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by  Eric Lascelles Jan 8, 2024

Diving into the new year, Chief Economist Eric Lascelles shares an abundance of positive trajectories in the economy, despite the fact that there is a fairly high chance of a recession over the next year.

  • Yields are up massively since 2020, but are down significantly since the autumn 2023.

  • U.S. Federal Reserve signals that rate cuts may be sooner rather than later.

  • Global inflation has declined since 2022, and continues to settle.

He also discusses the busy political calendar ahead, sharing the upcoming political events to watch in the next few months.   

Watch time: 34 minutes

View transcript

Hello, my name is Eric Lascelles. I'm the chief economist for RBC Global Asset Management and sharing with you our latest monthly economic webcast. As you can see, the title is Glimmers of Hope Amid Dark Clouds. Just to explain that exciting title, The Dark Clouds, we still think there is a real chance and a fairly high chance of recession over the next year.

But actually some things have gone fairly well in recent months. We've seen bond yields come down and the U.S. Federal Reserve talking about rate cuts and a few other things that do create a glimmer of hope and make a soft landing scenario at least plausible. So there's been more good news than bad, but still, certainly some issues out there.

Let's jump our way in, as we always do, and we'll start with the report card and work our way through what's going well and what's going badly in the world today.

Report card: On the positive side of things, I can start with a fairly obvious statement, which is at least in a U.S. context, the economy is still growing for the moment.

That's not something that's normally worth flagging. But in a world of recession fears and in a world in which a lot of other countries really aren't growing all that reliably right now, we should celebrate the fact that this big U.S. economy is still moving forward. We can certainly celebrate --- and this is a nearly global truth – we can celebrate that inflation is falling again and falling fairly nicely, and that's a big deal.

High inflation has been the central economic problem and it's getting quite a bit better. We have, as I mentioned a moment ago, we have the U.S. central bank, the Fed (Federal Reserve), signaling a pivot toward rate cuts. Some pretty explicit talk about rate cuts this year and markets pricing that in. Indeed, even Fed participants are projecting rate cuts by the middle of this year, if not a little bit sooner.

And so certainly that's relevant and markets tend to get very excited and enthusiastic when central banks pivot toward rate cuts. That helps to explain recent stock market strength as an example, and recent bond market strength as bond yields have fallen. Boy, it's been quite a roller coaster ride for bond yields. I'll get into all of this in more detail in a moment.

  • Bond yields are still up quite a bit over the last few years, but they have fallen notably over the last couple of months. And so moving back down, and lower yields broadly are supportive for the economy.
  • Oil prices have fallen. That's part of the inflation story, that's a helpful one as well.
  • Lastly, as I mentioned a moment ago, there is more optimism about achieving a so-called soft landing, the idea being that a soft landing would be avoiding a recession, not necessarily growth being completely normal, but managing to dodge the recession scenario. And so markets are increasingly budgeting for that.

As I'll talk about in a moment, we have increased the likelihood of that in our own scenarios as well. Not to the point of being the most likely scenario, we still think a recession is more likely. But nevertheless, it is more conceivable than it was a few months ago.

So those are the positive themes. Let's work our way into the negatives now. I can start by saying even with falling bond yields, interest rates are still pretty high. And so that is still a net drag. And we know there are big long lags in terms of higher rates impacting the economy. So we're still seeing interest rates as a rather significant headwind as opposed to a tailwind even if that headwind is a little bit smaller than it was a few months ago.

Our business cycle work still says this is quite a late point in the cycle. So there's a real vulnerability there. It's worth flagging.

We tend to be very U.S. centric in a lot of our analysis, just because the U.S. economy is still the biggest in the world, very relevant globally, very relevant to Canadians and certainly relevant to all investors. But I can say that non U.S. developed world economies are already sputtering. They're not moving forward with any kind of enthusiasm.

