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Hello, and welcome to our latest monthly Economic Webcast, New Year's Edition. I should say, happy New Year to everyone out there. My name is Eric Lascelles. I'm the chief economist for RBC Global Asset Management. And very happy to share with you our latest economic thinking.

I can't say the title itself is particularly evocative. This time it's 2025 in focus which could be almost anything lurking within 2025, I suppose, but nevertheless I think there's a lot to share. And it does shape up, we think, to be a pretty interesting year. So why don't I jump forward?

Report card review: As we often do, we'll start with a report card of sorts, and we'll talk about some of the good and some of the not so good things going on in the world today. We’ll start with the positive side, and I'm going to preface this by saying we're going to hit the negatives in a moment.

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There are actually a few more negatives, or maybe slightly more intense negatives than we've seen in a while, and so do be braced for that. But let's start on the positive side, nevertheless. We can say central banks are still in the business of cutting rates. In fact, they were doing it fairly briskly right up until the end of 2024.

They may be slowing. We'll talk about that a bit later, but nevertheless, we're still getting those rate cuts that are removing an important economic headwind, which is nice. Inflation is no longer as high as it was. Pressures have diminished to some extent. Again, I will tell you in a moment that they're not improving as much as we'd like right now, but nevertheless a lot less problematic than they were a year ago or a couple of years ago.

00:01:28:11 - 00:02:07:26

Not a bad starting point for a new year. We do believe that the global economy, and maybe more precisely, the U.S. economy, is on track for a so-called soft landing. The idea being the economy slows a little bit, as is necessary to cool some overheating and inflation.  We ultimately end up with an economy that's still alive and interest rates that are lower and inflation that's also a little bit lower.

And so we still think that's the most likely scenario, though I have to tell you about some other scenarios in a moment.

In terms of just the run of economic data, we've seen some decent economic data recently. I'll talk about that. We do continue to believe that there's room for more Chinese stimulus ahead. China's done some of that.

00:02:07:26 - 00:02:43:17

We think there's more to come. We believe they can ultimately stabilize their growth despite some underwhelming activity over the last year.

And then – this is starting to nudge a little bit in the direction of U.S. public policy -- a new president about to take office on January 20^th and we do expect some fiscal stimulus.

We think there's going to be some tax cuts and some spending and some deregulation in a way that can unlock some economic growth. So certainly some positives there.

I will say a lot of the negatives, sort of chip away at some of those positives. So the positives still stand, but they're looking maybe a bit less friendly than they were a couple of months ago.

00:02:43:17 - 00:03:17:19

So let's run through those. To begin with, yes, central banks are cutting rates. But those rate cuts do appear to be slowing. The market is now pricing in quite a lot less rate cutting ahead for 2025. Quite limited in fact overall. I'll talk about that a bit more later.

Inflation has come down quite a bit. It has been fairly sticky recently, though. We haven't had a whole lot of progress in recent months, and it's created some concerns. We could be stuck not at a horribly problematic level, but just a little higher than we'd like it to be, with consequences for interest rates.

I talked about the potential for tax cuts coming out of a Trump presidency ahead. That sounds nice.

00:03:17:19 - 00:04:21:26

U.S. tariffs, though, are also threatened. That's a little bit less nice from an economic standpoint. So there are some risks that we'll talk about there.

When we look at the outlook again, a soft landing is the most likely. That is the desired best-case outcome also. But I would say the risk of a no landing is rising, which sounds good in the short run.

It's an economy running even hotter. But an even hotter-running economy presents other problems in terms of too much inflation and high interest rates and so on. So that is a risk on the other side from the recession risk we normally dwell on.

China. Well, China may be set to deliver more stimulus, we think. But there's a reason they need to consider that at least, and that's because the economy is still somewhat underwhelming. Certainly still a complicated geopolitical place, which we've talked about in past webcasts.

And then throwing Canada into the mix here, there’s potential for some pretty substantial economic choppiness in 2025. Canada could potentially lose multiple percentage points of population growth, while hopefully reclaiming percentage points of productivity growth – but perhaps not precisely aligning in a way that could create quite a choppy set up and maybe even a couple quarters of weakness for Canada.

00:04:21:26 - 00:05:15:27

And then just on the interesting side, well, U.S. exceptionalism is continuing, and I mean that very much in an economic context. The U.S. economy was the fastest growing of the major developed countries in 2024. It looks like it may pull off the same trick in 2025, though the margin of victory might be a little bit smaller.

