Broadening inflation versus resilient growth

Eric Lascelles - Managing Director, Chief Economist and Head of Investment Strategy Research

Hello and welcome. My name is Eric Lascelles and I am the Chief Economist and head of Investment Strategy research for RBC Global Asset Management. And I’m very pleased to share with you our latest monthly economic webcast. This is for the month of June 2026. And as you can likely see, the title is Broadening inflation, which is not something we much like.

Inflation is getting higher and again broader versus – and this is what we do like – resilient growth. So we're seeing economic growth that's holding together pretty well despite an energy shock and despite a number of headwinds. And so we do like that side of it. But we'll talk our way through the tricky balance between those two developments.

Okay. Let's jump in as we always do.

Report card: We'll start with something of a report card. And within that we'll start on the negative side of the ledger. And so let's talk about some things that aren't so great in the world today. And then we can ease our way into some better news and ultimately give you a balance of where things are.

And so on the negative side, well, let's start just with this war in Iran. And I do need to say I'm recording this on May 28th. It almost feels necessary to say May 28^th at 2 p.m., just because we are getting significant news even as this day progresses. I think we've learned over the last few months that you can have wonderful, good news and it looks like there might be a deal that is struck very, very soon indeed right now.

And then there's a backtrack and then you're back on and off. So it's hard to say exactly where this lands on. I'll give you my take in a moment, but I will start by just acknowledging for the moment, as I record this, the Strait of Hormuz remains significantly closed. And so that, of course, is problematic for the global energy market and part of the inflation story and so on.

Inflation is, for the moment, rising and broadening. And the main numbers, when we get them, likely won't look that great either. Central banks, in part for this reason, have been forced to shift from what had been a gradual easing cycle of rate cuts and are now thinking a bit more in a rate-hiking direction, though I don't think urgently or necessarily soon.

But that's just where the thoughts are now going as higher, broader inflation maybe dominates some other considerations. And as for that matter, the economy proves somewhat resilient, which doesn't really argue for rate cuts right now. We think there will be some lagged damage from the blockade of the Strait of Hormuz. And so again, not seeing a lot of economic damage, not too, too great in terms of the outlook at all, as I'll speak to in a moment.

But we are assuming we will get a bit of pain that shows up over time, second order effects and so on.

Changing the story completely and the subject at least completely and switching over to AI and technology for a moment. We do have some concerns about the memory chip sector. The cost of memory chips has risen extraordinarily.

It's not clear whether that sector can hang on to their quite remarkable profit margins right now. I’ll have a few things to share a bit later on that subject.

And then I've been very unfair in including this and please don't panic, but pandemic risks – we've been following, of course, the hantavirus outbreak. We've been following, similarly, the Ebola outbreak recently.

Our conclusion, I'll just tell you in advance so no one gets too concerned. Our conclusion is these are quite unlikely to become pandemics of any global relevance. I'll talk through the details on that a bit later. But of course, these sorts of things are on our minds, as we are in the realm of five to six years removed from the biggest pandemic in a century.

On the good news side, well, let's start with the war with Iran. Again we do think that this energy shock should be temporary and we're hopeful this all gets resolved quite soon. But one way or the other, whether it ends up being a three-month energy shock or a five-month energy shock, we don't think it's a permanent new normal.

As a result, there's room for some unwinding of the inflation pain, and so on, which is certainly quite welcome. I can say that the ceasefire is mostly holding in the Middle East. Mostly is doing a lot of work there because there have been a few breaches of it here and there. But on the net, on most days, both parties are not attacking one another.

It does appear and I have sort of said this already, but it does look like a deal could be imminent. Now, one might have been tempted to say that three or four other times in the last three months and that was wrong. This one seems more genuine. I don't doubt there will be a couple of twists and turns and perhaps some temporary pullbacks, but we think there is a pretty good chance of a proper deal that opens the Strait of Hormuz and makes significant progress toward normalizing energy markets in quite a short period of time.

So that's our thinking right now. I can say that throughout this energy shock and given all the other things going on in the world, the global economy is proving pretty resilient. It's holding together fairly nicely, which we're quite pleased about and even a little bit pleasantly surprised about. We do have above-consensus growth forecasts. And so, as I'll speak to in a moment, we have been downgrading them a little bit, just a necessary action given all that's happened over the last three months.