In fact, if we're thinking about the U.K. and the Eurozone and Canada as prominent examples, they're really not moving forward at all. These countries are recording negative quarters of growth as often as positive quarters, and that's just not a normal state of affairs. There's already a real degree of suffering there.

We still think the U.S. recession risk is elevated. A normal recession risk might be 10% or something like that in any one year. We think it's a 60% likelihood over the next year. That's down from the 70% and even 80% numbers we've talked about occasionally in the past. But it is still more likely than not in our view, and certainly much, much higher probability than normal.

And then just throwing one other much smaller issue out there: you'll recall the world was very much frozen by supply chain problems at various points over the last few years, and it hurt the economy and it added to inflation. This is a bit of a premature statement, but there's a risk that we could start to see a little bit more complexity and problems in the supply chain space as we see the Red Sea decreasingly friendly towards shipping vessels. That's one of the main shipping routes for the world and we are beginning to see some of the costs of shipping go up.

I don't think in the end it will much resemble what we experienced in 2020 and 2021 and parts of 2022. But it's worth flagging. There's a bit of an issue that's presented itself on that front.

I'll finish with a quick thought, just in the interesting bucket, neither unambiguously good or bad. I can start by saying it is a busy political season ahead. It's actually a record year in 2024 for elections in terms of the fraction of the world getting to vote on national leaders. And it does include some elections coming along awfully soon, which I'll get to a bit later. It also, of course, includes the U.S. presidential election, which we can talk about as well towards the end of this presentation.

The other interesting thought is just global fiscal drag. We've been in a world of big deficits and lots of fiscal stimulus. Those deficits are at this point unsustainable in our view. And so we will likely have to see some austerity gradually over the span of a number of years starting to rein that back in. That's not a new development, but it is one we should be thinking about.

My suspicion is when we work past the “will it /won't it fall into recession?” debate, which may dominate a chunk of this year, we may start to see more attention on getting fiscal positions into a more sustainable place.

Okay, so there's your report card. Let's jump into the picture show now if we can.

Market optimism is in significant part due to Fed pivot toward cuts: We'll start with what was maybe the biggest driver of market enthusiasm recently. In the U.S., the Federal Reserve Chair Powell signaled that rate cuts may be sooner rather than later. He gave explicit credence to the idea that rate cuts are coming and was talking in a way that suggested cuts this spring and at a minimum this summer are arguably in play.

This chart, by the way, just shows you the incremental shifts that have occurred over the last several months. You can start way back in August. That's the light blue line. So markets were already expecting rate cuts, but fairly cautiously. Interestingly, from the summer into the fall up to that gold line, we actually saw markets taking out rate cutting. Inflation was a bit tricky there for a number of months and we weren't getting much of a signal from the Fed.

So the market was less convinced that rate cuts were coming or at least wasn't pricing as much in. And that's all reversed now in a big way. You can see really since just since late October through to early 2024, as we record this, you can see the market's pricing at a much lower policy rate a year from now, even two years from now, a steeper rate cutting trajectory.

Our views are, I would say, roughly in alignment with these market expectations at this point in time. Maybe we could envision a slightly lower ultimate Fed funds rate in a couple of years time. But the idea that the rate cutting can start in the spring or summer seems about right to us. Again, it's been a big driver of bond yields going lower, which we can see in this next chart.

Yields are up massively since 2020 but down significantly since the autumn: So there's that huge increase in interest rates from 2020 through to really the fall of this year and then a pretty substantial decline. Again, you can debate what's more relevant here, the fact that rates are still a lot higher than they were a few years ago, or the fact that they're a fair amount lower than they were just a few months ago.

I think both are relevant in different ways. You know, we talked extensively in the fall about the sharp increase in rates that had taken place just in the few prior months as being something that added to the likelihood of recession. We would be inconsistent, we would be a little bit biased if we didn't say, “Listen, this decrease in rates taking place pulls back a bit on that and takes away a bit of that risk now.”

