Hello and welcome. My name is Eric Lascelles. I'm the Chief Economist for RBC Global Asset Management and very happy to share with you our latest monthly Economic Webcast. It's called Soft Landing Narrative Still Intact. The point of that is to say that we are still getting pretty good economic data. It still looks more than plausible, likely, in fact, that the economy can continue to grow in 2024.

We have flagged and do continue to flag that there are other risks and the risk of recession is not at all trivial right now. Nevertheless, we're getting more good economic news than bad news. And of course, that's quite welcome.

All right, let's jump right in. We'll start with the report card that we always start with. And we'll take a look at some of the good things, bad things and interesting things going on in the economy right now.

Report card: We'll start on the positive side of the ledger. Again, really just to reiterate the title of this presentation, the soft-landing story does continue to play out. We're still getting more evidence supporting that soft landing, meaning the economy keeps growing and doesn't descend into a hard landing. And so that's certainly quite good. Among the factors supporting that idea, the U.S. Beige Book has rebounded recently.  I'll speak at more length about that in a moment.

But that was something that had been weak, had been making us nervous, and it's making us somewhat less nervous now. It's still the case that some of the recession signals we had been tracking over the last couple of years, few of them have reversed happily. So that's supporting a more optimistic economic interpretation as well.

Turning elsewhere, looking at China, where we'll spend some time in this presentation.

Chinese productivity growth, is it slower than it was a decade ago? It most certainly is. It's still pretty good, though. And so for all of China's problems, there is still this underlying engine of rising productivity, and that's where prosperity comes from. And so I think you have to conclude that China is still growing in an important and probably a sustainable way, despite a variety of other challenges, one of which I'm going to get to in just a moment.

Lastly, and certainly relevant to all the investors out there, risk assets are very happy. ‘Risk assets’ is a blanket term that refers to the stock market and credit and other maybe historically more volatile investments. And for the most part, these are very pleased. The stock market has gone up quite a lot over the last 4 to 6 months.

There are a few things that you can take from that. One is just it's nice when that happens for investors. Another would be that risk assets tend to be pretty attuned to the economy and to the economic outlook. And so if they're feeling good, that is a pretty good endorsement, that the economy is fine and is expected to be fine.

Of course, one of the challenges is that we do our economic analysis with an eye to predicting financial markets. So you can't quite entirely rely on those same markets to predict your economic forecast. Obviously, we do need to stand on our own two feet as well. Nevertheless, the point here is that financial markets feel pretty good as well. They feel optimistic.

On the negative side, there are some negatives. I don't know that I would say there are quite as many or as profound negatives as positives. But I can say that there is still a recession risk. We've been talking about a 60% chance of a soft landing, a 40% chance of recession. That's not a trivial number in my mind.

Perhaps the risk of recession is starting to trend even a little bit lower than that, but we haven't formalized that in a new number yet. Interest rates are still pretty high. Let's keep that in mind. That was and is still the central headwind against economic growth. The inflation trend has improved, of course, enormously, from eight, nine, 10% inflation to roughly 3% inflation.

It is moving a lot more slowly now. And so we're seeing that it's a more challenging path from 3% to eventually, one hopes, two-and-a-half percent. And I would say an uncertain path from something like two-and-a-half percent all the way down to central bank targets of two percent. And so that's making life a little bit more complicated, which isn't ideal.

It's also resulting in central banks having to be a little bit more cautious. And so are central banks likely to cut rates this year? Probably. This summer is a reasonable guess for a starting point. But the economy is holding up. And if inflation is only grudgingly, reluctantly coming down by very small amounts, we may not see that much rate cutting this year.

And so do be alert to that. We certainly do still think a neutral interest rate is a fair chunk lower than right now. So there's room for easing over time, but it might start fairly slowly.

And then I mentioned that China, hey, that productivity isn't too bad, albeit slower than before. Chinese housing, though, is still quite concerning.

I'll speak to at least one way that's true in a moment.

Then lastly, on the interesting side of the ledger, well, let's talk about central banks for a moment here. We are waiting with bated breath for the Fed and the Bank of Canada and European Central banks and others to start cutting rates. And so that's probably the main story.