But we are still, I guess, on the optimistic side of the consensus. And so that's somewhere we're comfortable being,

I can say risk assets, stock market and so on looking quite chipper indeed despite a highly imperfect world and significantly reflecting a tech sector optimism. Nevertheless, good news for the investors out there. Most of you likely are in that camp.

Global trade is moving fairly well.

Obviously, tariffs have theoretically challenged it. In the U.S., trade numbers don't look so great. But globally it’s holding together as I'll show you in a moment.

The other subject I want to share a little later with a picture is China's housing market is still weak. It’s not at all clear that it's going to rebound. But we did get one very important green shoot and I want to talk about that a little bit later.

It's been a real drag on the Chinese economy for quite some time.

And then interesting. It doesn't quite fit into either of the other buckets. One is just – and this is could not be more obvious – AI is still very much in focus right now and in the spotlight. We’re thinking an awful lot about it. I'll talk a bit about that, shortly.

I can say, and I guess swinging back over to the energy shock and neither good nor bad, we can say that there is a regional variation here. The basic thesis that North America does relatively better or less bad, and Europe and Asia do relatively worse, is fair. However, the divide is probably smaller than you might think for several reasons.

One of which we're going to talk about in a moment. And I've tried to convey in this bullet –I'm sort of regretting its length now. But the basic notion here is that these European and Asian countries actually use much less oil and natural gas per unit of economic activity than, say, North America. That provides a significant level of protection, which helps to explain why there's been no recession, despite this adverse situation.

We'll take the quickest of peeks at private credit spreads in that market. In general, they’re feeling a little bit better, is the conclusion.

And then one other sort of interesting topic we were digging into recently, El Nino looks like it's back. And I'll get into that. It might even be a super version of El Nino.

So that's the plan. That does sound like an awful lot. So we better keep moving forward. So, let's jump in here.

Refreshed growth outlook: downgraded on energy shock but still decent growth: Starting at the highest level, macro thesis, I’m showing you a big table with all sorts of pluses and minuses and gaudy colors and numbers and things. But I'm going to focus on three things here.

These are our forecasts for the major developed markets, you might say. And so point one is that, as I mentioned earlier, we have broadly downgraded our growth outlook over the last quarter. Canada is an exception, is a country that isn't actually really hurt by this energy shock. It sells a lot of energy, we happened to have a bit of good data come along that prompted an upgrade.

But the bottom line is for most of these markets, yes, we've downgraded our forecast. This is the logical thing to do when suddenly energy prices surge.

Point two is that – and really point two and three are both ‘however’ points – however, when we look at what these new forecasts are, the new numbers are still not bad.

They're either in line with what you would describe as normal growth for these markets or actually for North America. Again, recognizing North America is less adversely affected than some other places. We're actually maybe even a little bit ahead of what you might think is the normal rate of growth for those markets. And so hardly forecasting trouble is the point.

Finally, and certainly in terms of the impact of our economic outlooks versus the market, where are we versus the consensus? The consensus is a little bit more sour than we are. These numbers are mostly positive signs and green in color. And so that means that we are actually slightly optimistic relative to the consensus.

That's one of the reasons why we're happy to continue owning risk assets like stocks and like credit and so on. Even though by some conventional metrics you could say the credit spreads are narrow, the stock valuations are high. It wouldn't seem like an obvious time to be reasonably keen on that sector. And yet we are a little bit overweight still, because in part at least, the macro story is decent.

Certainly another part is because the tech sector looks pretty remarkable right now. Okay.

Economic data better than a year ago: Let's just run through a couple of high-level economic data indicators. This is a data change index actually maintained by Citibank. And so the point here is whether you're talking about the U.S. in blue or the broader G10 region area in gold, in both cases you've got numbers that are above zero.

So what that means is economic data is actually coming in better right now than it was a year ago. So we've seen an improvement. This is data that looks pretty solid. I know it's tempting to focus on that gold line retreating a little bit. That means that the data is still better than a year ago, just not as much better as it was a few months ago versus the year before.

So it's still better. It's still an improvement versus a year before.