Putting it a different way, financial conditions are now easier than they were a few months ago and that's something that does help the economy. We still think there's enough of a drag out there that a recession is entirely plausible. Historically, when rates have gone up this much and when central banks have raised rates this much in a short period of time, you usually do still get a recession.

I'll talk about that in more detail later. We can still celebrate that yields have come down and are exerting a bit less pressure on household balance sheets and on businesses and on the economy in general.

Now it's clear that markets are pricing in a rather substantially diminished likelihood of recession. You can see that in the way the stock market has soared and earnings expectations are fairly good at this juncture.

Markets may have sharply discounted recession likelihood, but economists haven’t entirely: Interestingly, we haven't seen that much of a move in the consensus forecast for an actual recession from economists. And so this is a busy chart, lots of colors moving in all sorts of directions. But these essentially are the consensus likelihood of recession for a variety of countries.

One point would just be that with the exception perhaps of Japan and with the exception of China, the majority of these countries are being assigned a 40, 50, 60, even a 70 or 80% chance of recession. Those are high likelihoods. That's about as high as you get.

So economists still think a recession is more likely than not in most cases, and actually not that many economists have revised down their estimates all that much. We were in a position where we thought the likelihood was higher than the market thought, but I'd say we're now at a position where we're probably a little bit closer to the economists’ consensus.

But again, there's this curious disconnect between what economists are saying and what markets are thinking. And as much as I'm an economist, I'm not sure I can say that the economists are right. Markets are pretty darn smart as well. And so markets are feeling a bit better about this. We are more cautious, I can say, relative to what the market is pricing in.

Our two main macro scenarios for the U.S. in 2024: Indeed, as we think about the future and the way forward over the next year or so, as much as our base case scenario is a recession, what you might call a hard landing, I do want to say that it's most useful to operate in a probabilistic world and to think about the scenarios that exist. And as much as there are infinite numbers, really when you get into the weeds, the two most likely are just a soft landing – meaning avoiding recession, but still probably having a bit of economic weakness as high rates still have some effect – versus a hard landing, which is a recession.

The difference maybe isn't as big as you might imagine because our hard landing scenario envisions a fairly mild recession. So it's not a deep recession. It's a fairly mild, fairly short one, one that could be recovered from reasonably quickly. But still, there is a difference there. And historically, markets haven't been very keen on recessions or hard landings. So you can imagine that there would be some recoil in risk assets in that scenario.

Now, in terms of why we think both of these are viable scenarios, well, to start with, on the soft landing side, it's undeniable that in particular the U.S. economy has just refused to quit. That's not a particularly scientific observation, but we've seen surprising growth across the last year at a time when many had expected recession. You can't deny that. And some level of buoyancy appears to exist.

As I mentioned a moment ago, interest rates have fallen somewhat in recent months. So that is a helping hand to the economy. We have a Federal Reserve, a central bank that's feeling more optimistic. It's less worried about inflation, and that's fair. Inflation has been behaving. It is more focused on ensuring, therefore, that economic growth can continue. So that's a promising thought.

You could say the Fed put is back. The idea there is historically, when bad things happen to the economy, central banks swoop to the rescue and minimize the amount of damage that happens. The thinking was we wouldn't get a Fed put this time because they'd be so focused on killing inflation that they would have to tolerate economic weakness.

But inflation is coming down by enough that maybe they can pay a bit of heed to the economy and they can help a little bit by cutting rates at the appropriate moment. And so that would argue potentially for a soft landing.

And then similarly, just a positive confidence shock of sorts. People are pretty excited. Markets have gone up quite a bit in recent months. And just that sentiment of feeling better, even thinking that a recession is less likely maybe does make a recession less likely because people behave in a more confident matter and they spend and so on.

So again, the point being soft landing is a perfectly conceivable scenario. It's more likely than it was a few months ago. We're giving it a 40% chance.

