Hello and welcome to our latest video #MacroMemo. As always, there's a lot to talk about, but the big news is that we have officially made a pivot in terms of our most likely economics scenario from hard landing to soft landing. So l’ll talk extensively about that.

I will spend a moment on an economic disconnect that's happening in other developed economies between their labor markets and their economic output.

I've rarely seen a larger disconnect, and we'll talk about what that is and what that means.

We'll spend a moment on inflation and we'll also talk about Canadian immigration, which has been quite remarkable for a while. But it's worth putting some numbers to that remarkable trend and trying to understand that a little bit better as well. So that's our plan.

Soft landing: Let's start with the big news, though, which is on this hard landing versus soft landing debate; hard landing meaning recession, soft landing more or less meaning avoiding recession. We have increased the odds of a soft landing from the last time we gave a number, from 40% to 60%. And so just to be clear, this is just the latest change.

We've made adjustments over the years. There's no guarantee this number stays here. There's no guarantee it continues to rise. But at the moment, this is our best assessment.

And I would say it's of outsized importance just because by increasing that soft landing odds beyond 50%, by putting it at 60%, it means that we are saying that a soft landing is the single most likely outcome.

And that's really the first time we've been able to say that about a soft landing in several years. It is incrementally more likely than a recession.

I do want to emphasize that a quarter ago, a soft landing was entirely possible. That was a possibility. It was just somewhat less likely. Today, a recession is still entirely possible. It's just less likely than a soft landing.

We think there's a 40% chance of a recession still. And I would just mention that 40% chances happen all the time. It isn't that far removed from a coin flip. So there are still two entirely viable scenarios at play. It's just that soft landing, we think, is now the more likely of the two.

In terms of why we think that, I would give a number of answers. One would just be that we continue to observe, in particular U.S. economic resilience. The economy just keeps growing, it keeps moving forward, it keeps exceeding expectations.

One example would be the ISM (Institute for Supply Management) Manufacturing Index, which was quite weak for a long time, which was seemingly trundling toward recession. It has in recent months stabilized, begun to revive, and the new orders component actually is looking quite strong indeed. So we're seeing some outright resilience. If anything, there's a small economic acceleration happening right now, not just in the U.S. but in a number of countries.

These things don't necessarily stick or persist indefinitely. But I should mention that we've been long of the view that the first half of 2024 was going to be a make-or-break time for the economy. And if you could make your way through it without succumbing to recession, the odds were going to be a whole lot better that a recession could be avoided altogether.

We're obviously not done with the first half of 2024, but we're just not seeing much signs of anything breaking just yet.

Other favorable factors? Well, you know, bond yields are a little less high than before. So that just helps the economy keep moving forward, maybe lets central banks cut rates a little bit.

A number of historically powerful recession signals have also been reversing.

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Maybe this is the other big point. So part of it is just, hey, the economy refuses to quit. Part of it is some things historically that predicted recessions, some of them now are un-predicting recession. Without getting too much into the details, I'll say, for instance, the senior loan officer survey in the U.S. and actually in a number of countries really showed a lot of tightening of lending standards.

And every time we've seen that amount of tightening, we've had a recession in short order. Not only did we not get a recession yet, at least, but we've seen those lending standards since ease significantly. And normally once you're into easing mode, that's actually a signal that you're recovering from a period of economic weakness. And so we've lost that recession signal.

When we look at the inclination to buy big-ticket durable goods in the U.S., that had fallen sharply. Most times when that falls sharply, you've got a recession.

It's since begun to revive. There wasn't a recession. It's now rebounding, as you often see at the start of a new cycle.

Profit margins, S&P 500 profit margins were falling, notably every time they'd fall like that, notably, you got a recession. We've seen them start to just creep their way a little bit higher.

Maybe it's premature to render a final judgment there, but an increase would suggest that the recession window was closed according to that measure.

We also have a Duncan leading indicator, really just a fancy reconfiguration of the components of gross domestic product (GDP) into things that are more forward-looking and those that are more backward-looking. And normally, when the Duncan indicator is falling, you get a recession. It was falling. We didn't seemingly get a recession. It's now not obviously falling any more. It's maybe even rising a little bit.

