Hello and welcome to our latest monthly Economic Webcast. My name is Eric Lascelles, I'm the chief economist for RBC Global Asset Management. I’m pleased to share with you, as always, our latest economic thinking. This is the webcast for the month of October 2025.

As you can likely see, the title of this particular presentation is Rate Cutting Resumes. That is a pretty key theme from the last few weeks, and likely to be one that remains relevant over the coming quarters. We've seen the U.S. Federal Reserve, the Bank of Canada cut rates recently and resume using cycles that had been undertaken in 2024.

Significantly, I should flag that's not the only thing going on. As I say, these words, and I'm recording this on October 1st, we have a U.S. government shutdown to talk about, and of course plenty of other subjects, including tariffs and onward from there to discuss.

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So let's work our way forward and do precisely that.

Report card: If we begin with a report card of sorts, I can report quite happily there are a number of positive themes to discuss. Let's talk about those and then flag the negatives and some interesting ones as well. We’ll then proceed forward with some charts to support some of these assertions in just a moment.

On the positive side, as mentioned in the title, interest rate cuts have resumed in a North American context, in the U.S. and Canada. The U.S. had not cut rates since December 2024, so it had been a long time coming up. Canada did ease through to the spring of 2025, but nevertheless a fairly lengthy pause there as well.

00:01:28:16 - 00:02:26:25

And so rate cuts back underway, plausibly more to come, indeed. More on that later in this presentation. I can say that the U.S. economy remains fairly resilient in the face of tariffs. Not to say it is unscathed. And we have seen in particular some softening of the labour market that I'll speak to a little bit later.

But on the aggregate, actually, it's an economy that's still moving forward, actually moving forward at a fairly resilient rate when we look at some of the GDP numbers in particular. A 3+% kind of figure is still being bandied about, not just for the second quarter, which is now concluded, but also for potentially the third quarter, that has just finished in the last day.

Policy uncertainty has been a huge theme over the last 9 to 12 months, and I can say that it is still significant, but it has lessened pretty materially. We have a chart that shows precisely that. And it does argue that perhaps businesses can feel a bit more comfortable making investments on the basis of their long-term expectations.

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We should acknowledge that when we look at a surprisingly resilient economy, why is that the case? Well, all sorts of reasons, but a non-trivial part is that spending on artificial intelligence, particularly in the U.S., is booming, and has provided some important support, which we'll talk about a bit later. We still think a recession in the U.S. context is likely avoided.

We're giving about a 25% chance of recession, which flip that around a good 75% chance that the economy gets to grow this year, which we think, again, is fairly likely. When we think about tariff-based inflation, the price effect, the price channel from tariffs, we are seeing some, but it shouldn't be too extreme.

I'm going to do a thought exercise in a moment that gets into that.

A final positive theme, and this one is circling over to Canada, is a Canadian infrastructure push, which has been long discussed and long proposed. It seems to be perhaps underway as five major initiatives were announced, and some efforts beginning to really get those going and to create a real tailwind for these kinds of projects going forward.

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So perhaps a long-term tailwind for Canada there. It's not all good news, though.

On the negative side, we are still seeing some damage from tariffs. Some of that is still showing up in the numbers, particularly perhaps the labour market numbers.

I can say that there are indeed new tariffs. In fact, beginning in the month of October or thereabouts, we have seen a 100% tariff on pharmaceutical products announced, and set to be introduced. There are a number of forestry and forestry adjacent tariffs that are on their way as well. There's a heavy truck tariff too.

So we are seeing tariffs still rise. And they are running a bit hotter than we had initially anticipated.

As I say these words, the U.S. government is in shutdown mode right now. I'm going to talk very soon on what that means and how that might play out.

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And just more generally, we can say that just the idea of politicization, that theme has extended, you can argue, to the corporate level, and you're seeing that politics and policies, of course, as always, are having an effect on tax rates and regulations and this sort of thing. But actually, now in some cases, moves are being made that affect individual businesses or are designed to put pressure on individual businesses. And so that's a bit less normal and we'll talk about that.