It's not that we expect the U.S. economy to accelerate. We even have it slightly slowing. But nevertheless, on the aggregate, the U.S. economy does seem to be the best of the bunch. And so that may persist into this new year.

I mentioned before, I'll mention it again because it is pretty central to the global geopolitical and the fiscal sphere, but of course, President-elect Trump is set to take office on January 20^th. By the way, if this is in the past for you, I'm recording this on January 2nd. So we're looking ahead at all of this.

And then the debt ceiling is coming into focus as well. So the U.S. has this peculiar rule that says the U.S. may not borrow more than a certain amount of money without explicit congressional approval.

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It looks like things get tricky around the middle of January in terms of exceptional measures that will need to be taken to prevent a debt default at that time. As we've learned from past such episodes, there are normally then multiple months in which the government can take exceptional efforts and do all sorts of little tricks, accounting tricks, and otherwise to prevent itself from defaulting. But eventually it does come to a head.

And so we are going to need to deal with a congressional effort to raise the debt ceiling at some point in 2025. We think they will, but just note that this will start to be on the front pages of newspapers in the coming weeks.

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Okay, let's jump right in now.

Growth to persist in 2025 / U.S. exceptionalism continues: To begin with, that U.S. exceptionalism story, laid bare right here. This is actual and I suppose in both cases, forecast economic growth. 2024 is done, but we don't have the fourth quarter numbers yet, and there are always revisions to earlier quarters as well. So these are all forecasts.

Nevertheless 2024 is mostly done and 2025 mostly in front of us. As I mentioned earlier, we have the U.S. on the far-left side here as having been the fastest growing of these major developed countries in 2024 and set to retain that mantle, if we think will grow a little bit less quickly in 2025. You have South Korea in second place.

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You have the likes of Canada, UK, eurozone and Japan trending a little bit behind. But do note those last four countries, four regions, I should say, given the eurozone is in the mix, we think they are in a position to grow a little faster in 2025 than 2024. And much of that has to do with rate cuts.

Nevertheless, even with that faster growth they’re set to grow somewhat less quickly than the U.S. And so it helps to justify higher rates in the U.S. versus most of those other countries.

Okay. Let's talk about those economic scenarios. I would say they are in flux. Not that the most likely scenario has changed. We still think a soft landing is indeed the most probable outcome.

00:07:06:17 - 00:07:45:12

Macro scenarios for U.S. are in flux – soft landing still most likely: We've assigned a 60% chance to that soft landing. That's the camp we've been in for well over a year at this point in time. It makes sense in that central banks are cutting rates. That's helpful. The economy is just objectively still growing. We're moving or shifting past the period of maximum recession risk.

Just historically, you would have often had the recession by now from a rate-tightening cycle. And we seem not to have, and we've seen some recession signals reverse, including another one quite recently that I'm going to share with you in a moment.

So we're looking for moderate growth in the near term. That's the most likely outcome. I will say, though, there are some other outcomes. You may be familiar with me normally talking just about one other outcome, which is recession.

00:07:45:14 - 00:08:17:21

And so the recession risk is still there. We think that risk is continuing to fall though. So we had it at a 25% risk in recent months. It's now, we think, down to about a 15% chance. So that's falling, but again that risk isn't zero. And so high rates do hit with a lag. There's still some pain.

And we do have some recession signals that are still intact. We think that there is the risk that there could be some less favorable U.S. economic policies implemented. We don't think those are likely to dominate. But if tariffs were to be bigger or, population growth or immigration were to be reversed quite aggressively, there are some headwinds that could arise.

00:08:17:21 - 00:08:43:20

So we should acknowledge this risk isn't zero. Even if a theoretical recession would probably be mild and quite temporary. You'll notice there's a missing spot here, though, and that's what I want to get to now, which is, the no-landing risk. And so this is really the opposite extreme. It's the economy running too hot, going faster than a soft landing, which again, sounds good in theory, but in practice it means that inflation can't decline and interest rates have to go maybe even up, not down.

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It's just not a sustainable place to be and it creates trouble. And so the no-landing risk is a 25% chance that's been rising. That really wasn't being discussed much as of 3 or 6 months ago. And so that risk has gone up. We're left with the soft landing still as the most likely outcome, but no longer fretting quite as much about a recession, at least for the moment, fretting a little bit more about overheating as opposed to under heating.

And that speaks to some of the higher inflation prints recently, it speaks to some of the central bank repricing that's happened. That's taken away quite a lot of rate cuts as well. So we're not the only ones thinking somewhat about this. And I'm going to speak more about some of those risks in a moment.

