We are still in the hard landing camp for 2024. We think a recession is more likely than not. With about a 70% chance if we're talking North America and much of the developed world. To be sure, mathematically, that means there's a 30% chance of something like a soft landing.

That possibility exists, we just think it's less likely. And to us, the recession call has a lot to do with interest rates, which, despite a recent rally, are a whole lot higher than they were a year ago. Much, much higher than we've been used to over the last decade plus and arguably sufficient to induce an economic contraction by themselves. We're looking very carefully at a variety of recession heuristics like inverted yield curves and other traditional signals that are also signaling recession.

Our business cycle work is similarly saying it's very late in the cycle, and so there's a downside risk there as well. We think a recession is more likely than not. I should emphasize, and these are the caveats, we think it can be fairly mild. We think it can be fairly short. We think damage to the labor market can be less than normal as companies hoard some labor after a difficult experience hiring them.

And ultimately, this, you could say, is the most anticipated recession in history might just limit the scale of the damage on other fronts. But at the end of the day, recessions are still painful. They're painful for economies. They are traditionally painful for markets as well. We are braced for some measure of pain in 2024

Whenever we talk about the global economy, we really do need to break it down into the developed world and emerging markets. On the developed world side, we are expecting recession across the bulk of developed world nations. I would say ex-U.S., we think it could be a little bit deeper.

The U.S. is proving somewhat more resilient, though likely not immune when we're talking about Canada and the U.K. and the eurozone. These are economies that are already stumbling to some degree, and we're not seeing particularly reliable growth out of them even across 2023. And they are somewhat more interest rate sensitive and so this is a logical outcome.

We do think there is some pain to come on those fronts. And we can see business expectations that are softer and consumer spending that's beginning to wobble itself and labor markets that are still mostly holding up, but equally less robustly than in the past. We are expecting some measure of weakness there. The emerging markets story is similar but different.

It's similar just in the sense that when you see weakness in one part of the world, it usually does affect the rest of the world to one extent or another. But it is less likely that the bulk of emerging market countries will shrink out. This is probably a story of 2024 involving somewhat less growth than normal.

Speed limit of these countries is generally somewhat greater when we think about some of the bigger emerging market countries. Of course, China comes to mind quite quickly. The Chinese economy probably still in something of a recovery mode in 2024. And it's just been marching to its own drum or having been locked down in 2022 and staging something of a recovery this year, we still think there is a bit of a recovery left and there's enough stimulus in there for China to be more on the good news side of things then the bad news side of things, at least in the short run.

And then when we turn to India, which really has come into its own and has been a fast-growing country, it's now the world's most populous country as well, having just passed China. And it's set to slow, fairly notably, we think, in 2024, but still move forward reasonably well. And to me, maybe the bigger story about India is just if we step back from the 1-year outlook and talk about perhaps the 5-year outlook and ask where will global growth come from over the next 5 years, answer number one is still China.

It's probably set to be about a quarter of global growth, which is, by the way, less than it was over the last decade, but still enormous. Number two isn't likely to be the US, it's probably going to be India. India could be the second biggest driver of global growth over the next 5 years. It is really becoming truly quite important and something I think investors are beginning to awaken to.

Expanding on that theme, just to conclude, I would say incredibly, over the next 5 years, emerging market countries are set to generate over 80% of global growth. We talk a lot about the likes of the U.S. and Canada and Europe and so on, but we need to think a lot about the rest of the world because that is where the growth is coming from and that's where profits come from and that's where market opportunities exist as well.

The U.S. economy is certainly demonstrated more resilience in 2023 than just about any other developed country in the world. They managed a 5% annualized growth rate in the third quarter, which beat the pants off of every other country. The U.S. has been holding together quite well so far. I think the thing to observe though is we're starting to get hints of softness there.

For instance, business expectations are fairly grim and consumer spending, while source of strength in recent years, is starting to show a little bit of distress. We can see a lot of the spending is being spent via credit cards. We can see that credit card delinquency rates are starting to rise. There's a little bit less room for consumers to keep spending and it's very similar on the labor market side, which is they’re still being hiring, but the hiring is certainly slowing.