But in the meantime, we can say that some other central banks have been doing some interesting, perhaps important things. The Bank of Japan in Japan, of course, has just raised rates for the first time in 17 years. It is marching to its own drummer. And it is, I would say, if anything, a lagging indicator as its inflation rose later.

As a result, interest rates are rising later there. And so perhaps not a guide for the rest of the world. But Japan matters in its own right, and this is an awfully interesting development after nearly two decades of flat and even negative interest rates.

Conversely, on the absolute diametric opposite side of things, is the Swiss National Bank, which maybe isn't one of the major, major central banks, but it's pretty close.

It just cut rates. Bank of Japan was raising, the Swiss National Bank was cutting. And so that rate cut came as a bit of a surprise. Let it be known that Switzerland is in a bit of a different economic situation. A lot of countries are struggling to get inflation below 3%. Switzerland already has 1.2% inflation. Switzerland's a small economy within Europe.

It's very trade-oriented, very currency-sensitive. Its currency was strong. This helps in theory to offset that. So I wouldn't say that this says that everyone else should be cutting rates tomorrow. But I think it is another little bit of evidence that argues that we can get some rate cuts coming down the pipe.

And then the other comment here is just on the tech boom.

We're still optimists. We still like all the technologies afoot. We think we will see faster productivity growth over time. It takes time, though, to get there. What's been interesting, though, is we’re actually not seeing that much evidence of the capital expenditure and research and development boom that you would normally expect to lead that off. So it's just a waiting game, but I'll show you a few charts to that effect.

Okay. So that was me giving you really the overview, also giving you a bit of a table of contents for where we plan to go. And so let's just jump forward and look in graphical form at some of those things again.

Soft landing still on track: To start with again, the soft-landing story is still holding together fairly well. We're seeing pretty good signs of economic growth.

And so this is the Beige Book. If you don't know the Beige Book, it's put together by the U.S. Federal Reserve. It's a qualitative survey. So they ask businesses, how are you feeling? The businesses say good or not good, and there are no numbers that come out of it. But we've done our best to quantify it. We've converted ‘good’ into the number two and ‘bad’ into minus two and sort of added these things up and we've ended up with this. And so we can say that indeed the Beige Book was signaling quite a bit of caution in recent quarters.

It was making us nervous. There were in fact more regions of the U.S. where business sectors were signaling the economy was flat to shrinking, then flat to growing, and that was making us quite nervous. You can see the latest Beige Book now shows a pretty handsome-looking rebound. This is more obviously now an economy that is indeed growing, even as per this particularly reluctant indicator.

High frequency economic data still looks good: Looking at other economic indicators, we certainly like to look at high frequency metrics. There didn't used to be a lot of those going back a number of years, but the pandemic, for various reasons, surfaced and created and encouraged the creation of quite a range of these. And so this is a weekly economic index for the U.S. It's maintained by the New York Fed (Federal Reserve).

You can see we are still seeing signs of economic growth. It is still more often than not trending a little bit higher. But really the big point is just one in which it is still sitting comfortably above zero. And so no signs of a sudden collapse according to the high-frequency data.

Labour market mostly holding together: Similarly, looking at labor markets, this does get a bit nuanced and I'm going to speak to the nuance in the next slide.

But first, I can say when we look at the highest frequency measure of the labor market, which is weekly jobless claims, you can see weekly jobless claims are pretty flat. You may not get a great sense for this because there's not a huge amount of history in this. But this is a pretty low level, too. This is not a high level of jobless claims.

Not a lot of people are falling onto unemployment right now. And we've had a few, I would say false readings. We got nervous a few times over the past few years. You can see when jobless claims started to tick higher. Historically, that's a predictor of recession. But each of those times it reversed. And right now we're not even getting that.

We are seeing ultimately a flat level of jobless claims. And so life is fine on that front. Now, I will say that when we pay close attention to the labor market, we do see little bits of evidence of distress or of struggling.

