the plan here is to talk about this tentative U.S.-Iran peace deal. We'll talk about a lot of U.S. content here, a lot about U.S. economic resilience. We'll talk about how productivity growth is picking up and the extent to which that is or isn't AI-driven.

We'll take a look at the consumer, which has been a little bit neglected recently as everyone gets so excited about capital expenditures (CapEx).

We'll also say, is it a recession or not, for both the eurozone and for Canada? I'll give away the ending. We think not, but nevertheless it’s worth working through some recent weakness that we've seen.

Let's start on Iran. And so again, there is a tentative deal. At least, as I'm recording these words, it looks likely that deal will be signed in the form of a memorandum of understanding in the next few days. This has been confirmed by the U.S., by Iran and by the intermediaries who have helped to arrange the negotiations.

The expectation is the Strait of Hormuz opens thereafter. That's, of course, a big deal and quite important to the extent that's been the real pinch on the global supply of energy. As for Iran's nuclear material, there’s still some debate here, but the expectation is their nuclear aspirations are greatly set back. And the existing refined materials are either diluted or given away.

Iran is expected to receive waivers to increase its oil production and exports, perhaps even beyond the sort of levels that existed before this war. Sanctions on Iran are expected to be significantly lifted. This is the big carrot for Iran to accept all of these other things. It could be that its economy is less constricted coming out of this than it was going in.

And of course, fighting is expected to halt, and the existing Iranian regime seemingly endures – although, of course, the initial U.S. motivation was in part on the basis of a popular uprising. But it doesn't seem that the government has actually changed, in the end. And so, this all seems credible and we are optimistic. We think a deal can be struck.

We are hopeful that it holds. I will warn, it's not quite 100% certainty, in part just because there have been, believe it or not, 40 prior such announcements of an imminent deal. And most of those, of course, did not work out – though again, this one does have some confirmation behind it. Do note that even if this deal is signed, there are then 60 days after that in which to negotiate certain details.

So some details are missing, which means that there is scope for later disagreement. And then also a question on the Israel front in terms of does Israel stop fighting with Hezbollah in Lebanon? That's meant to happen. Perhaps it doesn't. And so is that a showstopper? And it's just not clear right now. We think ultimately, though, a deal can hold.

In terms of implications, well, we're seeing this in real time in markets. And so the price of oil, of course, is down. We're seeing oil prices actually $80 or below now, which is the lowest price since the first week of the war. Bond yields are also incrementally lower, which makes sense, unwinding some of the inflation fears associated with what might otherwise have been a longer energy shock.

And then, of course, stock markets are surging. That's interesting because of course, stock markets have been so strong, one was tempted to argue they were just ignoring the war altogether. Turns out they weren't ignoring it. They were just enthusiastic about AI and some other positive themes. And there was still room for more increases as the risks around this war diminished.

I guess we would say to the extent this deal does get finalized and then does hold, and the Strait of Hormuz does reopen, you would think there's room for more travel for markets in the direction that they've been going over the last couple of days since this was announced.

From an economic standpoint, certainly good news for growth, certainly good news in terms of lower inflation for inflation.

I will say, though, at this point, we don't think we need to change our growth forecasts or our inflation forecasts. We've been assuming this would be a temporary shock. And so this is running broadly consistent with those assumptions. If this war had instead continued for another month or two, we would have had to revise down our growth forecasts and revise up our inflation forecasts.

Okay, new topic, a couple of U.S. ones in a row here. So one would just be U.S. economic resilience, maybe economic strength is the better word because it is really quite remarkable. We keep getting good U.S. economic data despite the energy shock. And so the Citibank Data Change Index for the U.S. is quite positive and rising, just to summarize the whole thing.

Monthly job numbers keep exceeding expectations and indeed have looked quite good overall. The ISM (Institute for Supply Management) manufacturing, the ISM services indices have been moving higher. The manufacturing index is now the best it's been in several years.