The hard landing, the recession scenario, we're giving a 60% chance. In terms of why we still think that's probably the more likely outcome, we did get an awful lot of rate hiking over the last few months and that's still playing out. Higher rates hit with a significant lag. Historically, this is indeed about when you'd start to feel maximum pain, so we're not overdue for that suffering. The suffering is still on schedule, we think.

We have a lot of classic recession signals that are still intact. We'll get to some of those later, including inverted yield curves and things like that have historically presaged recession. Our business cycle work, as I mentioned earlier, is quite old. It says this is probably the end of a cycle.

International economies, as mentioned, are already quite weak. They're already not growing. So there is some real pain that's mounting here. Support in the U.S. context from fiscal policy and from consumer spending, those are maybe the magic tickets that let the U.S. economy outperform almost everyone else in 2023. We think those things are going to fade in 2024 and we also think we're starting to see a little bit softer economic data just on a trend basis.

Again, we think a hard landing is more likely. But, you know, the balance of risks has shifted a little bit and we're less convinced that's the only possible outcome.

Okay. Let's go on from there and celebrate some inflation developments.

Global inflation fell, rebounded slightly, now falling again: Inflation is looking an awful lot better than it was a year or two ago. We've gone from eight, nine and even 10% inflation in the developed world. And we are now living in a world that's looking more like two, three and 4%.

That’s still higher than ideal and certainly not symmetrically centered around the 2% targets a lot of countries maintain. But there’s been a lot of progress. We did get a bit of a stutter step in the late summer, early fall, when oil prices were rising.

We've since seen those come down and we've seen inflation for the most part start to settle a little bit. Again, we would flag that when the December inflation numbers come out – and to be clear here, I am talking in January and it takes time for these numbers to come out – we think that might be a little bit less friendly.

But in general, the trend has been a good one. In general we feel pretty good about the potential for inflation to improve further from here, at least on a trend basis.

Falling oil price helps inflation and global growth: Falling oil prices are very helpful. We've gone from a world in which West Texas oil was approaching triple digits in the fall to one in which it's in the realm of $70 a barrel right now, which is a huge improvement.

It also goes without saying, though, not clear on this chart. that oil was $130 a barrel at its worst point during the early stages of the war in Ukraine. Of course, we're far, far from those levels as well. So we're getting a bit of help from gas prices.

Inflation trend is becoming much friendlier: When we look at the broader trend, this is a busy chart, but really the colors maybe tell the story, which is we're getting a lot more green and maybe some less red and dark orange on the left side, on the left column.

So the idea here is you've got the 12-month trend for just a slew of different U.S.-oriented inflation metrics. On an annual basis, you're still seeing a lot of numbers that are three and 4% and even some fives. So year-over-year inflation is certainly much too high.

Interestingly, if you start to look around, I like looking at a three-month basis, which is the second column from the left. I'm starting to see some numbers that are in the twos and so on. Still mostly a 3%-type world.

There is still more work that needs to be done. Service inflation does need to come down more and shelter inflation isn't quite where we'd like it to be, as you can see, towards the bottom. But we are seeing progress and we think there is room for some further progress.

And I guess that's me saying we're slight optimists on inflation in terms of its ability to continue to settle. Maybe not precisely to 2%. We think it's a journey and it may have proved sticky at a somewhat higher level. But we don't think we're stuck at 3+% right now.

Supply chain concerns rising again on Red Sea disruption – inflation and economic risk: I can say, as I mentioned before, supply chain issues are getting a little bit worrying. Everyone is watching the Red Sea and Houthi rebels and Yemen and it’s getting more difficult for ships to make their way through the Red Sea. That, again, is a main shipping route between Asia and Europe and so consequential. You can see here that the cost by some measures of shipping has gone up. And so that's notable.

I should say that's not the only measure of shipping. Some of the others are moving somewhat less excitingly. But again, we're budgeting for a little bit of supply chain complication, again, lending less help to the inflation trend in the near term. We're assuming it's not a permanent condition, though.