Mass layoffs are somewhat higher than normal: For instance, here you can see that the number of mass layoff announcements in the U.S., it is higher than normal.

In fact, it's even ticked up recently, though I would say the broader story is one in which that gold line has been just a little bit elevated for the better part of the last year plus. It's not clear to me we're entering uncharted territory here so much as it actually has been a time of higher-than-normal churn in the labor market.

But at the end of the day, we still see overall jobless claims, overall unemployment claims, low. We still see a pretty good level of hiring. We get a little bit nervous that temporary employment's been falling. Historically, that has signaled trouble, but it's been falling for so long, it's no longer really in the right time frame for signaling that trouble.

So that's an uncertain interpretation. And just more generally, ultimately, the labor market seems to be fine even as the unemployment rate is edging a little bit higher. So still holding together fairly well there.

News sentiment is soaring: And then this one, this is a funny one. We don't always talk this out, but I think it is worth looking at just because it's moved so profoundly.

We're doing a real tour of the regional Federal Reserve District offices right now. So the San Francisco Fed maintains a nationwide daily economic news sentiment index. And you can see that economic news was pretty grim in 2023 and particularly in the first half of 2023. And then it became a bit less grim over the second half of the year.

And it's actually become positively ebullient recently. We are seeing a lot of really favorable economic news and sometimes it's a virtuous circle and it builds on itself . You get one good piece of data, people get excited, the stock market goes up and off you go – maybe on the basis of a fairly limited information. But still we found this to be fairly useful.

And when new sentiment has been negative, it has been a bad time for markets. And when it's been positive, it's been a good time for markets. And so let the record show that it is genuinely positive right now. Nothing suggesting we're about to see a sudden turn lower in the economy. So again, just further to the soft-landing story. Just a quick nod now in a Canadian direction.

Canadian economic signals also look pretty decent: I can say that one of the metrics we look at in Canada, one of the high frequency ones that's quite useful is a business conditions index maintained by Stats Canada. Now I should say this is meant to rise over time. Rising doesn't mean amazing things are happening. It just means normal things are happening.

Nevertheless, you can see actually that not only is this rising over time, including in recent months, but it has actually spiked quite impressively higher recently.

Now it's pretty famously volatile. I don't know if that latest spike sticks or it unwinds as some of the prior ones have. But you can't say we're seeing all that much distress in Canada either. Indeed, Canada's most recent month of job creation looked pretty good. It was about 40,000 jobs and it was all full time and so on.

So it would appear the Canadian economy is holding together as well, even though there's clearly some distress from higher rates.

Now, when we look around the world, the U.S. has been truly the exceptional economy. It's the one that's just completely continued to sail along. Canada hasn't broadly done as well, though it has dodged consistent economic contraction.

We can’t actually say that when we're talking about the UK and Germany and indeed Japan as well at times.

Many economies are weak, but not actually suffering: And so here's the UK in front of you. The idea here is high is good, low is bad, and we've included two things. We've included the economy. Those are the dark blue bars. We've also included the labor market. That's the light blue line. And so I guess there's two takeaways here, maybe three. The first one is just that the British economy and the German and the Japanese economies have all been significantly weak recently.

You can see the UK has just recorded two consecutive quarters of declining GDP. Some people would call that a technical recession. I'm going to say I don't think it's a proper recession just because the labor market has stayed quite strong throughout. That light blue line is high. It means unemployment is low, it means that we're still seeing hiring and so on.

There's this very unusual disconnect in which the economy has shrunk, but no one's feeling all that much pain. And that's a very similar story in Germany and Japan as well.

So you can say that economies are weak and they really haven't been growing. And yet equally, it would be quite a stretch to call it a proper recession.

It's hard to say that a small decline in output is a recession unless you're seeing real pain in the labor market, unless you're seeing markets recoil and these sorts of things. And we're actually not getting that. So the bottom line here is that other countries have certainly underperformed the U.S. and have not had the happiest of experiences over the last year.

But we'd stopped short of calling that a recession as well, given what the labor market has been up to, which is just that it has stayed just fine.