Obviously, CapEx is quite strong. That's well appreciated. With a hyperscaler or AI kind of twist to it, with the AI tailwinds, certainly.

And, you know, really to summarize, as we look at what Q2 GDP might look like as we get, towards the end of the second quarter, the Atlanta Fed's Nowcast, which is probably the best thing for tracking this, is currently tracking more than 3% annualized real GDP growth for the second quarter, which is quite good.

So, U.S. economy is doing very well would be the main point. In fact, to the extent that people are nervous about Fed rate hikes that prospect maybe diminishes a little bit now that this war has seemingly been resolved. But it is still certainly the case that growth is strong. And so that doesn't argue for rate cuts, at a bare minimum.

Okay. Let's talk about productivity growth. And we'll talk about it in a U.S. context because it is moving most excitingly there, and the AI effects are most visible. But I do want to flag, perhaps unsurprisingly, given all of the economic strength, but productivity growth is running quickly right now. It's up 3% year-over-year through the first quarter in the U.S.

And for context – and this is admittedly setting aside brief bounces after recessions and some funny business during the pandemic – in terms of normal economic times, this is the fastest we've seen in two decades – again, other than bouncing out of recessions and things. And so we think this is a new normal, or at least a new regime, a high productivity growth period of time.

The U.S. went through this and very much enjoyed it from the mid-1990s through the early 2000s. That was significantly the computer and the start of the internet boom as a productivity driver. To the extent we're getting a period of faster productivity growth now, this could be, perhaps, the AI boom. One question is, is this all AI?

It would be very early if ‘yes.’ Often it takes surprisingly long for a technology to give a benefit. Often there's even a J-curve effect where your productivity does worse for a little bit as you're retraining your workers and reconfiguring your capital and processes and things. And so certainly it’s early if this is already AI, but we actually think that it may be.

And so the Federal Reserve Bank of Saint Louis has calculated that about two thirds of the faster-than-normal part of the productivity growth in recent years is due to AI. So not all, but significantly. We've done work looking at sectors and we find the sectors that are investing most heavily in AI also are managing the fastest or faster-than-normal productivity growth for their own norms.

And so we think a fair bit of this is AI. We think there's more of this to come. We've already upgraded our productivity assumptions to some extent. And indeed, that's part of why we have above-consensus growth forecasts for the most part. And I should say, as much as this is a U.S. conversation and the hyperscalers are largely U.S. businesses, this is relevant internationally.

The adoption part of AI is something that can happen right around the world, maybe with something of a lag. But we are, if to a lesser extent, revising upwards our productivity assumptions for a range of markets, which we think is pretty important. And again, we are ultimately macro-optimists right now, for this reason in significant part.

Let's talk about the U.S. consumer now. Maybe as a starting point, it's not in focus because capital expenditures have been the main economic theme. And so we are seeing extraordinary CapEx growth. And it's absolutely outgrowing, on a percentage basis, consumer spending growth. We don't want to lose sight of the consumer, though. And so the consumer is still about 70% of expenditure-based GDP.

It is such a large fraction. It's actually still the bigger driver of overall economic growth. We're taking it for granted right now, but it is still the bigger numerical driver of growth than all of that CapEx. And so it's important to know how the consumer is doing. And there are some concerns. Concerns would be:

High energy costs of course, bad for households

Low immigration, not necessarily bad for individual households, but just capping the number of households, the increase in those households, which is the driver of top-line consumer spending growth.

And so how are they doing? In practice, actually not badly. Maybe not a surprise given those good GDP numbers. But, you know, real consumer spending growth is looking not exciting, but okay and pretty steady.

Pretty normal would be the way to put it. I would say that's not bad given some of those challenges I just mentioned. We tried to sort out and ask why is it proving so resilient? And we came up with a few answers. One would be, well, just mechanically there is a falling savings rate right now.

