(en anglais seulement)

Hello and welcome to our video #MacroMemo, there's a lot of things to cover this time. Let's just run through the list and then jump right in.

We'll talk a little bit about central banks, in particular the Bank of Canada's somewhat surprising rate increase recently. We'll talk about technology in the context of what technological change means for the economy. We'll spend a moment just reviewing the debt ceiling, which was resolved a few weeks ago. Nevertheless, a few other interesting things have emerged from that. We'll talk about China – the Chinese recovery, some pessimism there and the hope for stimulus. We'll run through some economic data. We'll debate rolling recessions, and we'll even spend a moment gauging national power.

That's an awfully long list, so we'll just jump right in.

Central banks: The Bank of Canada was the latest central bank to surprise us by raising its policy rate. The expectation had been a pause. Instead, it raised rates by 25 basis points. The Reserve Bank of Australia pulled a similar trick not that long ago.

The logic in Canada's case was just that the recent economic data had been fairly strong. First quarter GDP was 3%, which is big. Hiring had been good at the moment that they made the decision. Since then, we've had a new number that wasn't so good, but in any event, hiring had been good. April inflation was strong, and the Canadian housing market was seemingly starting to rebound. So, they felt they needed to raise rates a little bit to tame all of that.

A secondary consideration is whether the neutral rate might be a little bit higher than they're currently assuming. The idea there is, if it is, then you need to raise rates more to achieve whatever level of restraint that you're trying to apply to the economy.

Bottom line is they've gone to 4.75%, the market thinks it's fairly likely they go one more time to 5% in a month. So that possibility does continue.

It's interesting, as you turn your attention to other central banks and start to wonder whether they might pursue a similar course. In the U.S., the Federal Reserve, at least as I record this, is on the cusp of making a decision.

The best bet is that they don't raise rates, but there's a fair chance they do deliver another hike sometime over the summer. For similar reasons, an economy that's hanging on and inflation that, while falling, isn't quite back to where they'd like it to be.

A very similar story is that the European Central Bank looks quite likely to deliver another hike at its next meeting, as does the Bank of England.

So central banks are not quite done yet. We think they're close, but they're ultimately delivering a little more than one would have bargained for as of a few months ago.

Technology: Let's talk about technology for a moment. We've been somewhat optimistic on longer-run productivity growth for a while. Some of that is just because the bar is low to clear. The prior decade was really weak, and we only need to expect a normalization to be considered an optimist.

One part is China is now at the technological frontier and you just get more people pushing human knowledge forward, which is helpful. But the big reason is just that there are some exciting technologies out there. Generative AI is the biggest new one.

The ChatGPT brand name is the one people associate with that at this point. It's technology that generates text or images or other media by finding patterns in data, and it provides quite an impressive summary of information right now, and it's advancing quite quickly. It seems capable of generating computer code and conducting legal research and providing customer service, and the applications may ultimately be quite broad.

There's other technology as well that's fairly exciting right now, and some of it's also in the artificial intelligence space. You're seeing big jumps in sensing and understanding speech and vision, in the context of self-driving cars and manipulating objects, which is surprisingly tricky.

Outside of artificial intelligence, there are big gains in health technology, including mRNA vaccines, CRISPR, genetic modification. Also big advances in green oriented technology, the Internet of Things, quantum computing, nuclear fusion, virtual reality, distributed ledgers, and 3D printing.

So there are a lot of quite exciting technologies. Not all are revolutionary in nature, but nevertheless capable of pushing innovation and productivity forward.

The question is, what does this mean for the economy? In the short run, we do think there's room for a little bit more capital expenditures by businesses, particularly with regard to generative AI. But we're dubious it's going to be big enough to prevent a recession altogether in the near term.

There are choke points in terms of the availability of chips, the supply of hardware, and the availability of workers with the expertise to operate all of that. So there will be some increase in CapEx, I suspect, but not enough to totally drive the economy forward in the short run.