Inflation picked up in recent months: Okay, let's pivot over to inflation just for a moment. A couple of things here. The gold line is monthly CPI (Consumer Price Index).  Again in the U.S., this is still very much rhyming with other countries.

The month-over-month change has been actually fairly robust over the last couple of months. So we are back to a world in which inflation is moving a little bit hotter than we would like. And as I mentioned earlier, though you can't see it here because this is just monthly data, the annual inflation metric is still in the realm of about 3% per year, which is too fast.

You can see the blue line, this is actually a real-time inflation estimate. And so it says, yes, indeed, inflation is running a bit hotter recently. And it says that when the March data comes out – I'm recording this at the very, very, very end of March and we don't have the March inflation data until mid-April – so we don't have that yet.

The real-time metric, though, is giving us a hint that the March numbers are probably going to be a little bit challenging as well. And so this is further to the idea that it's going to take some time before inflation can fully settle if we don't get a recession. Recessions aren't great in and of themselves, but they do a pretty nice job of resetting the pricing power of companies.

They can pull wages down and do things in a way that does help to tame inflation. If we're not going to get that, it's a harder journey down as it pertains to inflation.

Inflation is still in a tricky place: Indeed, when you look at what the market is saying and what other indicators are saying, you're seeing as an example that business pricing power . . .

Well, it was incredibly strong there for a moment, wasn't it? And that helped to explain why inflation was running so high. Plans to increase prices were right off the charts in 2021, 2022. You can see we’ve had quite an impressive retreat. However, there's been a bit of a revival, and I should say, then a little bit of a retreat.

So it depends what frequency you care to look at.

To me the story is, well, companies were planning on raising prices a lot, and they did. They really railed that and pulled that back in quite significantly. And now, you know, we saw a bit of a drift back higher in a way that suggests, again, it's trickier to tame this inflation.

So we do think inflation can come down from 3%. We do think we can get to the two-and-a-half percent kind of range over the next year based on some other things that we're seeing. But it's hard to say how easily we can move beyond, say, two-and-a-half percent inflation. And these are good problems to have in the sense that at least it's not a 9% inflation rate.

That was a truly profound problem. But still, you know, we don't want to get stuck at a higher level. It would necessitate higher interest rates. It would be corrosive to the standard of living and it just would be undesirable in a more general sense.

Inflation expectations believe inflation could get stuck in the 2.5-3.0% range: I can say just looking at inflation expectations and to give you a flavor for this, this chart takes a little bit of work to disentangle.

So it's a number of different inflation expectation metrics and some are from the market: what financial markets think in dark blue, what consumers think in light blue, what businesses think in gold. It's a little bit of an apples versus oranges situation in terms of the consumer business metrics or rather the business metric is over the next year and the other two over the next five years.

So it's a little bit of apples and oranges. But historically, consumers have always thought inflation was going to be higher. There are just some biases that exist.

To me, the useful thing is to say, where are the inflation expectations today versus where they have been normally, say, over the last 10 or 20 years and then what's the gap?

What is the gap there? And the gap there is these expectations are looking for inflation that's about half a percentage point to a percentage point higher than normal. And so you map that on to normal inflation of 2%. They're saying, you know, they're looking for two-and-a-half to 3% inflation. That's where they think we get stuck.

We're maybe a little bit more optimistic than that. We'd say we think we can get down to the low end of that range anyhow. And it's an open question how easily we can progress beyond that. But nevertheless, it's a lot harder to continue improving inflation from here. And we think that's a big part of the reason why central banks probably have to proceed pretty gingerly.

Rate cuts, yes, but not a lot of rate cuts and not necessarily instantaneously.

Soft landing and stubborn inflation argue for only gradual rate cuts, but historical easing cycles have been fast: Now we’re aware this is me now contradicting myself, but just looking historically at rate cutting cycles, again, using the U.S. as our bellwether, this is historically how the policy rate has evolved. So the zero was the peak policy rate where you started and then the numbers indicate the number of percentage points of rate cuts that happened over various periods of time during various cycles, as you can see at the bottom.