And so, again, none of this is definitive. There is still the chance of a hard landing. And I would mention, I guess on the flip side of the ledger, we still see inverted yield curves. We still have global trade in decline. Other things would still say a recession is entirely possible.

But I guess the point is a bunch of things that have either always or almost always been right about predicting recessions seemingly were wrong and are now reversing in a way that they're not giving that same signal anymore.

And so at a minimum, you have to say the odds of a soft landing have gone up. We happen to think they've gone up enough to inch past that 50:50 mark.

So that's essentially where we are. In terms of the consequences of a soft landing if we were to get one. Well, I mean, it is, of course, welcome from an economic standpoint.

Maybe that's the most important point.

It does make life harder for inflation, though. It makes it a little harder for inflation to come down. We think it can, still, but more slowly, more fitfully, over a longer period of time. That makes it harder for central bank. Central banks were thought likely to be cutting rates before too long. They maybe can't cut rates quite as soon or quite as profoundly.

That has very much been reflected in market expectations. It also does raise some big questions for 2025 and 2026 and beyond, just because here we are with low unemployment rates and the sort of thing that normally only exists at the peak of a cycle and normally doesn't last for more than a couple of years. And so it does start to raise some questions. How do we resolve this later?

Does there have to be a recession later or can we just take the air out of the balloon slowly and avoid that? It's not clear right now. I think that's a question for another day.

But I wouldn't say that avoiding recession necessarily means we're just on to a 10-year period of growth, as you might normally imagine, if you are beginning a new cycle.

So that's the soft-landing story. Again, I think that that's the most important message.

Economic disconnect: Some other interesting ones, though, include just this fascinating economic disconnect that's existing, I guess, in the rest of the developed world. It’s between GDP growth and the labor market. And it's not unique to but it’s particularly acute in the UK and Japan and Germany right now.

All three of those countries have just experienced two consecutive quarters of declining economic output. Some people call that a technical recession. I don't like that term because it's actually not a technical recession. A technical one requires labor markets and breadth and other things. I would call it maybe a rule of thumb recession or shorthand for recession, but it's bad for the economy.

The economies have been shrinking. What's so strange about it, though, is that we're not getting the other usual recession accompaniments. The stock market isn't panicking, businesses aren't doing aggressive layoffs and so on. In fact, you look at the unemployment rate and amazingly of those three countries I mentioned, in the UK and Japan both unemployment rates are a standard deviation below normal.

That is to say, it’s way lower than normal and improving.

If anything, in Germany there's a bit of a deterioration. I can say the unemployment rate is normal by the standards of the last decade, not especially low, but still it's only normal even though the economy's been shrinking. And so these are things that don't normally go with one another.

I guess mechanically you could explain it by saying that productivity is falling so you have more workers doing less work. It's not exactly a perfect setup, but that's mechanically how it's playing out. It's tempting to say these areas have had a recession. That was the recession. But again, they didn't have the full experience. It's just been a very strange situation.

And again, I don't think I have a neat and tidy, easy explanation or conclusion for you other than to say this has been so unconventional. It's really hard to make heads or tails of it. I'll just leave it at that, I think.

Let's move from there unsatisfactorily and we'll talk for a moment about inflation and we'll finish with immigration.

Inflation: On the inflation front, focusing at least for the moment on the U.S., we had a disappointment in the January numbers. Inflation and core inflation were both a little hotter than expected. Core inflation has been accelerating for a couple of months now. That's bad. It's creating some worries.

It's partially, we think, due to economic strength. So as the economy hangs on, you're just not getting the disinflationary forces that you otherwise would have gotten.

I should emphasize a couple of things which make us feel a little bit better. One is that two thirds of the inflation in January was shelter costs. And we know that the shelter numbers are intentionally lagged. We see rent inflation slowing. We think that there's some helping hands coming down the line there. So there's still room for some decline, we think.

Also we can see the PCE (Personal Consumption Expenditures) deflator. It's a competitor to the CPI (Consumer Price Index). It's actually preferred by the Fed. By some measures, it's been improving a little faster.

And so some measures are still looking fine. I guess the bottom line is inflation is getting a bit trickier. People have sort of assumed it was fixed and done and it's not quite fully fixed and done yet.