Canadian shelter costs are highly divergent and proving sticky: Let me also just make a quick comment here just in a Canada-specific context about shelter costs. Shelter costs have been a stickier part of the inflation price basket for almost every country, for a lot of countries at least and there are lags built into the system and so on. It is proving, I would say, especially tricky in Canada, for a couple of reasons.

  1. Home prices are cooperating. So the light blue line shows that home prices are indeed falling. And so that component showing up in CPI (Consumer Price Index) is falling. That's helping the inflation story.
  1. The complication is the other two things. You have what amounts to rent in dark blue. So rent inflation is proving sticky and is running at not a radical rate, but it's running at a 5+% rate. And that's significant.

    So one imagines people with mortgages who are renting out their condos, as an example, they're seeing their mortgage payment go up a lot. And so rent payments are going up quite a bit as well. And with the population growth Canada is sustaining right now, there's just a shortage of properties available. And so that part is not helping much.

    It's not clear if that's going to turn in the near term. I think a recession would turn it. I'm not sure much else would.

  1. Then, of course, you have this special component called mortgage interest costs. And by definition, as interest rates have gone higher, mortgage interest costs have gone higher. And so that's adding to inflation. It's this very strange, vicious circle of sorts in which the Bank of Canada is trying to reduce inflation by raising rates. Yet this one funny component of CPI is going up more, as opposed to coming down.

So there is a bit of, again, a vicious circle that exists there. I would say raising interest rates dampens the rest of inflation and off that it still makes sense to raise rates to kill inflation. It just doesn't help this one thing.

The problem is even if the Bank of Canada is done raising rates – and they probably are – even if they start cutting rates this year – and I would say they probably will – it takes some time for this to come down because a lot of Canadians haven't yet rolled their mortgages into that higher rate. So we're going to see, I would think, positive numbers for quite some time.

As a result, it's not a foregone conclusion that Canadian shelter costs can fully settle. And so that's just one example of how inflation could stay somewhat hotter than normal for a while. But again, not necessarily at a 3% plus rate.

Okay. So let's pivot from the inflation. We'll get into the economy here.

So I've talked about how it's plausible to achieve a soft landing. Now I'm going to sort of pivot and sort of hammer home some of the things that aren't going quite so well and why ultimately we are still expecting it with diminished conviction, but expecting a recession.

Seeing evidence of rising rates starting to hurt: One would be we are seeing some pain form in the economy. This chart shows U.S. credit card delinquency rates.

And you can see a notable increase both in newly delinquent credit card loans and those that have been delinquent for 90 days or longer. For quite a while, we could say “Well, we see an increase in the 30-day delinquency rate, but it's not really mapping into the 90-day rate.” So people are sort of making a payment, maybe 45 days late, but not actually failing to make the payment all together.

Now the blue line is going up as well. So consumers are looking a little bit more stretched. That diminishes their capacity, we think, to spend.

Global manufacturing contraction is not just underway but already the longest in a quarter century: When we look at global manufacturing activity indices, these are global PMIs, or purchasing managers’ indices. This is kind of a funny type of chart. I quite like it, but it takes a moment of explanation.

The reason those pyramids or those triangles look so beautifully formed is they're just counting the number of months that these manufacturing indices are in expansion mode versus contraction mode. By definition, it's a triangle that's rising or a triangle that's falling until the point that it crosses the 50 threshold, which delineates growth from decline.

Most of the time, these manufacturing indices are recording growing manufacturing sectors, just like economies spend most of their time growing. Every once in a while, you've got a golden triangle pointing down. That's where we've been for quite a while. In fact, I can say that we've now been more than a year where the global manufacturing sector is in decline.

This is actually a record dating back a quarter century to when the data started to be collected, so this is an unusual state of affairs. It reflects a degree of economic weakness. I hesitate for a moment to say it means there's a recession coming, or it argues there was a recession coming. You can argue that, just by saying the manufacturing sector is weak, that suggests that the risk of a recession is elevated. That makes sense to me.