Again, lots of variation, no two cycles looked exactly the same. But as a loose generalization, you can say normally when central banks start cutting rates, when the Fed starts cutting rates, you see a couple hundred basis points, a couple percentage points of rate cuts over the first year, and that might be a little bit challenging this time.

We may not get quite that far, just given that normally when central banks are starting to cut rates, you're falling into a recession. There is an urgency. Inflation is not a problem at that juncture. Maybe they're worried about deflation at that juncture and that just isn't really the set up this time.

So we're going to say this this easing cycle could be more leisurely than historical easing cycles, but it's worth keeping in mind how history has played out, because often events do rhyme with history.

Okay. A couple other maybe more idiosyncratic subjects to cover off here.

Canadian productivity woes got even worse: So one just would be Canadian productivity. I think it is well appreciated that it's been a source of real weakness in recent years. Indeed, as that gold line shows, we've actually seen an outright decline in GDP (gross domestic product) per capita over the last year or so. And so that's most unusual.

Normally, prosperity is rising over time outside of recessions. Nevertheless, we have seen an outright decline. And indeed, this is now the lowest level of prosperity. Or rather you could say the same level of prosperity as was achieved eight years ago, which is not exactly a great place to be. You would certainly hope for rising prosperity over that period of time.

Indeed, this is the worst eight-year period outside of brief recession kind of moments. And so not great.

In terms of why this is happening. While some is related to all of that immigration that recently took place coming into the workforce. But that's not the full eight years. That might explain the last year or two. Some is we think some post-pandemic hangover type effects that are probably temporary.

But really, you know, this has been a problem for a while. Even when productivity was rising, it was rising fairly slowly. It was lagging quite badly behind the U.S. and even behind some other markets. And so Canada doesn't do enough CapEx, Canada doesn't do enough research and development. The business environment simply doesn't seem to be that conducive to the sorts of productivity gains we'd like to see.

And it's a real problem because you can say, well, overall GDP is rising, but it's really only rising because the population is growing. The average Canadian isn't getting any richer. And so certainly this needs to be a policy priority and it really just hasn't been in recent years. And so hopefully we see some pivot there. But it's a slow process.

It's not something that turns instantaneously.

Excitement about artificial intelligence swells: Okay, let's pivot over to artificial intelligence technology, that sort of thing. Just a couple of quick words here, which is it is an exciting time. I've said before, we are optimists as it pertains to generative AI. We think this could be a general-purpose technology, the sort of thing that does advance prosperity and indeed productivity on a global basis over a sustained period of time.

And so that's exciting. This actually is a Google Trends search of the extent to which are people looking for the term artificial intelligence on the internet. And so you can see something really did happen over the last few years and people are much more attuned to that and perhaps even using some of the available AI software.

But they're aware of this as a trend. And of course, the stock market has embraced this most enthusiastically. So it is a real phenomenon, I think, that needs to be said. And of course we're all aware that Nvidia's profits have soared. They make computer chips and so on. So some companies are very much making hay as the sun shines on this front.

I will say, though, that when you actually dig in, we're of the view that – and indeed I can say the evidence shows that – you don't get the productivity growth immediately. It comes after a few years of investment and research and just the adoption of new technologies. So that probably comes later, the extra productivity growth we're all salivating over. In the meantime that we should be seeing more R&D (research and development) and more capital expenditures.

And we're actually not obviously seeing that yet.

But research and development isn’t surging yet: So let me just maybe reset things and say here is U.S. research and development as a share of GDP in blue. It has risen beautifully in recent decades. And so there's a whole lot more research and development happening today than there was 20 years ago. That's amazing. This is really great.

But the question is, what about over the last couple of years when this latest AI boom has happened? Curiously, we actually haven't seen a big jump. It's gone up, up until the last year, but it wasn't going up especially quickly compared to the prior two decades. It's actually come down over the last year or so. I do want to flag that there are some tax reasons why that might be happening.

There was an accelerated depreciation credit available for R&D that expired not too long ago, and so that likely helps to explain this. That might be reintroduced, so we could yet see better times ahead. But the fact remains, we have not seen more R&D as this boom has happened. We're actually seeing a bit less. So that's curious. We're not getting that economic effect we look for.