And some of the adjacent indicators like temporary employment and youth unemployment and things like that, are starting to deteriorate in a way that suggests to us there probably is some weakness ahead. One of the saving graces of the U.S. economy in 2023 was fiscal stimulus. And as we mapped that into 2024, we are seeing some fiscal drag emerge.

I think the takeaway for the U.S. is that it's still likely to descend into recession, which is what we think for a lot of developed countries, it may be somewhat milder than the other countries because it is just a less interest rate sensitive economy right now by virtue of 30-year mortgages and less household debt and those sorts of things.

Probably not quite enough to dodge that outcome altogether. And in particular, some of the things that saved the U.S. in 2023 may be a little bit less helpful in 2024.

The Canadian housing market has been quite a roller coaster ride in recent years. Of course, there was the boom during the pandemic with very low rates and people spending a lot of time in their houses. There was quite a bust in 2022 as interest rates started to go up, and that was a textbook sort of response.

There was this curious bounce then in the first half of 2023, and that would be, we think, partially seasonal factors, partially people just not listing their properties. There was a shortage of supply for a period of time. That's starting to be resolved and we're back to weakness. What we're seeing is some tentative softness right now and existing home sales are slipping a bit.

Home prices are edging a little bit lower. And we're working on the assumption that there are a few more years of difficult times for the Canadian housing market, in particular home prices. That's not a prediction that home prices fall at the rate they did in 2022. That was pretty extreme. We are assuming flat to down, though, over the next few years.

And the biggest reason is just that affordability is still quite poor. It's much worse than it was before the pandemic. It wasn't great before the pandemic. We're still quite some distance offside from that perspective. Obviously, mortgage rates are part of that story, and even if mortgage rates themselves, the posted rates don't go any higher or even start to fall, the reality is you have a lot of people who will be renewing their mortgages over the coming years.

And in particular of the 2025, 2026 cohorts are notable and worth watching because these are people who enjoyed extremely low mortgage rates when they locked in last time and they'll be facing presumably significantly higher rates the next go round. And so that is to say there is some pain that will persist over the next several years.

We're aware that population growth is fast, immigration is strong. If you want to be an optimist on Canadian housing, that would be the best thing to hang your hat on. I would just warn that when we do the math on what a rising population does to home prices, it certainly helps. It's a smaller effect than most people would imagine.

We still think the affordability and the rate story is probably enough to keep things soft. And indeed, historically, the average housing bust in the developed world lasts quite a number of years. It's not usually a 1-year phenomenon. We're assuming soft home prices. The construction side is a bit more nuanced in the sense that there is indeed great population growth in this country.

We do need more construction. There are some constraints on that in terms of zoning and other restrictions, and it's very costly right now to build given the cost of financing and the availability of labor. But we think that we will see a decent level of construction and perhaps even the building level over the years ahead.

So quite a contrast between prices and supply.

We think the Chinese economy can stage something of a recovery in 2024, but a muted recovery. And the reason we use the word muted is in part because, of course, much of the rest of the world could be in a more difficult position. China won't be getting much help from foreign demand.

But equally, we can talk about the Chinese housing market in particular, that was a great source of strength over the last few decades, which simply isn't right now. And so Chinese home prices are flat to lower. A number of builders are technically insolvent and just not in a position to build. Housing matters a lot, and China is about a quarter of the economy.

It's much more than most economies, and it represents around 80% of household wealth. That's where households put their money. When home prices aren't moving and there's not a confidence in that market, it does cast something of a chill more generally. And so, again, we think there's a recovery just because China was so locked down for a period of time, but a muted one because housing won't be helping as much as normal.

I think it's worth expanding from there and just thinking beyond the next year and saying from a medium-term perspective, China is in a different position than it was over the last few decades. China was long a country that could grow at 6%, 8%, 10% a year was quite remarkable. And as China has matured and grown wealthier, those sorts of growth rates just aren't possible.