Let's talk about the vibecession now.

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That wasn't one of the three scenarios.

Vibecession doesn’t align with economic reality: I'll just say that's a state of mind or maybe a feeling, that some people are having right now. But it's a term we've seen used pretty regularly in the U.S. media and the Canadian media as well, perhaps elsewhere – although I haven't noticed it elsewhere. Nevertheless, the idea being that it may not officially be a recession.

We may not be stringing together big declines in gross domestic product (GDP), and we may not be hitting huge jumps in the unemployment rate. But it does feel pretty rough for some people. You could say, of course, rates are still fairly painful. For people trying to get into the housing market, housing affordability is still quite poor.

00:09:56:21 - 00:10:31:13

For people in the housing market, home prices haven't been going all that far these days. They've been even in retreat in some markets. So it's felt fairly rough for people. I would just say by standard, objective economic measures, you know, this isn't a recession, but this also isn't all that bad. One thing you can look at is the misery index.

If you're not familiar with that, it's a very simple bit of math. It adds the inflation rate of a country, the annual inflation rate, to that country's unemployment rate. And so a little bit random. But the idea being a higher inflation rate is bad. A high unemployment rate is bad. So a high number here is bad.

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And it just happens to be the case the numbers sort of work out. If you had an inflation rate that was a couple percentage points higher than normal, that would be notably bad. If you had an unemployment rate a couple percentage points higher than normal, that would also be notably bad. So they’re sort of compatible mathematical units.

And so the misery index is that resulting metric. Just to confuse you, this isn't actually the misery index. This is a percentile ranking of where we are in the misery index versus the history of each country. And so, to give you a sense in looking at the U.S. and Canada too, they’re in around the 30th percentile, which means their misery index is better than it is 70% of the time.

00:11:06:19 - 00:11:41:06

Only 30% of the time has the misery index been even better, that is to say, even lower than it is right now. So people should be feeling pretty good right now. By most objective measures, this is a good time for the economy, not a bad time.

Japan's a bit of an exception. It's the only one that's above that 50 percentile mark. So it is in a slightly worse position than normal. Those sort of are funny reasons, because the Japanese unemployment rate is only 2.5%, but that's actually sort of high by Japanese standards recently. Simultaneously, Japanese inflation is sitting in the 2 to 3 per cent kind of range, which is just, you know, scandalously high for Japan, a country that's historically had nearly no inflation.

00:11:41:06 - 00:12:26:21

So they are actually doing a little worse than normal without it really being all that bad, to my eye. Amazingly, if you look at some of the countries toward the right side, Germany, the UK, Spain and France, Italy even more so, Italy is invisible, almost. These countries all have notably better misery indexes than normal.

They are doing a lot better than usual. Italy is doing the best it has ever done by this metric. It's never had inflation plus unemployment. I shouldn't say never, but going back decades at least, it hasn't done any better than this.

And so again, you know, there may be a vibecession out there. Certainly individual households and parties are suffering. If they happen to be especially leveraged, that is to say, indebted, or their mortgage rolled at a time when rates were really high, or other special situations, obviously, it can be a time of suffering. But overall, the economy isn't too bad right now.

00:12:26:21 - 00:13:06:25

Recession risk continues to decline: Let's talk about recession risks. So this is a table we've used repeatedly. It's 15 different recession indicators. And we've tried to track which ones are saying, yes, the recession is coming, and which are saying no and which are equivocating. And so what I can say here is, well, you can see it: first of all, there are more no’s than anything else. And so we continue to think that we're not in a recession. And we're not too likely to descend into one.

There are still certainly some yeses. Four of them are there. Actually three are getting pretty tricky, though. Those yield curve metrics. First of all, an inverted yield curve is a traditional recession signal. We've had inverted yield curves, one is un-inverted, two are still inverted, but the two that are inverted are rapidly un-inverting, just to confuse you again.

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But the interpretation is mixed, too, because normally when the yield curve un-inverts, that can say, well, the recession isn't a year ahead, but maybe it's only a month ahead. And so that can be cause for concern. But usually that's in the form of a bull steepener, that is to say yields are falling, short-term yields are falling more.

Actually recently we've had yields rising, and it's the long-term yields rising more. So it's a bear steepener, which is kind of the more benign, less threatening version, as I say. All that to say that of the four yeses, actually the first three yeses, you could start to quibble with and say, maybe they're maybes or something like that, but in any event, we have some yeses.