We think we're going to get it. We're just not getting it yet.

Capital expenditures on computers have fallen recently: Similar story here. Instead of research, this is just capital investment. You can see actually investment in software is still rising, but it's not rising really any faster than it was prior to the last few years. You would have thought that a lot of the investment would be on the computer side, you know, computers and peripheral equipment.

And you can see that as much as that's gone up nicely over the last few decades, it's actually come down over the last year or two. And so we're a little bit perplexed by this, to be honest. I suppose a little bit of that is that there was a lot of buying of laptops for employees and so on during the pandemic.

So perhaps we're just back down to a somewhat tamer trend. But nevertheless, we're not getting the obvious R&D and CapEx boom that AI promised. We think we are going to get more over time, but it seems to be a bit slower in coming. So we need to be patient on that front.

Okay. I'm going to finish with two China charts.

Chinese productivity growth is declining, but still good: The first one is, well, not great news, but okay news. So this is the productivity chart. I would look at the gold dotted line as sort of a trend measure because this can be a choppy thing. But nevertheless, GDP per capita is a proxy for productivity. Certainly China's recorded amazing growth. And there have been times Chinese productivity growth was 14% a year, which was amazing, albeit 15 plus years ago.

At this point in time, Chinese productivity growth has been slowing for quite a while, so that's not great. But you know what? Even with all that slowing, it's still running at about 5% per year right now which, compared to the nothing in Canada, compared to maybe a trend rate of one or one and a half percent in a lot of developed countries, that's great.

You lose sight of that because the overall Chinese economy isn't growing as quickly as that, because its population is shrinking. But from the perspective of the average individual, they are still on average getting materially richer each year. And we think Chinese productivity growth continues to slow from here, to be sure.

Nevertheless, you know, there is still room for China to be a driver of global growth, for China to become wealthier – even in the context of housing market challenges, which I get to next, even in the context of trade wars and all those other things as well.

China is still advancing and even a little bit better than you think, if you can set aside the shrinking population.

China’s housing market remains problematic: I'll finish with this. This is kind of a neat chart, neat looking at even beyond the Chinese context, really. It’s housing affordability internationally, it's a pretty simple metric. It's just home price to income. So it's not factoring in mortgage rates and other ultimately relevant considerations as to who can afford what.

But it's a neat and tidy way of looking across countries. And you can see China and Hong Kong are far and away the least affordable housing markets. The average home price is, you know, 30 plus times the average annual income, which is a pretty wild number. You sort of try and make that math work in terms of could the average person afford that?

And, you know, if the average working career is only 40 years, you put 75% of your money into this pretax. And, it's not exactly obviously a sustainable proposition. So you worry about the sustainability of that. Indeed, I suspect it's not sustainable. And we are seeing Chinese home prices now fall and of course, Chinese incomes are rising.

That's the other secret sauce towards sustaining something like this, which is the average person who buys a house will have a higher income in five or ten years, and that helps to solve some of the problem. But it's still awfully challenging valuations and it has gotten worse over the last decade. And so it's just part of the story where we're skeptical that the Chinese housing market can hold on like this.

There probably is still a period of weakness and indeed, home sales are down. And as I said, home prices are down and builders in some cases are technically insolvent. So it's quite a challenge given this was a central driver of Chinese economic growth. We are certainly much more cautious and conservative on our Chinese growth forecasts than we once were.

We're looking for a trend growth rate of 3 or 4% a year, which we think they can pull off even with these housing challenges. But this really does make the point that there is still some correction needed in the Chinese housing market before you can say that it's ready to be a source of growth again.

Okay. So I'm going to stop there.

Hopefully you found that interesting. The big message again, is just that the soft-landing story still seems to be intact. Certainly other interesting things are going on at the margins as well.

If you find this sort of thing interesting, you can follow us online either on Twitter now called X there. LinkedIn is the middle link. And at the bottom, of course, please visit us at rbcgam.com

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I'll just conclude by saying again, thank you so much for your time. I wish you well with your investing and please tune in again next month.