Global trade is successfully diversifying away from U.S.: When we look at trade, I mentioned the punch line here already, but we’ve finally gotten smart about this and we're looking at global trade for the U.S. and for the world excluding the U.S. And what you will find is that, first of all, in blue, U.S. trade is not going great, which makes complete sense, right?

The tariffs have largely been erected by the U.S. that are discouraging international trade with the U.S. So their trade is actually in some decline. Conversely you would say – and the numbers get a little bit jumpy and skittish over the last month – the gold and dashed or dotted line have retreated recently actually because the Strait of Hormuz closes.

So Asia can't get the energy and it's sort of a temporary distortion. But in general, there's been an upward trend in terms of really global trade, ex-U.S. That kind of is the main point here. We're not seeing as much globalization as we thought. Yes, the U.S. is globalizing. The rest of the world, if anything is actually going about their business even more enthusiastically and have found other trading partners, and there has been quite a flurry of trade deals with India, with the Mercosur trade deal and South America, with some other parties.

The rest of the world is finding new dance partners – and that bodes well for their economic growth. So, interesting story there. And net global trade actually holding together.

Okay. And then on from there, we do business cycle work and there's a lot of different ways of doing this.

U.S. business cycle still most likely “late cycle” or “mid cycle”: We have a scorecard at 60 some imports.

The inputs have a grand time disagreeing with each other. But that's part of the charm of this. And so this bar chart in front of you specifically shows really what fraction of the inputs say different things. For instance, some inputs think it's the start of the cycle, some think it's the end, some think it's a recession, some think we're smack dab mid-cycle.

So lots of contradiction. But when we tally up the numbers, we can still say where the best guess is. And so just based on the height of the bars here, the best guess is this is a late-cycle moment. Second best guess is it's a mid-cycle moment. And so between the two you can say pretty likely it's mid-to-late cycle.

Just to give you some sense, mid-cycle would suggest quite a number of years of growth are likely left ahead of us. Late cycle sounds a little bit ominous. Late means that there's not much left and I guess that is strictly fair. But do appreciate that business cycles are often these days 10-year type of experiences. And so late cycle could easily mean you've got two and a half years left or some variation on that.

We're not seeing a ton of trouble, I guess is the point. It's not the start of the cycle. We love the start of the cycle. That tends to be when you get outsized stock market gains and you feel good about a big, long runway in front of you and central banks are sometimes even cutting rates and so on.

Nevertheless, it's not the worst to be mid- or late-cycle. That's still a time when risk assets can normally go up. And it would appear to us to be a time when there can still be a number of years left in this expansion, at the risk of pretending that we can see the future more precisely than we can. Because you never quite know what the next shock is around the next corner.

Strait of Hormuz probabilities: Shifting over, for the last few months it's been it's been Iran, Iran, Iran, in terms of being the first subject discussed in these webcasts. And so, I guess saying something that it's taken us until slide seven or so to actually get explicitly to the subject. And this is what probability markets are saying in terms of their current thinking.

We updated this in the last hour, at least as I'm recording this. And so, many markets feel pretty good. They feel pretty good that the U.S. blockade, looking at the blue bars, will be lifted soon. So slightly more than a 50% chance it's lifted really in the span of the next two weeks or so, you could say.

And then there’s closer to a 70% chance it's lifted by the middle of this year, essentially over the next month or so. So, we’ll probably get significant resolution. Now, the gold bars acknowledge that, well, you can open the Strait, but it still takes some time to get ships moving and to get oil and gas pumping and to get insurance sorted and to feel confident that there are no mines in that passage.

And so it takes longer to get back to normal. But you can see the markets thinking, well, by the end of July, there's a pretty good chance that things are significantly normalized.

Now, don't get me wrong, you still do need to replenish inventories. And there are all sorts of other things that would say don't bank on oil prices snapping right back to where they were in early February, in the near term.

But there is perhaps some good news on its way. And so that's central to our forecast.

Now,  we are alert. Again, if this thing does get resolved in the short term, then great. And you can maybe ignore this. But we are alert that inventory levels are getting a little bit tricky.

It's certainly very true in oil and natural gas, but it's even more true in what you would call the distillates and sort of the byproducts or the products of those raw materials.

Important to get energy flowing again before inventory levels fall too low: And so just to give you a little flavor for things, this is European jet fuel inventories. So we've included it because there were some fairly ominous reports a couple of months ago that Europe was going to run out of jet fuel by the end of May, or something like that.