From a central bank perspective, the market has fully priced out a March rate cut at this point in time. That's not looking very likely at all. A May cut has not been fully priced out, but it's mostly priced out whereas people had that almost fully priced in not that long ago. Even the June and July decisions are in the realm of 50:50 or a little bit higher, I should say.

But nevertheless, not far from a 50:50 proposition. So it's as likely as not that we start getting rate cuts in the summer, but it's not quite a certainty, especially when inflation isn't cooperating.

I'll mention that Canadian inflation looked quite good recently for January. I'll mention that UK inflation looked quite good. There is a bit of a disconnect here and you can say again that the economies that are performing poorly from a GDP perspective and Canada is not quite in a two quarter decline mode, but it nevertheless has underperformed as well, they are seeing their inflation come down a little faster, as you would expect.

And so, the U.S. is exceptional in the inflation regard as well but just in a less attractive direction than the economic exceptionalism it has enjoyed recently. Okay.

Let me finish with some comments on Canadian immigration. Let's start just with the comment that Canada has recorded truly unprecedented immigration figures in recent years. Indeed, through the final quarter of 2023, just over the prior year, 1.2 million more people came to Canada.

That's a huge number that's in the realm of double the record that prevailed prior to the last year or two. You can see that reflected in some of the aggregate population stats. So not only is the population over 40 million, in fact it's actually at least 41, if not 42, if you do the math correctly at this point in time.

But 23% of the population are now immigrants, people who themselves came to live in Canada. And that's a modern-day record, by the way, applying back well over a century. You know, the prior high was a 22% share in the 1910s, 20s and 30s. And so Canada is now more immigrant-heavy now than it was even over a century ago, which is remarkable.

We see six main reasons why the immigration has been so strong recently. The first is just that the permanent resident target has been set at a big number: half a million people per year. It used to be a fair chunk lower than that.

Another is that international students have surged in the last decade and especially in the last year or two.

And numbers vary. Here we have between 800,000 and a million international students in total in Canada right now and rising. So the rising part would be the extra population each year, including in the last year.

The third factor would be temporary foreign workers. And so that has also surged. And so there are now about 800,000 temporary foreign workers in Canada.

That's up 300,000 just from the year before and up 600,000 from 2015, so the great bulk of the temporary foreign worker program has grown recently. I should say some people are leaving and some are returning. This is the net change across all of that.

Those are the big forces. You can see maybe there's two smaller drivers of that population growth.

One would be there's also been a jump in refugee claimants. So 150,000 in the latest year. That's several times higher than the old norm, though it's pretty small potatoes compared to the other forces.

And then – and this one's a bit blurrier and not well understood – but there are something like 750,000 to 1 million expired visas, people on expired visas who have been told to leave but have not left.

And so ultimately, I suppose illegal residents. And so that seems to be growing, though that's not quite understood as well. But that might be part of the story.

So looking ahead, where do we go from here? And it's sort of hard to say it.

So to begin with, attitudes are changing. Polls are showing Canadians are less keen on immigration after this big surge.

It wouldn't be a shock if the target for permanent immigration came down a little bit. It's currently targeted at half a million. It might fall a little bit, it might not. But that's where the risk lies.

We have seen a major change to the international student rules that cap the number at about 35% lower than the current rate.

So we should see some reversal even over the next few years, though it takes time to work that through. Existing students, of course, will be here for a number of years and many are converted to permanent residence at the end.

We haven't seen much yet on the temporary foreign worker program. I wouldn't be surprised if there was some tightening there as well.

I think the takeaway is 2023 was probably the high watermark. 2024 probably will be a pretty big year for immigration as well. After that, it should decelerate.

I wouldn't say it'll be slow by any means. There might even be some negatives in terms of the students and the temporary foreign workers in a way that could actually make net immigration maybe even below that permanent target of 500,000 per year.

Even with that, though, there's still a lot of absorption yet to be done, especially from a housing market perspective, catching up housing supply to the additional demand. There's been some damage to productivity given the fast population growth. It’s going to take some time to fix that as well. But we probably passed the point of peak population growth as much as it likely keeps growing from here.

Okay, I'll stop there. Hopefully you found that interesting and useful. I wish you well with your investing and please consider tuning in again next time. Thank you.