00:13:41:18 - 00:14:12:00

The recession risk isn't zero. But I do want to say we did recently see one indicator pivot from yes to maybe. So, the Conference Board leading indicator has been falling for quite a while. It actually just made a tentative jump higher. If I were to just read that literally, it actually moved from a yes to a no.

I would say that we only have sort of one month worth of data. I'm going to show you this in a moment. I don't know if it's quite enough to say that the new trend is in place. So I put it as maybe for now, but that could become a no as well. But the main point is, as we track this over time, the number of yeses are diminishing.

00:14:12:00 - 00:14:29:28

The number of maybes and no's are rising. The recession risk is falling, to our eye, and we had quite a lot of yeses as of a year ago, certainly as of two years ago. And it's now waned to only four out of 15 indicators.

Macro implications from U.S. election: Let's talk about this. We've talked certainly about the U.S. election in the past.

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I'm not going to elaborate on all of these items. This could be its own, half-hour presentation or more. But I do want to just flag this again because President-elect Trump does take office in the coming weeks, and we should just recognize some of the potential economic implications. So the way we've run this is really just to give a high-level summary of some of the main policy planks and what they might do to short-term/medium-term growth, inflation, stock market and the bond market.

00:14:54:12 - 00:15:36:08

And the Coles Notes takeaway is just that we do have Trump policies as being potentially a mild positive for the short-term economy. That is essentially predicated on deregulation and tax cuts and rising animal spirits outweighing the negatives that come from tariffs and less immigration. So that's the math that we've done, certainly very dependent on the precise policies that come, which we really won't know until post-inauguration.

In the medium term, we have a more neutral profile. That is to say, there are still some positives. Some of the negatives stick around and start to balance out the positives. So less of a favorable reading over a multi-year time frame. We do have inflation running a little higher than otherwise. That's a statement about tariffs and more growth and so on.

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We have the stock market running hotter as it certainly has since the election. We think that could continue at least as a tailwind, not a headwind, amid swirling other forces that also need to be considered. That's because the stock market really likes deregulation and tax cuts above all else, and maybe cares a bit less about some of the other things.

And then we have Trump as being bond yield positive, which he has been so far also. And that's a statement about tariffs being inflationary and more economic growth. Also adding to rates and inflation, and additional debt because some of the stimulus is a deficit-based financing, also adding to the level of yields.

00:16:11:16 - 00:16:49:23

So that's our thinking. That's broadly on the market side what's actually played out as well. You can see those additional thoughts though, which is just that there is considerable uncertainty. The fact that it's a Republican sweep has increased the scope for action. We did actually bump up our expectations in terms of the short-term economy once that sweep was confirmed.

We're not assuming the most extreme form of these ideas. And so if we get aggressive full tariffs, that's a different kettle of fish, and the economy wouldn't do as well. If you were to see a large-scale deportation in the U.S. of illegal immigrants, that would also take something away. It's not central to our forecast, though we are budgeting for some deportation and a significant decline in immigration.

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Do keep in mind there's a steadying hand that comes from the stock market and C-suite advisors and bond yields and so on, which Trump appears to care about. And then this is all a U.S.-focused analysis. When we look at the rest of the world of Trump, victory is probably a negative for rest of world growth.

So we have subtracted a little bit from the economic outlook for other countries that are at risk of being hit by tariffs, that may suffer some capital outflows because the U.S. may be a more attractive environment from a tax and a regulatory perspective.

We're going to learn a whole lot more about this, and we're going to hash this out and debate this and follow this for the next four years, in any event, but this is our initial thinking on the subject.

Animal spirits surging post-election: I can give you a couple of charts to support some of that thinking. So I mentioned animal spirits being a supportive factor, and that's a bit of a hazy concept. It's basically, the idea of psychology or confidence. And we have seen small businesses in particular become massively more positive post-election. And so small businesses were feeling quite negative, actually, going into the election. When Trump was confirmed, they liked it.

We've seen the NFIB small business confidence metric surge. And it's gone from being one of the weakest readings of the last decade, to one of the better readings and back to a much more normal level. And it would suggest to us a pretty good environment then for small businesses to do hiring and Capex and that sort of thing.

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So that's an example of where higher confidence is mapping potentially into economic activity. And I can say something similar when it comes to tariffs.

Who would be most affected by blanket U.S. protectionist measures? Here we are thinking about tariffs, expecting tariffs or at least the threat of tariffs to be among the first actions of a Trump presidency. And so we continue to look at who is most exposed and vulnerable and what is likely to play out.