Those have since been revised. They have not run out of jet fuel. It's just lower. But the dark blue bar line shows you this is not a familiar level of jet fuel inventory. It is running well below the normal seasonal perturbations that have existed over prior years. Equally, I would note it's hardly zero.

Again, you couldn't get to zero and zero is not a realistic target. You would run into serious trouble well before that. But we look at this and we sort of say it is important to get a deal fairly soon because there are credible estimates that over the next several months, if you didn't get a deal, you would then run into some pretty serious problem with certain specialized products.

And so jet fuel is one certainly to watch very closely. We're hopeful again that a deal gets struck and this ceases to be relevant.

Energy shock: Why Europe and Japan haven’t done too badly: And then just in terms of stepping back to the regional story, as I tried to convey a little bit earlier, again, there's almost three levels to this.

So ignore this chart for the briefest of moments. Certainly the reasonable conclusion is Europe and Asia get hit harder than North America. North America is an energy exporter. To the extent they import some energy, they're not importing a lot of Middle Eastern energy. So, it’s Europe and Asia's problem to a far greater extent.

So that is the first order conclusion and the final conclusion, even after some fancy footwork we're about to do. It's tempered a little bit by the fact that a lot of governments, particularly in Asia and Europe, have introduced gas subsidies and other sorts of measures that shift some of the pain away from the consumer, from the economy, from inflation, and basically create a bigger fiscal deficit, which is tomorrow's problem.

But ultimately, I guess you could say they've delivered some fiscal stimulus to help offset the pain. And so, again, that might narrow the divide between North America and Europe, Asia, to the extent North America hasn't done quite as much. Canada has done some. The U.S. has a proposal, but it's still not as much.  

The third consideration, finally, and this is what the chart is trying to show: don't forget that every country uses energy to varying degrees of intensity. And so the U.S. bars here are locked at 100%. So this is all comparing other countries to the U.S.

For instance, on the far left, Canada uses more oil (in blue) and more natural gas (in gold) per unit of economic output than the U.S. does. So you would say, all else equal, Canada could be hurt a little more than you would think.

Now, I should emphasize, my understanding is quite a fraction of this higher intensity, some would be just colder weather, etc., and big, big long distances, low population density. But I'm under the impression that a fair fraction is actually the extraction of oil and gas is itself energy intensive. So I think a fair chunk is that, and those companies are still feeling pretty good given how high energy prices are.

But looking maybe further to the right here at Japan, at Italy, Germany, France, the UK, at developed Asia and developed Europe. You'll note that pretty reliably these countries are less energy intensive. The blue bars would say they use a little bit less oil per unit of economic output. The UK actually uses a lot less, it uses half as much oil per unit of economic output. It matters less to them, were the shock of the same magnitude.

The gold bars are actually broadly to a more extreme degree, they use even less natural gas, than they do oil relative to the U.S. for the same unit of economic output. And so the point here is just, if you had the same shock you'd actually say Europe and Asia do better.

I should say developed Asia does better. Emerging Asia does maybe worse to be frank. And so again, it sort of tempers the story. We're still left saying, listen, Asia and Europe do worse. But it's not as much worse as you would think if you started by saying, well, this region doesn't even use that energy type and they make more than they consume.

So, it narrows the divide to some extent.

Okay. Having thoroughly confused you, let's just keep pressing forward and double the stakes here with two charts on one page.

Energy shock has impacted inflation, with broadening influence? So, inflation really is where we are clearly seeing the effects of this economic shock. So it's kind of not that visible in the economic data. That's proving resilient. We can see it in the inflation data.

It was very visible in March and April, and in the May numbers will again be visible. The point of these two charts is to convey sort of next steps.

For instance, the chart on the left is agricultural commodity prices. No crazy jump here, but we are seeing a jump for a few reasons. Some is literally that fertilizer would normally be coming from the Strait of Hormuz as well and isn’t.

Other elements might relate to the higher transportation costs of foodstuffs. But the bottom line is we think we are seeing a broadening of inflation. It's not just showing up in gas and prices. It is maybe starting to show up a little bit in food prices and the cost of things that need to be transported.