Households are opting to grow their spending faster than they grow their income. You can't do that forever. We would say we're reasonably comfortable with where the absolute savings rate is right now. And we're cognizant that, of course, a rising stock market is creating wealth and means you don't need to save quite as much. So we think part of it is that and that's okay.

Part of it is the tax cut. So obviously that's driving growth. The benefits of tax cuts are outweighing so far the cost of higher gas prices. And so that's a big one.

The stock market wealth effect, which I sort of worked my way backwards into a moment ago. Stocks have gone up a lot. The average American household has twice as much stock market value as they did just seven years ago.

And so rising stocks help a lot, make people richer, make them less inclined to save, make them more inclined to spend as well. And as much as we're dealing with an energy shock that hopefully is now ending, but we have been dealing with one.  It hurts less (compared to earlier energy shocks). The energy intensity has gone down. The average household, the average unit of GDP, is less exposed to the price of oil than it was certainly 50 years ago, but also even 10 or 20 years ago.

And so what we see is a consumer that's holding together better than imagined. We’re not seeing that much distress. We can see delinquency rates that at least through the first quarter – and I know that the oil shock was mostly a second quarter thing – but at least through the first quarter, we can see actually declining household delinquency rates.

Okay. Two quick ones for me to conclude here. And so this is the ‘Is it a recession or not?’ part of the, the video. So let's start with the eurozone. Eurozone GDP did fall slightly in the first quarter of 2026. The tongues wagging naturally. Is that a recession? We would say we don't think so. First of all, it's the first decline in 10 quarters, which for Europe is pretty good.

They've gone through periods of stagnation before. The reason really centrally, though, that it’s not even on our radar screen for a recession is that the decline was entirely due to Irish GDP collapsing. That's not great for Ireland. But actually, it's not as bad for Ireland as you think, because Ireland is a hub for multinational corporations, and there's a lot of accounting maneuvers and things like that that happen in a way that really swings Irish GDP and makes it almost unintelligible.

In fact, they tend to look at GNP more than GDP just to get around some of those headaches. And so Irish GDP went down a lot. But Ireland isn't suffering that much. The big economies in Europe are actually growing. Germany, Italy and Spain were all up nicely. France was down a hair. But the point being, overall, we don't think this is a recession.

Now, Q2 could be challenging given the energy shock, and we know that hits Europe harder than some. But we are seeing some leading indicators starting to recover in the subsequent part of that quarter. And so our conclusion is there's not a big recession problem for Europe.

Same question for Canada, in fact, maybe even more intense.

Canada has actually now had two quarters of declining GDP – or I guess falling output is the word – in a row. And so Q4 of last year, Q1 of this year, certainly reflects a subdued period for the economy. There's no getting around that. We would quibble, though, with the recession claim. First of all, the most recent quarter was the tiniest decline possible.

It's being called -0.1% annualized; unannualized is down 0.03%, which is pretty trivial.

There are three ways, actually, of measuring GDP. You don't hear about two of them that often. Two thirds of the metrics actually were up. The one being reported was the one that was down. GDP per capita was rising. Now, that's not officially a criteria for is it a recession or not.

But I'll just say in any recession I've ever seen, GDP per capita is collapsing, meaning the average person is spending less, the average person is earning less. It's trouble. In this case, GDP per capita was rising. The average person is spending more. The average person is earning more. It's just the population shrinking which limits overall economic growth.

Most industries, not all, but most industries were still growing over the quarters in question. Unemployment rate has been declining in recent quarters. Consumer spending grew in each of the two quarters. That is not what you expect to see. Consumer spending is pretty high beta, tends to fall. Looks like the economy had a good handoff and can grow in the second quarter of this year.

And so again, I'd say it's a subdued period for the economy. And I would stop short of calling it a recession. I don't see it as being significant trouble for the economy. We still look for roughly on potential growth for 2026. We think that there's room for actually some pretty decent growth in Canada. All right. I'll stop there.

Thanks so much for your time. As always. I wish you well with your investing. And please tune in again next time.