And so worth pulling this chart up and sharing just which countries have the biggest exposure to U.S. demand. And so this is the fraction of a country's economy that is essentially U.S. demand, because they export that much of their output to the U.S. You see Mexico and Canada right near the top, as I think one would expect.

00:18:47:11 - 00:19:34:00

So Mexico, 27% of GDP is exporting to the U.S. and for Canada it's nearly 20%. For Vietnam, the slight surprise in the middle there, also 26%. That is a statement of how intertwined the Vietnamese economy is with the U.S., as are the Taiwanese and Malaysian and Thai and South Korean economy. So other Asian economies are very connected. Again, some significant exposure there.

Non-trivial exposure: we're talking about places in Europe like Germany or talking about Japan. But it is much smaller. And so do be aware that the effect of tariffs could have an order of magnitude difference depending on the country. And that's one of the reasons why we are all pretty nervous and particular about that 25% tariff that's been threatened against Mexico and Canada, in part because it wasn't actually part of the campaign platform.

00:19:34:00 - 00:20:12:12

It came up post-election. We think it's largely posturing and it's been linked explicitly to border control. We see these countries now making a greater border control effort. We think that they can likely appease the U.S. on this front and avoid large tariffs and certainly at least avoid enduring tariffs. But nevertheless, there is a risk there.

We've always known we're going to get nervous and scared as the possibility of tariffs approaches. And so I would expect to be more nervous. Not yet over the next few weeks, and perhaps even we will see some things put in place with a later implementation date as an opportunity to negotiate or temporarily, which is what we saw in 2018 and 2019.

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Then negotiations were moved as an example, steel and aluminum tariffs for a number of countries when they made certain concessions to the U.S. That's still the most likely way things go. But of course, there is a worst-case scenario where big tariffs just come on and do more significant economic damage so that's something that we are on guard for.

00:20:28:28 - 00:21:20:28

Economic simulations can quantify tariff damage: The modeling that we've done in terms of tariffs would say if you got the full Trump tariffs, there is significant economic damage to GDP to be done. Interestingly, Canada and Mexico get more damage than the U.S. and China do, even though the main trade spat, you could argue, is between those countries. And that's just because Canada, Mexico are so linked to the U.S., whereas China is less so, and the U.S., conversely, is less so and just in general less trade oriented as well due to its large domestic market.

We are budgeting for partial tariffs instead, though, which does damage but less damage. Also skewed a bit toward the likes of Canada and Mexico, somewhat less so elsewhere, but manageable. It’s something that shows up on our forecast but isn't a complete growth killer in our eye. And on the inflation side, we can say that tariffs certainly to the U.S. are potentially inflationary. It’s a bit more ambiguous for other markets where the loss of demand could actually dominate in some cases.

00:21:21:01 - 00:22:04:12

Alternative Trump-influenced macro scenarios: Let's talk about some alternative scenarios here. So I'm sort of layering scenarios upon scenarios. So I talked about kind of the main idea here is base case is a soft landing, worried a little bit about overheating, still considering the possibility of a recession. That's the main way to think about these things. But if we're just talking about U.S. public policy, and some ways things could go, again our most likely scenario is some fairly moderate tariffs and fairly moderate tax cuts and so on.

But that's not the only way this could go. And so let's think about three possibilities here.

1. So one would be just a stronger version of the Trump policies. Maybe you get the full tariffs, maybe you get large-scale deportation actions. Maybe there is a sharp government spending cut, if not the $2 trillion that's been talked about.

00:22:04:12 - 00:22:54:10

So if you just got stronger forms of those policies, we think that would damage growth. We think that would add to inflation. So that's the risk. Certainly that exists.

2. If we want to think about geopolitics, again, not as a base case forecast, but as a risk, there is the risk of an escalation in the Middle East post-Trump presidency in the context of perhaps more support for Israel, more antagonism toward Iran.

It isn't impossible that greater frictions arise there, maybe with consequences for the price of oil and other commodities. Instability in general. Russia could be emboldened, if the U.S. provides less support to Ukraine and Eastern Europe or imposes a ceasefire or some variation of that. And so there is a potential for Russia to gain the upper hand, either for some future effort on some other country or on other land, or perhaps even in the active conflict in Ukraine right now.