So, there is a bit of a broadening of inflation, which is too bad because it's a little harder to put the genie back in the bottle. It's easy enough to say, well, we're going to fix this war soon. And the price of oil comes significantly, if not completely, back down. You may not see quite as full a reversal of food prices or some of the other products that are getting more expensive, subtly, along the way.

And the rather psychedelic chart on the right-hand side sort of says the same thing. So this is actually a measure of inflation breadth for the U.S. It really says that as much as we had never gotten inflation quite back to the 2.0% numbers that we would have liked to have seen after the inflation shock after the pandemic, we had at a minimum seen that gold shaded area go past the 50% line.

In other words, the majority of products in the Consumer Price Index (CPI) basket were rising at 2% a year or less, even though some other things weren't.

Unfortunately, over the last number of months, we've seen a reversal again. So inflation is broadening out. You have a significant number of things going faster, rising faster than we would like. Now it's not purely the energy shock.

Some of this is also just tariff effects showing up over time. But you know the broadening is in part the energy shock and in part transportation costs. And so again, we're not quite budgeting on inflation going all the way back to normal. I think I've said this a few times, in part because we don't have the energy prices quite going back to where they were before the war, in part because we do budget for a little bit of bleeding through to other products.

And so it's tricky for central banks and the fact that the economy is resilient and the fact that inflation is clearly proving higher, with some of it maybe being a bit sticky. We'll watch this closely to see if that's true. That is sort of the central thesis for why central banks really aren't seriously contemplating rate cuts and might have to think a little bit about hiking in the quarters ahead.

Okay. Record scratch, let's shift subjects here over to artificial intelligence.

AI boom overview: And so a very high level, probably unsatisfactory overview here, really of almost hot button topics. One would be, of course, memory chips. And so we've seen this extraordinary run up. The three main memory chip makers around the world have seen truly unbelievable price increases.

Two were in South Korea, one is in the U.S. Their profit margins are enormously high. They've really pre-committed their sales for 2026. And I think increasingly for 2027 the demand, because of data centres and AI build outs, greatly exceeds supply.

I'll talk a bit more about that in a moment. But I guess the punchline here is that it's not clear that can persist for a long period of time.

Historically, the memory chip makers go through cyclical ups and downs, and this would appear to be the mother of all ups. And, as much as they're showing some restraint in terms of production, it's not obvious that they're going to overproduce and create a horrible loss later.

But it would be surprising if they could hang on to these margins indefinitely. I would say we feel some caution towards that sector right now, although it is continuing to perform beautifully right up until this day.

Overall, on the AI subject, I would say we are more optimists than pessimists. We think this is the real deal.

And this is a big general-purpose technology. And we've been incrementally increasing our productivity growth forecasts. If you want to know how it fits into our economic outlook, we're obviously thinking a lot about the implications for the labour market and all those sorts of things. But on the net, we think this has a proper positive effect.

Some of that is very mechanistic to capital expenditures. And so we've just seen these serial upside surprises in AI CapEx. And so that has proven a support for growth both last year and this year, and potentially going forward. I would broaden that conversation out and say between the AI-related CapEx boom and countries that really seem to be keen to build out their defense industries and increase defense spending . . .

And now an appetite for more energy investment to diversify away from the Middle East and to provide some more energy security and resource security more generally is encouraging resource investments. And robotics may yet be a major source of investment. Bottom line is it looks like this is a time when CapEx is going to be a big driver of growth.

I mean, we can rightly observe the consumer is, at best, underwhelming these days, and particularly in North America. You’ve got very little population growth. And for consumers who just are feeling a degree of pessimism right now, CapEx is saving the day here and racing to the rescue. There is scope for this to continue to remain quite favorable going forward and even again a bit beyond purely the AI space.

And then productivity, I guess I've stolen my thunder here, it is already moving a bit more quickly than we’re used to.

It's not all AI-driven. We're sorting through that as I speak, but nevertheless we think some is and we think there is scope for considerably more. So, some favorable things here, though not purely favorable.

Let's dig into a couple elements of this. And so I guess the unfavorable part, or at least one potentially unfavorable would be, again, just some risks around memory chips, which I guess I've articulated now. But it is pretty incredible just to see how memory chip prices have gone up.