From a productivity standpoint, it often takes a surprisingly long amount of time for new technologies to show up in the productivity figures. That was the case with computers, and it's been the case repeatedly. Even after the technology is adopted, it takes a while for people to really harness it in an effective way.

But over the long run, you can imagine somewhat faster productivity growth from all of this, though it’s hard to say exactly by how much. It could be profound, it could be slight. We'll just have to see what sort of applications arise, but nevertheless, a little bit more productivity growth than otherwise assumed. And that's a nice offset because we know that we're dealing with demographic challenges at the same time that are exerting the opposite influence. And so more productivity growth is a helping hand. I think it's reasonable to expect that over the long run, based on these new technologies.

Debt ceiling: Let's spend a moment on the debt ceiling. Yes, I do know that it was resolved more than two weeks ago, but just a couple of thoughts. In fact, three thoughts may be worth dwelling on after the fact.

The first one is just from a political standpoint, it was good news! I was pleasantly surprised by how neatly and tidily the Democrats and Republicans were able to come to an agreement. Don't get me wrong, it would have been better to fix this way back in January or even before hitting the debt ceiling. But nevertheless, they didn't end up with a government shutdown. They did find some common ground in the end.

So it makes me feel a little more comfortable as we deal with other presumable events that arrive over the next two years. There's a fair chance that the politicians come to their senses and ultimately do the right thing. So that's good news.

The number two item is just that there is some fiscal austerity coming out of this debt ceiling. We've been crunching some numbers. We're calculating that you lose about 0.2 or 0.3 percentage points of economic growth in the U.S. in 2024. You lose 0.1 or 0.2 percentage points in 2025. It's not a ton, but it is on the order of a 10th of a year's worth of growth. So there is some consequence there.

Then the third thing is just there's a liquidity drain over the next four months or so. Basically, the Treasury department kept the government going by draining its Treasury general account. Normally there are several hundred billion dollars in that. They drained it almost down to zero.

They'd like to rebuild that. This is like the chequing account for the U.S. government, so to rebuild that, they need to issue bonds and bills. And unlike usual bond and bill issuance, where it's matched with more spending by the government, this isn't money that's going to be spent. It's money that's being sucked out of the economy, and it might be on the order of $850 billion. So that puts a little bit of upward pressure on bond yields.

China: On the subject of China, we've been contrarian fairly consistently, but from different perspectives. So initially when China reopened, we felt good about that. We forecast a recovery, but we were cautious on just how quickly that would occur. There was a lot of ebullience in markets at the time that has since faded, though.

China’s had a period of sour economic activity and China's manufacturing PMI (Purchasing Managers’ Index) fell below 50. Exports are down 8% over the last year. Chinese producer prices are falling, which is a sign of weakness. Demand for appliances and furniture is down. Youth unemployment is above 20%.

China is having a challenging moment. There is a lot of pessimism now with regard to China, I would say it strikes us that the pessimism is overblown. We still think there's a Chinese recovery hiding in there. In particular, the Chinese government is in a pretty good position to deliver stimulus.

Unlike most countries with too much inflation, China has too little growth and too little inflation, so that's a classic situation where you can cut rates. In fact, they've done that just before I began recording this. They are delivering a bit of monetary stimulus and they can do fiscal stimulus, too. We suspect there will be some support for consumers in particular.

So I think the Chinese recovery will get back on track, if not rollicking forward.

Economic data: On the economic data front, more generally, I would describe economic data as soft. Don't get me wrong, U.S. hiring a couple of weeks ago was quite strong, up 339,000 positions. But when you dug into the details, you saw unemployment that rose by a third of a percentage point.

You saw an alternate employment survey, the household survey, that said instead of gaining 300,000 jobs, there were 300,000 jobs that were lost. It's the “jittery-er” of the two surveys, it's less trustworthy, but there is a bit of information in there. And when we look at weekly jobless claims, they are rising and they are now the highest they've been since October 2021.

We do think we're seeing a bit of weakness beneath the surface in the U.S. labor market. We think we can see it above the surface in the Canadian labor market, which just reported the loss of 17,000 jobs in May. Again, notoriously choppy, maybe some seasonal distortions, we'll see whether it sticks. We'll need another month to know, but nevertheless, maybe labor markets are turning a little bit.