00:22:54:14 - 00:23:28:24

It's also possible U.S.-China frictions could increase, not just in the economic sphere, but beyond the economic sphere. And so if we were to get any of those – and again, none of this is our base case forecast – you could imagine more risk aversion in markets and perhaps in business activity, more inflation and potentially less growth as well. So there are some risks there.

00:23:12:27 - 00:23:46:09

3. Maybe the third set of risks in a White House policy context, would be – and this does align a bit more with the no-landing scenario earlier – would just be overheating. And so, you know, the pro-growth policies work and animal spirits surge as they have, and the effects prove especially fertile.

You end up with just more growth than people expected, and more inflation that people expected. Suddenly the Fed doesn't get to cut rates. Maybe the Fed even has to raise rates and you end up with some undesirable outcomes in that direction as well.

So again, to be clear, none of these are our base case scenario.

00:23:46:11 - 00:24:18:23

We're just kind of recognizing that there is a broader set of possible outcomes than usual right now as it pertains to U.S. public policy. It happens to be the case that the most likely set, we think, is also favourable. I wouldn't say the most favorable. You could imagine even more favorable scenarios where there are tax cuts but no tariffs and so on.

But among the possibilities set, we would say the most likely is a fairly favorable mix. But there are some other mixes here that could be less favorable. Okay.

Monthly headline and core inflation edged up in recent months: Let's talk inflation for a moment. The story for inflation, particularly in the U.S. – though, it's been a little bit true elsewhere – is just that inflation has been hotter than expected.

00:24:18:29 - 00:25:11:11

You can see here's the monthly profile for overall inflation, with the month-over-month change in dark blue for the U.S. The numbers have been a little higher and actually accelerating slightly, if anything. You can see in gold that's core inflation. And core inflation did accelerate a bit.

I don't know if I can say it's actively accelerating every month now, but I can say it’s running a little bit warm. It's running in kind of a 0.3% a month pace. We'd rather it was a 0.2% a month pace in terms of getting down to a 2% kind of annual inflation print. So inflation has been a little bit too hot.

It's been certainly a key contributor to markets taking out rate cuts and concerns about overheating, and so on.

Inflation starting to broaden out again: I will confess that inflation has started to broaden out a bit again. So this is our measure of inflation breadth, the fraction of things in the price basket rising quickly. That's the red shaded area. That's still pretty small.

00:25:11:11 - 00:25:40:24

But you can just see maybe the thing to look at is to invert this and say, let's look at that bright yellow section. That's the fraction of the price basket that's rising at less than 2% a year. Normally most things are in that state. Most things are still in that state. But you can see there's been a slight reversal.

In other words, the yellow areas are in slight retreat. The rest is in slight offense. And so we can see that we are getting a slight broadening of inflation again. I don't think it's at all preordained that it broadens right out. I'd be surprised if it did. But this is not just a story in which gas was a little bit higher, one or two things send inflation higher.

00:25:40:24 - 00:26:14:01

Inflation has been running a bit hotter. And it may be in part because the economy's strong and people are optimistic and corporations are starting to feel they may have a little bit more pricing power. In fact, I can speak to those two concepts or that particular concept in a moment.

But first, when we think about what drives inflation, well, it’s quite a number of things. You can think of it from a money supply perspective or an economic growth perspective. But you can also look at, well, are wages moving quickly or not? Because that can determine whether or not the amount of money people can pay for things goes up or down. And so wage growth has slowed quite a lot. That’s the main story.

00:26:14:01 - 00:26:46:21

U.S. hourly wage growth has slowed, but recently stabilized: You can see here that it’s sort of stopped slowing, it’s stabilized. It's still at a fairly robust level recently. And so wages are no longer the inflation driver they were. But we can't quite say they've gone back to a normal rate of growth. And so as a result, potentially a little bit of pressure coming from wages.

Business pricing plans rise slightly after earlier decline: I can say similarly from corporate pricing plans. Again, they’ve greatly diminished from where they were as of a couple of years ago. And that's most welcome. But still, as they have been a little bit higher than normal in terms of price increase plans. And then you can see based on that arrow that there has been a slight increase as well since the election.

00:26:46:21 - 00:27:21:08

So corporations are thinking a little more about price hikes as opposed to a little bit less. And so it does make controlling inflation just a little bit, more challenging.

Conversely, inflation searches not too bad: Now I will note on the flip side, inflation searches, just a proxy for the level of concern people out there in the economy have. How often are they looking for the word inflation around the world?

That actually had risen somewhat across 2024. It's actually declined a bit recently. And so that's a welcome thing and we'll see if that sticks. And I guess really our main takeaway on inflation is just that inflation is set to be a little bit more troublesome. We still forecast it to be a little bit lower in the U.S. in a year.