Memory chips are now more than half the cost of an AI semiconductor: And so you're seeing literally a seven-fold – 700% -- a seven-fold increase in AI, in pricing, just really in the last year or so. And so that that is pretty extraordinary. You can see historically, memory prices were flat to falling slightly. And so there's just a shortage and they're going up. Again, it's not clear that the demand is going to abate anytime soon.

And so maybe this just continues to run for some time. But historically, this is not a high- margin business. It is historically commoditized. It's historically had some pretty big busts, after some pretty big booms and, for that matter, I'm not sure hyperscalers love just how much money they're spending on memory right now.

The incredible fact is that more than half of the cost of an AI chip is the memory component now of that chip. So most of the cost – most meaning 67%, not 99% -- but the bottom line is it's eating a lot. So they are incented to go make their own or figure something out or become an awful lot more memory efficient in their next models and next computer chips.

And so I would say we have some skepticism this can last for a sustained period of time.

Open models offer 93% of the performance at 1/8 the cost: And then just an interesting little aside here, I've made no mention of this so far, so this may be out of the blue. But you may be familiar with the idea of closed versus open models. And so the open models are sort of available for all to see their inner workings.

But I think maybe a bit more practically, the open models are built usually much more cheaply and they're sort of standing on the shoulders of the existing close models. So by definition they're not going to be as good as closed models, because they're using the prior edition or they're an incomplete version of the latest model. But it is kind of interesting to think about the fact – which is what these two lines try to show – the gold lines would say what the open models are up to, the other would say the performance of the closed models, the conventional kind of bleeding edge ones that you might be using or you're thinking about. And the gap isn't that big. So the latest estimate is it's about a 7% gap, which again, isn't that big.

So if you can get an open model and I mention that because they seem to be a lot cheaper because they cost a lot less to develop, and if there can be more of them out there, you know, 7% worse performance for in some cases, one eighth of the cost. That is a pretty interesting value proposition.

That might not work for some sectors. If you're developing the next incredible pharmaceutical drug, you probably need the best model. If you're in an adversarial business and you're investing and someone else's investing and you're both trying to beat the stock market, you may need the best model to have a hope of doing that.

But there are a lot of things out there where pretty good is good enough, especially when it's one-eighth as expensive.

So it does make the point that, first of all, don't underestimate open models and what they can do. But second of all, and certainly with no clear conclusions right now, there is a scenario in which it's hard for the big fancy models to fully monetize all this investment if a lot of their potential customers are able to get a not totally dissimilar service for a lot less money.

So there's a bit of a risk, I guess you could say, to the top AI makers, for this reason, a great opportunity for users certainly of it, to save some money as they go about their business.

Okay. On to China and in fact Chinese housing.

China’s housing market reveals green shoot: I mentioned green shoots, but it is really one green shoot, so let's not get too excited.

But these are Chinese home prices. It's the month over month change for different gradations of housing. So tier one cities in China are the big giant metropolises. It's the Beijings, it’s the Shanghais and the like. Tier two cities are still pretty big by global standards, but not as big. Tier three and four are again smaller, obviously.

And I'll just draw your attention to the gold line here, which has recently gone above zero. So in tier one cities, home prices have actually been rising a little bit in recent months. I'll mention that just because, first of all, we haven't seen a whole lot of home prices rising in recent years.

It's been a pretty epic housing bust for China, with failed and beleaguered builders and home sales are down considerably by half. Home prices have been falling more often than not for a number of years. And tier one cities, in theory, can be a little bit of a leading indicator. You sometimes see them go positive or move in any which direction a little bit before the tier two and the tier three and four cities move.

It's possible we're getting a little signal of things getting better now. Nothing is certain here. You will note there was, in fact, a false start a couple of years ago where tier-one city prices went up a little bit and then they just sank back down. So that could yet happen. We've been tracking Chinese housing affordability very carefully and it has improved a lot.

I believe you could say that for China on the whole, the median home price was 45 years of median income, which was a pretty wild number. That was the worst affordability a number of years ago. It's improved, I think, to 28 or thereabouts. And so it's a huge improvement.

And so you can say, well, this would be a good time for the housing market to revive. But 28 years of income is still a lot of years of income that is still substantially worse than most, countries around the world, including even some of the more expensive cities around the world. And so it's cheaper than it was.