Back in the U.S., we have the twin ISM (Institute for Supply Management) surveys that are looked at so closely. The manufacturing Purchasing Managers Index(PMI) has now fallen again at just 46.9. That is clear contraction, and the service sector one has fallen to 50.3, which is just a hair above contraction and it's a lot weaker than it was a few months ago. So we are getting some weakness and certainly seeing that weakness in other jurisdictions.

Germany recorded two consecutive quarters of economic decline not that long ago. The eurozone just did its own revisions. It has now had two consecutive quarters of economic decline. Canada just had a revision and reported that its economy in the final quarter of last year shrank a little bit as well, though let the record show there was then a quarter of growth after that.

But the bottom line is we are seeing some wobbling in the economic data. We still think a recession is more likely than not.

Recession: On the subject of recessions and the concept of a rolling recession, I've seen some people argue that maybe we don't need a proper, true, economy-wide recession because different sectors have been dealing with their problems on their own time.

For instance, the tech sector did a lot of layoffs late last year and now it's rebounding. The housing market weakened all of last year, it seems to be rebounding. Resource prices fell quite a lot last year, they're more stable this year. The banking sector in the U.S. struggled quite a bit last quarter, maybe it's not so bad going forward.

Maybe these sectors have all dealt with their issues in a way that just doesn't leave enough weakness for there to be a recession.

We think it more likely, though, that that's probably not the right way to think about things. We would disagree with that notion of a rolling recession and avoiding a proper recession for two reasons.

One is just that we do still think there's some weakness left in some of those sectors. For instance, we do believe there's a bit more housing market pain to come, particularly as central banks do a bit more rate tightening. We also think there's some more bank pain to come in the U.S. Maybe not as acute as in March, but nevertheless there is a chill, at least with regard to bank loans. And so that's a challenge as well.

So we think some of these sectors aren't fully fixed. More fundamentally though, and reason number two is just that recessions don't happen because a bunch of sectors have excesses that all need fixing at once.

It's usually narrower than that, usually one bigger problem, maybe one really unbalanced sector or maybe an interest rate shock, which is what we've had over the last year, where interest rates go up by a lot and that affects risk appetite for everyone. It affects bank lending to everyone. Essentially, it's a problem that cascades into all sectors.

So recessions usually see a lot, if not all sectors shrinking, even if there was nothing wrong with them beforehand. You don't need a problem in all the sectors to have a recession. You need one more general problem and it sort of infects everyone.

That's how we're tending to think about this, and it's why we continue to think that a recession is more likely than not.

National power: Let me finish with just a quick thought on national power. It's easy enough to compare countries on the basis of GDP. Who is the biggest economy? The answer is the U.S. If you're talking about the value of goods and services produced, the answer is China. If you're looking at the number of goods and services produced, they just sell them for less money. So that's fairly clear.

What about power in a more general sense? Of course, everyone's definition might differ. Reasonably you could say: “We should look at the economy. We should also look at the military clout of a country, maybe its financial market clout, perhaps its resource wealth and a few other things like that.”

There's a Country Power Index out there that actually does capture this quite nicely. We're tracking it and it argues the U.S. has the lead. That's not a particular surprise. China's in second. That's not much of a surprise either. China is moderately behind, not enormously though, and so I think it's fair to recognize these are the two global powers of our time.

Other countries are quite a bit further back. Germany is third, then Japan and South Korea, then the UK. And I mention all of this not because there's any sort of pressing relevance, but this is a time of friction between world powers. It's a time where different cliques are forming. Certainly we hope there's nothing worse than that down the road, but it could be that this sort of power becomes relevant.

And so let's watch this. We’ll watch the extent to which China might narrow the gap with the U.S. over time and so on. I think at a time like this, this does matter. The U.S. is still in the lead by this definition.

Thank you very much for your time. I hope you found this useful and please consider tuning in again next time.