00:27:21:10 - 00:27:45:25

We think it can make further progress elsewhere. But nevertheless, it’s set for slower progress and just a more challenging environment then had been the thinking six months ago. That brings us to central banks.

Fed rate cut expectations have significantly moderated: This is the Federal Reserve (Fed) in the U.S. here. When the Fed sees pretty good growth, when the Fed sees the potential for tax cuts and things to support the economy, when they see inflation that's running still in the high twos, as opposed to in the low twos where they'd rather it to be.

00:27:45:29 - 00:28:02:12

Of course, that slows down what the Fed can actually accomplish. And so, this shows you just different expectations at different points in time. The dark blue line is where we are right now. So this is the market's expectation for the fed funds rate going forward. So that dark blue line is how the fed funds rate is expected to evolve over the next several years.

00:28:02:12 - 00:28:18:10

You certainly notice that it's only a very slight downward slope from here. In other words, the Fed has now cut rates that had a peak of 5.5%. It's now down to I'll call it four and a half, technically four and a quarter to 4.5%, that range. The market only thinks there's another rate cut or two.

00:28:18:10 - 00:28:33:23

That's it. Market thinks you get down to about 4%, and that might be it in terms of 2025. In any event,  that's a lot less than if you look at where the market was in September, the light blue line, the market thought the rate cutting was going to go not just down to four, but down to three and actually below three.

00:28:33:23 - 00:29:29:24

So there's been a real backtracking. Again, in significant part, as the fear of recession has faded and the fear of overheating has grown, the Fed is just not in a position to cut by as much.

In terms of where we stand, we have the Fed cutting a little bit more than the market currently prices. We’re of the view that market may have taken out a bit too much rate cutting.

And certainly we agree that with inflation at 3%-ish, that's not a great time for rate cutting. It could be slow going. But we do believe there is room for inflation to improve a bit further. We do believe the economy could achieve a soft landing and more likely than not, not overheat. And as a result, we think there may be three rate cuts in 2025 as opposed to two.

But I guess the point being, we've already seen a fair amount of cutting. The amount of cutting going forward, particularly in the U.S., is set to be significantly less. There's not as much room for that going forward. And so Americans are going to have to live with a higher level of interest rates than they would perhaps ideally like.

00:29:29:24 - 00:29:50:10

And as much as we think there's some room for the housing market to rise from here and so on, it does provide less of a tailwind for interest rate sensitive sectors.

Okay, let's get to Canada here. And so I've got two slides to conclude this presentation on Canada. Election preview is number one.

Canadian 2025 election preview: So here we are in 2025. Canada will have an election in 2025.

00:29:50:10 - 00:30:20:03

As I'm recording this, there's quite a debate as to when that might be. You could think the Liberals and NDP would like to delay it as long as possible. That would be pushing it all the way into perhaps October. You could think they would pick the spring. That's often a popular time for elections. But it's not impossible.

There could be an election even before that. The Liberal government has been on the ropes, and the Prime Minister has been challenged on a number of occasions by his own caucus. As a result, it's not impossible there's a sooner election as well. So we really don't know when in 2025. But there is set to be an election.

00:30:20:10 - 00:30:59:16

As it stands right now, polls do currently track a significant Conservative party lead to the point of the potential to form a majority government. Now, things could change, and things certainly could change if the election isn't held until the fall. But nevertheless, at this point, you have to think that there's a high probability of a new government in Canada at some point in 2025 and likely to be a Conservative government.

So we've been just looking through some of the platform comments and some of the policy positions and trying to reach some sort of economic judgment here. This is hard to do, I'll admit. And it neglects any number of things that don't have a direct bearing on the economy as well. So lots of speculation here and done in as non-partisan fashion as we can manage.

00:30:59:16 - 00:31:42:08

But I guess the way that we think about this is, when we think of the Liberal government and the policies they've introduced, in recent years we've seen a pattern of gradually rising taxes over time, which tend to be a bit of a drag on growth. We've seen a history of substantially rising regulations, which tend to be pretty notably negative on growth and on productivity and on that sort of thing.

From a trade perspective, the Liberals have done fairly well. They have a record of trade policy competence. But of course, there are some challenges in a Trump era. Tariffs constitute a threat, not expecting a tailwind for growth in the coming years from that. Note that's exactly the same thinking for the Conservatives.