It's not clearly cheap. And so we're really just watching. I just wanted to flag this in case it did prove to be real.

And housing matters so much, because housing very often during an economic expansion is a key driver. You see construction rising. Rising home prices create wealth, create consumption and so on. So if Chinese housing were turning, you would suddenly say, well, gosh, maybe their economy can keep clicking along at 5% a year for longer than most people think.

If housing remains weak, then you're probably still talking about an economy that still has some really positive things going for but maybe it is still decelerating somewhat and down into the fours and below over the next few years. So do watch this space very closely.

Okay. A couple of word-heavy charts or exhibits in front of you, so I apologize for that.

El Niño ahead – possibly Super El Niño: This is more probably for my guidance than for yours. So let's talk El Nino. El Nino, for those who don't know, is essentially warmer Pacific waters. But this then has notable consequences, often over the subsequent year for the climate, for agricultural prices, etc. And so, the latest climate models say a 98% chance of an El Nino this year.

Looks like we're getting one. You get one every few years, but it's certainly not the standard. What's interesting is there is now about a 50% chance actually a couple ticks over that, but about a 50% chance of a super El Nino. You get that maybe less than once every decade. The last one was 2015-2016. It’s just a more powerful event with more visible consequences.

And the last super El Nino was ultimately actually not great for global economic growth. Some estimate $3.9 trillion of economic output was lost, spread out over five years. In theory, India, Australia, Indonesia, Japan are some of the more adversely affected countries based on the historical pattern. What happens is you really just get different weather patterns in different parts of the world.

As a very loose, high level comment, with exceptions, you would say, a warmer winter in theory, and a globally hotter summer in theory. Everything's a bit warmer. After all, there's more heat coming out of the ocean. But with a lot of variation. And so Western Canada, northern U.S. tend to be warmer.

Southern U.S., interestingly, tends to be wetter. Conversely, and this is really the agricultural problem in a nutshell, India tends to be drier. Southeast Asia tends to be drier, as does Australia. And so you often see price pressures, higher rice prices. This is the Indian monsoon fails or is underwhelming. Higher palm oil prices.

Southeast Asia would normally produce, they’re drier too. That's a problem. Wheat production goes down, prices often go up. And that's really Australia being dry, Western Canada being dry as well.

For those who love hot chocolate, sugar and cocoa prices both tend to go higher. Sometimes some mines are affected. And so copper and aluminum prices can be higher.

The silver lining, if you're looking for one, would be that often the insurance industry saves money because for whatever reason, you tend to have fewer North American hurricanes during El Nino. And so I don't quite know how that works. In my mind, warmer Atlantic waters create more hurricanes, but I guess this is warmer Pacific waters.

So I'll just stay out of the lane of the climate scientists. But, ultimately, possibly a saving there. On the net, though, there can be a bit of a drag to growth on the net, and it can add a bit to inflation. This is not, you know, the main story certainly for the economic outlook for the next year. But it's something to think a little bit about, perhaps.

I warned you there were more words to come. Let's talk pandemic.

Pandemic risk is low: Really, the main point is the title here, which is the pandemic risk we think is pretty low. But let's not completely ignore the fact that there is a hantavirus outbreak right now and an ebola outbreak as well. And these do have very high fatality rates.

So it is a frightening thought, in the realm of 50% plus or minus. But contagion rates, and if you remember the pandemic, you may remember the natural reproduction rate of a virus. These two are not that contagious. Not to underplay that, but they're not that contagious certainly versus COVID-19.

And so we are very much working on the assumption that these will be contained. Neither is a new virus. They don't seem to be new mutations. Both have been successfully controlled in multiple prior outbreaks. They don't transmit via the air. They require close physical contact, bodily fluids often and so on. Hantavirus spreads quite slowly.

The incubation period is so long, you just don't get generation after generation with any kind of speed of infections. If you want to be a nervous Nelly, and this may not be inappropriate, I would say actually, H5N1 bird flu would be the greater thing to fret about. Not that something has happened in the news in the last month, but it has become more aggressive over the last few years. It's now sort of constant in birds instead of seasonal.