Of course, optimists can say, well, listen, this thing's been shrinking for more than a year and it still couldn't pull off a recession. Maybe the economy is just so resilient in other ways that it's not going to happen. I would say that sounds like a pretty good argument as well. I guess that's why we think there are scenarios in which the economy keeps growing versus it doesn’t.

Maybe the simplest thing is just to say, listen, manufacturers are suffering right now and that's not great for the economy. So I think maybe I'll leave it there.

Historical monetary cycles point to Spring 2024 recession: When we talk about historical monetary tightening cycles – and don't feel like you've got to memorize all those dates – it's just a bit of evidence or ammunition behind what I'm about to say.

We can look at things historically in the U.S., when the central bank starts raising rates, how long until the recession happens? Because more often than not, a recession follows. There's a big range that that first column of numbers shows. There's a big range in terms of the gap between that first interest rate hike and recession. The median experience is a 27-month gap between the first hike and a recession.

If you're wondering, for the current cycle that would mean June 2024, if that median were to play out this time.

We can also say something else, which is the extent that it seems as though maybe central banks are now done raising rates. In fact, there is a pretty good chance of that right now. They're talking cuts at this juncture. So if we've seen the peak, what's the normal time period between achieving the peak and recession?

And the answer is again, with considerable variation, the median experience is nine months. If you map that forward from when the Fed stopped raising rates in the early fall on 2023, the answer would be April 2024.

The common thread here is that we're not behind schedule. You normally don't get a recession in the first year or two after rate hiking starts.

These sorts of things are saying maybe we get a recession roughly in the spring of this year. So that does align with our forecasts right now, recognizing that there's no guarantee here and that there have been episodes where rate hiking didn't induce a recession. It usually does, but not always. There have been episodes in which the timing has been quite different.

But this would be the central tendency and it would say, let's pay close attention over the next couple of quarters.

Non-U.S. economies are already flirting with recession: Then just looking, as I mentioned earlier, at non-U.S. economies, this is the UK, as an example. The UK economy really has not been performing very normally at all since the middle of 2022. You can see those bars shrink right down.

No longer are we seeing big or even normal growth rates. I would say normal is 2+%. There was some pretty impressive growth there for a moment as the UK recovered from the pandemic. But you can see the British economy basically is going sideways and you've had two quarters of outright decline. Maybe you could say you’ve had two quarters of almost no growth, a couple of pretty anemic quarters.

The tracking for the fourth quarter of 2023 is negative for the UK, for what it's worth. So technically, that would be two negative quarters in a row. Some people call that a technical recession. I don't, but I would certainly acknowledge its weakness and suggesting that all is not well in the UK. And it's very similar in Europe.

I can also say it's not totally dissimilar in Canada either.

Canadian economy continues to struggle: This is the Canadian equivalent of the quarterly GDP profile. You can see less growth at a minimum than we've been used to seeing, less growth than normal for the most part over the last year, plus two quarters of decline. And we're tracking a quarter that could be, you know, flattish or something like that for the next quarter.

So Canada is really not reliably growing right now whatsoever.

Again, it's been a different experience in the U.S. The U.S. has been moving faster. It had more fiscal stimulus recently, more enthusiastic consumer spending, less sensitivity to higher interest rates. That all kept the U.S. economy going.

We still think the U.S. economy is going to stall out here. But I would say it's easier to make the call that the rest of the developed world is already stalling out and is even more likely to succumb to a proper recession.

Recession signals point mostly to “yes” or “maybe”: We trot this slide out every couple of months. Soo I'll do this again without getting into the weeds here. This is a just a list, some of the heuristics we use and what they're saying about the likelihood of recession. We're still in quite an unusual position, which is that more than half of these heuristics are saying they've been triggered.