From an immigration standpoint, of course, this has been a big positive for growth in the context of many more people.

00:31:42:11 - 00:32:32:10

However, now, there has been a significant pulling back. And so we budget actually for both parties to be somewhat negative on the immigration side. We have the budget side fairly neutral in terms just that small deficits have persisted and likely would persist under a Liberal government. In housing, some efforts to boost construction, but with limited effect.

And so we tally that up and we have more negatives than positives. We would say that in recent years, and potentially if the Liberals were to again form a government you would expect at least a mild drag on economic growth and productivity.

On the Conservative side, certainly a mix of positives and negatives. I'll say, from a tax perspective, there has been talk about lowering the corporate tax rate and personal tax rate, eliminating a carbon tax as well. So some perhaps growth-boosting effects, at least from the first of those items. The carbon tax is more neutral to the extent that it was always repaid back to Canadians,

00:32:32:12 - 00:33:20:06

On the regulation side, potentially deregulation in the infrastructure, resource projects space, potentially less red tape. So potentially a growth boost there. Again, on the trade side, we wouldn't expect a big difference there. You lose some trade competence and trade expertise in terms of just inactive in recent years. You gain maybe a government more ideologically aligned to Trump, that might be in a position to negotiate. But we suspect there are negatives either way.

On immigration we have a fairly similar profile. On the budget side, we have the Conservatives a little bit worse, only because they say they're going to balance the budget. And fiscal restraint is what's necessary to do that. Balancing a budget would be welcome, but it does take a bit of money to do.

And then on the housing side, it seems to us that the proposals are a little bit more forceful on the Conservative side in terms of getting housing construction going on the zoning side and limiting limiting funding to municipalities unless they significantly increase their construction.

00:33:20:06 - 00:34:10:09

So we tally that up. It's not overwhelmingly positive, but we do have we think the potential for a bit more growth and a bit more productivity-friendly policies under a Conservative government, likely positive from a business sector perspective, which of course is important to investors. Likely positive, especially for small businesses, which is a bit less central for investors. Mevertheless, we mention that because there is the potential for a bit more of an economic boost in Canada post-election if there were to be a Conservative win, based on what we know about the policy platforms right now.

Unusually, growth in Canada significantly lags U.S.: I'll finish with this chart, which is just, looking at U.S. versus Canadian economic growth. And so Canada is in blue, the U.S. is in gold. It's astonishing how similar those two trajectories have tended to be, going right back to the 1960s.

00:34:10:09 - 00:34:45:18

Again, the two countries are generally intertwined. Obviously, there are some differences here and there. We can see the two notable deviations before now, over the last several decades, would be the late 80s, early 90s, and then again in the mid-2010s. And in both cases, Canada underperformed, then caught up to the U.S. That's sort of interesting as we look where we are right now, which is a Canadian economy that has again been underperforming the U.S. So if history were to hold, the blue line is more likely to rise to the gold Line than the gold line is to descend to the blue line.

00:34:45:18 - 00:35:27:11

I would note that the circumstances were quite different in the two prior eras, though they weren't particularly alike to one another. Each one has been quite different. And so in the in the late 80s and early 90s, you had an oil price bust and lower resource prices that were challenging to Canada. And Canada had a housing bust that weighed on the economy, and the Bank of Canada got to inflation targeting sooner than the U.S.

And so it was a little more hawkish. That likely explains the underperformance there. In the mid-2010s, that was an oil shock story. Oil prices fell, that was to Canada's significant disadvantage. Whereas today we think that the shortfall has more to do with productivity differentials and more painful interest rates in a rate-sensitive economy like Canada.

00:35:27:11 - 00:36:03:07

So totally different scenario. Maybe we're stretching too much to suggest there could be a snapback here. But historically there generally has been. And as we've said before, as we look out over the next couple of years, we do think that perhaps we are in the realm of peak pessimism about Canada, and we could have a government that's a bit more growth friendly. Interest rates are falling, which is very helpful to a rate-sensitive country like Canada. We're seeing immigration slow, which has a negative effect in the short run on growth, but could unleash some extra productivity as well.

So perhaps we'll start to see this gap shrink as it has historically in the past.

Okay, I will stop there. And so I'll say thank you very much for your time. If you found this interesting and care for more, please do follow along on Twitter now called X or LinkedIn. Or best of all, visit our website, rbcgam.com and visit the Insights tab. You can find all sorts of research from the economics team and our investment teams as well.

Again, thanks for your time. I wish you well with your investing. And please tune in again next month