We're assuming 3% to 4% growth is the new normal for China. That is a significant step down. It's partly for benign reasons, like China becoming wealthier and wealthy countries don't get to grow as fast. It’s partially because China had a multidecade housing bubble that I would say in a good way is being ended, but of course being ended in a way that doesn't support growth quite as much.

And it also relates to some challenging demographics, some maybe diminished productivity growth, given a preference for the state over the private sector and some geopolitical frictions. And so, 3% to 4% growth, disappointing by Chinese standards, still beating the bulk of the developed world, still enough to generate about a quarter of global growth. China is still here and a big deal, but maybe not growing as fast as we're used to.

Many countries around the world are running very large fiscal deficits right now to an unusual degree, the sort of deficit you might normally see during the worst quarter of a recession. But they're recording these at a time when economies are still, for the moment, alive and well. This is not normal.

Some of it is a relic of the pandemic. Some is just governments have been drawn into ever more spending and have been reluctant to raise taxes. It's not the focal point for the market right now in the sense that markets are focused on; will there be a recession? Where will inflation land? What's a normal interest rate? That's the focus right now.

But I think as we emerge and start to answer those questions, we may see that focus pivot more toward fiscal affairs and recognizing this is just not a sustainable proposition. And countries are going to need to run some austerity to get things back on side. And the bond market is more attuned to fiscal matters in a way that simply didn't seem to be all that relevant over the last decade or so.

And it's going to be a very difficult thing for countries to pull off, in part because it does in part economic pain, in part because there are a lot of demands on government money right now. More than usual, arguably. And so here we are in a world of aging populations which are expensive. One in which a lot of money is being spent on climate change mitigation efforts and those sorts of initiatives.

Industrial policy is back in fashion and it's very expensive. Military spending is rising and expected to rise. It's just a dangerous world. And the cost of servicing debt, of course, has gone up as well on higher interest rates. This is a challenging situation. It's going to be hard to pull these deficits down. I think it's going to have to be done and it's going to involve somewhat less growth for the countries that have perhaps run the largest deficits.

And there is no shortage of those countries. The U.S. is one of them. You see a fair swath of Europe in that position, also some emerging market countries. I think that might be the next market focus once we're through this question of a recession or not.

The good news with inflation is that it has itself declined significantly over the last year plus. But there are still risks, and indeed, I would say the risks do tilt more to the upside than to the downside. There are still scenarios in which we get stuck at a higher level than we would like.

We're watching very carefully for that. I would acknowledge just looking at long term inflation forecasts, that as much as we think a 2% number is entirely achievable over the long run, we have been flagging that there's a distinct risk we could run a little bit hotter than that. And we see climate change as a long-term driver of a bit more inflation and deglobalization, which seems to be happening, is also slightly inflationary and even workers gaining a bit of an edge over businesses after long the reverse being true could well be slightly inflationary.

There very much are some upside risks that exist and need to be acknowledged. I want to say, though, equally we believe there's further room for inflation to decline from here. We've been slight optimists as it pertains to inflation and its path downward. And we believe the four main catalysts of high inflation have turned. We've seen a commodity shock that's reversed, and we've had supply chain problems broadly go away and central banks delivered an awful lot of stimuli, are now delivering restraint.

And even fiscal policy, which is a bit blurry or isn't as generous as it was. It makes sense to us that inflation is coming down and we can see the money supply now in contraction, which is a good sign for inflation falling. The breadth of inflation has narrowed a lot. At its worst, you had 30% plus of the price basket rising at a double-digit rate.

It's now 1% of the price basket in the U.S. and not much more than that in Canada. We've seen important improvements there. So, we think there are further gains to be made, but not all the way back to 2.0% in the near term. It's still a process. There are going to be some choppy months. Wage growth is still swirling in a way that complicates this effort.

We're assuming there's a little bit of scarring. Just the trauma of high inflation makes it take a little longer to get back to scratch. And so really the economic outlook in the inflation outlook probably are more uncertain than normal. And let's acknowledge we don't have all the answers here. There are a few ways we could get stuck at a higher level, but there's a pretty good shot that we can see inflation continue to fall over the next year at least.