They're saying that, yes, a recession is more likely than not. You've got a number of maybes as well. You’ve got one no. Just for context, most of these would be No, most of the time. So even those maybes are telling you that there is an elevated recession risk relative to normal right now.

Again, we're estimating something like a 60% chance over the next year. Just looking at this table, I would have said an even higher number. But there are other factors to consider, so we're calling it a 60% chance.

Business cycle scorecard says quite far along already: I'll just pull this chart out as well, which is our business cycle work. This is the first time seeing it like this. The reason that we've got bars and every single possible point in the business cycle is we ask about 100 variables where they think we are in the cycle and they have a grand time disagreeing with each other.

Some think we're early in the cycle, but not very many. You can see, though, really the way to read this is to look at which bars are tallest. You can see you could debate is it end of cycle? Is it already a recession? Is it just late cycle? But gosh, the grand majority of the votes, the biggest bars are all towards the very end of the cycle.

So we feel pretty confident in saying this is an old cycle. It's pretty far along. Couldn't say with precision whether it's got to keel over tomorrow or six months from now or some other time frame. But it is pretty old.

So there's a significant risk that exists there as well. Okay.

So let's just flag this. Here we are at the beginning of 2024, and depending on when you hear this, a few of these things may have happened already. But for the most part, these are in the immediate future.

Upcoming political events to watch: So I just want to flag it's actually a pretty busy calendar, even in a non-economic sense, in more of a political sense, over the coming month or six weeks.

One would be the U.S. Republican presidential nomination process is about to begin. The Iowa caucus is on January 15th. New Hampshire gets going on January 22nd, Nevada is February 6th. So we're going to start to get a sense there.

I would say the consensus thinking is that former President Trump is very likely to win those. The question is, who comes in second? Do we start to see the consolidation of support around some secondary candidate who could, in theory, accumulate enough support over time to unseat Trump? So that's highly speculative. We don't know if that will or won't happen.

Right now Haley and DeSantis are the two most obviously contending for that second spot. We'll see whether there is then some consolidation of support around them. It may be more moderate support. That remains to be seen. But it should prove to be awfully interesting.

In a U.S. fiscal context, you may recall there were almost government shutdowns in the U.S,. in fact, on a number of occasions over the last several months. The next such risk applies on January 19th and February 2nd. Different parts of the budget expire on those dates, and they would have to shut down parts of the government on those two dates.

There's a risk there. That would be, of course, bad for the economy. It would be inherently temporary as well. We're assuming that it's actually avoided after some near misses, but ultimately some misses in the fall. It seems to me that politicians have figured this out a few times already. There aren't too many incentives to mess this up in an election year.

We're assuming that we don't get a shutdown, but the risk is there.

Lastly, just a flag, just a small selection of the international elections coming up in the near term, too, that could prove consequential. One is Taiwan, and that's January 13th. We mentioned that simply because, of course, lots of friction between China and the U.S. with regard to Taiwan.

At this point, the ruling party is favored, but there's a chance that a more China-friendly party is elected, which in fact is viewed as being something that would actually reduce tensions as opposed to increase them. But we will see what happens there.

And then Indonesia, I mentioned it's February 14th, so Valentine's Day election of sorts there.

Indonesia is the fourth biggest driver of global growth. I don't think that's always appreciated. It's a hugely important economy to the world. So we do need to pay attention at this point in time.

The ruling party is favored. There are term limits and so the incumbent can't run again. His son, though, is the vice-presidential candidate on the ticket, and they seem most likely to win. So probably a similar policy path for Indonesia going forward.

2024 U.S. election creeps nearer: I'll finish with a couple of thoughts here on the U.S. election. It's sneaking up on us. November of this year is the U.S. presidential election. We look at three different ways of gauging the likelihood, in a Trump-versus-Biden scenario, of who might win that head-to-head matchup. They are considered the most likely candidates for their respective parties.