It has spilled a number of times into mammals, particularly cows. And so in theory, it's a form of influenza. And so it could mutate in a more human, spreadable way, though there is a vaccine equally. And so if you were to worry about these sorts of things, that would maybe be the more reasonable worry to have.

As it stands now, though, a significant pandemic seems unlikely. Do note the definition of pandemic falls well short of what we all went through from 2020 to 2022 or so. And you can look at vaccine maker stocks and they surged for a moment and they've come right back down to normal. So I think that we are okay.

This is not at all in our base case forecasting and to be honest, not really even in our central risks to the outlook as well.

We'll finish with Canada, just a couple of quick slides here.

Canadian business CapEx has been sluggish, but surveys show investment intentions picking up: One would be we have looked with some optimism at the survey reflecting business investment intentions and that's rebounded fairly nicely here.

I know it doesn't look all that remarkable in the longer skew of history. But this is about as optimistic as we've seen Canadian businesses over the last year plus, anyway, so you might see in the tariff era. So that's nice. And I know we're all hopeful we could get more investment going.

After all, there have been some tax cuts and some deregulatory efforts to encourage more resource investment and infrastructure investment. And so it would be awfully nice if that actually started to manifest.

For the moment, we're seeing a little bit of optimism there. Not to overstate the health of the Canadian economy. Unemployment is higher than we would like it to be right now.

And the economy is moving forward, but not at any great rate. But maybe this helps a bit going forward.

Canadian resource wealth is significant and increasingly valued globally: And then just to remind everyone, and this is hardly news, but at a time when the world seems to value resource security more and it's a dangerous world. And boy, that energy out of the Middle East doesn't look quite as reliable as it once did.

And so on. It makes Canada look pretty good, right? And so you would know these things, but these charts and tables just convey that Canada is a resource superpower. And so it's number four in the world in crude oil production. That's the chart on the left. It's number six in the world in wheat production.

That's the chart on the right. The table in the middle says number one in potash. It’s number four in gold, number two in uranium at a time when nuclear power is of greater interest. It’s up there, certainly, when it comes to metals and lithium and so on: number four, seven, eight, if you're looking towards the bottom of the table. So Canada is a big deal there, and it would seem to have unleashed its ability to expand that production and expand those exports.

That's a multi-year journey, to be sure. But recent policy does seem supportive of some growth, and demand seems likely to increase as well for a pretty stable source of these resources. And so we are feeling fairly good about Canada over a multi-year horizon.

Private credit concerns in the context of AI – seemingly declining: I'm going to finish with this. And so a bit of a non-sequitur again.

And just jumping into markets for the briefest of moments. But of course, I think there's been some anxiety around private credit in particular in recent months. And we saw software stocks fall on concerns about AI disruption. And as it happens, a lot of private credit is loans to software companies. And so a bit of bad luck there, one might say.

Nevertheless, that's hurt the private credit sector and created some questions, some outflows and so on. I do want to flag this dark blue line is at least a proxy for the private credit index credit spread, if that makes any sense, in comparison to investment grade-type credit spreads.

The first point would be, well, the dark blue line is higher than the other two. It is a riskier product. That is just a basic fact. But I will say, we see the spike that happened a few months ago as private credit concerns increased. You will note, though, that private credit concerns have now abated significantly.

That dark blue line is traveling downward. It's maybe not back all the way to where it was before software concerns formed and maybe not as full of a retreat from the little humps that the other two lines have shown. So there’s still a measure of concern, but decreasing, and I would say notably not anywhere near the level of concern that existed a number of years ago around that Silicon Valley bank collapse and the repercussions from that.

And so spreads are elevated there, but they're not as wide as you might have feared. And I mention this as it is certainly relevant if you happen to be invested in that space. But I mention that even more so just because there's concern that this could create contagion into the banking sector and create other broader economic problems.

I would say, it looks like probably not, both based on sort of the structure of that market, but also probably not, based on how it's actually not behaving that badly, if that makes sense.

Okay. That is it for me. And so I'll say thank you so much for your time, as always. You can follow along, in quasi real time if you'd like to, on our website, rbcgam.com/insights.

We're fairly prolific and publishing things to LinkedIn as well. You can take a look at that QR code if you want to make your way to one of those.

And so I'll thank you again for your time. I wish you very well with your investing, and please tune in again next month.