At this point, Trump is considered to be a little bit ahead according to all three different metrics. One is is based on polls. Two are based on betting markets. One's an academic market, one's an actual money betting market. All have Trump a little bit ahead. So there is a very real chance that President Trump has a second term.

I would equally emphasize that it's close and it's still early going. This sort of thing can change 100 times over the 11 or so months that remain before the election itself. But it does look as though he is a competitive threat, whereas you might have guessed earlier he wouldn't be, having lost to Biden three years ago, and given that the incumbent usually enjoys quite a considerable advantage.

No, he is a viable candidate.

U.S. election platform preview:  I'll throw this chart up here. Press pause if you want to study it in great detail, because this isn't the forum for a 15-minute discussion of policy. I'm sure these platforms will be fleshed out in more detail over the coming months and we'll learn more.

We may also have a better sense for how Congress could unfold – because of course, you can be the President all you like, but if Congress isn't aligned with you, then you don't get to implement much at all. So, to be aware, these are just aspirations these candidates have as opposed to things they will do. But just to flag, I guess, a few big things.

If President Biden achieves a second term, he's talked about a higher corporate tax rate and a higher top individual tax rate. He's talked about tougher antitrust laws, perhaps to the disadvantage of tech companies. He’s talked about increasing regulations to some extent, raising the minimum wage perhaps.

Conversely, Trump’s talking about corporate tax cuts, going in the opposite direction, reducing government spending, maybe loosening the regulations on banks. He's been calling for lower interest rates, though in a more tempered way than he did during his first term.

Some differences there on trade. Neither likes China very much, but Trump would probably be more anti- China and more inclined to add tariffs elsewhere as well.

On foreign affairs, Biden supports Ukraine, Israel and Taiwan. With regard to Trump, no real change on the Israel side, but less support for Ukraine and Taiwan, by all appearances.

On the immigration side, both are talking about scaling back illegal immigration, but Biden wants to replace that with more legal immigration. Trump is more generally anti-immigration at this point, though he has talked about a merit-based system.

 On the environmental side, the big one is simply the Inflation Reduction Act, which contains a lot of environmental inducements. That is creating something of an industry in the U.S. Trump has talked about eliminating that. So worse, I suppose, for the environment.

Biden has also talked about a carbon border adjustment, the idea being that if you import things from countries without carbon taxes or from countries that pollute a lot, you would add kind of your own carbon tax to make it fair to compete with domestic companies. Europe is pursuing that already.

To summarize all of that: Biden, as you would expect, as the incumbent, would be more status quo, would probably be a bit less business friendly as per a kind of standard theory of Democrats versus Republicans. He might be fiscally expansive, has been keen to spend a lot over the last three years.

On the Trump side, you could argue maybe it would be a short term positive for investors to the extent that they might regulate banks less and maybe lower interest rates and cut the tax rate. Those are all things that investors tend to like.

It's less clear whether those would be wins over the medium or long run. Big differences as discussed in trade and foreign affairs and immigration and environmental policy, probably also fiscally expansive.

Neither presidential candidate seems all that worried about deficits. I think they may have to start worrying a bit more in practice in the coming years, but neither one feels all that constrained by fiscal realities right now. As much as one would rather spend and one would rather cut taxes, it sort of adds up to the same deficit implication.

I think would be fair to say and to conclude on this front, a Trump presidency would be less predictable. It's simply harder to read where it goes. So there are perhaps greater risks associated with that.

I’ll finish there. That was an exciting place to finish this. So hopefully you found some of that useful.

We'll certainly be revisiting the U.S. presidential race and be revisiting all of these subjects – recession/no recession, debates and so on going forward. If you found this interesting or useful, please consider following us on social media. That's how you reach us via X, formerly Twitter. That's how you reach us via LinkedIn and can follow along with our research or of course, visit our website as well.

So I'll say thank you very much for your time. I hope you found this useful and I hope to talk to you again next month.

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Date of publication: Jan 8, 2024

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