And then connecting, I suppose, a somewhat, weakening labour market with artificial intelligence, two big themes that do overlap in one narrow way. We are actually seeing that some of the job losses, particularly among young workers or young prospective workers, is perhaps directly linked to artificial intelligence. So we are seeing a bit of damage occurring there.

And then lastly, in the interesting column, one thought would be that the U.S. long-term yields, while certainly higher than you would have otherwise guessed – particularly as the Federal Reserve has cut rates and potentially will cut rates further – U.S. long-term yields have been stubbornly high, even in that context.

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But actually, when you start to compare U.S yields against other countries, it's not as badly behaved as you would think. So we'll talk about that in a moment.

I should say that there has been a proposal from the White House to lower the frequency of corporate reporting. So corporations, publicly traded corporations at least, report quarterly right now. The White House is proposing semiannually.

There are, in theory, certain advantages: just less paperwork and maybe a greater long-term focus. These companies could instead pivot to, on the negative side, in theory and indeed, in practice, it looks as though other countries that have tried this, the cost of funding sometimes goes up a bit for these companies, because just less is known about their operations. In practice, though, companies tend to report more than the regulations strictly require.

And so if this change goes through, it's not actually clear it's going to change all that much how companies operate. So maybe not a centre stage type of policy item from our standpoint.

Lastly, I'll just mention Argentina, which feels like it comes out of the blue here. But Argentina is a fascinating economy, and we've seen some pretty bold reforms taking place.

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So I just want to catch everyone up on whether it's working or not. And again, more on that in a moment.

So as I say those words, there's a whole lot we need to cover here. And so let's not waste any time. Let's move right forward.

U.S. government shutdown: I want to start with this American government shutdown.

Let's just talk about the broad parameters here. Republicans and Democrats are struggling to agree on a budget for fiscal year 2026, which in fact started on October 1st. So they’ve failed to achieve that so far and so the government is not funded. Hence the government shutdown. It’s a non-essential work halt. Essential work does continue.

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Non-essential work halts in the range of three quarters of a million workers, who are furloughed during this period. So they're not working during this period.

If you're wondering about history, how have other shutdowns played out? Well, the last one was in 2018-19. It was also, just by chance, the longest shut down in history. It was 35 days long.

Loosely speaking, the economic impact in the short run from that was that quarterly GDP was down about 0.2 to 0.3 percent. That's not annualized. So I guess multiply roughly by four if you want to know how the annualized quarterly GDP print could look. But the economy was physically 0.2 to 0.3% smaller.

Of course, to the extent that shutdown only lasted for about a month out of a three-month quarter, you can multiply that by three and say, there would have been a moment when the economy was maybe 0.6 or even a bit smaller than otherwise.

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The unemployment rate rose by 0.2 percentage points at that time. And, you know, financial markets usually suffer pretty modest losses and that's been the story so far. You can see financial markets recognizing this is a pretty inherently temporary story. And so I think that's worth reflecting on this time as well.

How could this one be different than the last one or than others?

Well, this one is, I guess you could say, more intense in the sense that it spans all non-essential areas of government. For context, back in 2018-19, the last shutdown, actually seven of the 12 major segments of the government had been prefunded. So only five of the 12 were shut down during that shutdown.

And so this is a full 12 of 12 shutdown. So arguably there should be more damage per unit of time per day this time versus the last time.

In terms of the length, though, it's awfully hard to say. You do have some pretty different opinions on what the budget should look like. The Democrats are pressing really to restore, you could say, some of the health funding cuts that took place last summer that are scheduled to take place, to expire, at the end of this year.

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The Republicans, I suppose, are less keen on that right now. And so it’s not exactly clear how this resolves, but we have seen a couple of politicians on each side waver a little bit. And so that is perhaps telling. One thing to pay attention to is that on October 15th, that is the standard military pay date – and actually the most affected department of the U.S. government by this shutdown is the military.

You can imagine hundreds of thousands, I think it's something like 400,000 military workers and many more in Veterans Affairs, not getting paid on that date. That could be a motivator to find some sort of solution by then.

I should note that the economy then, when shutdowns are over, generally bounces back, and then in some cases, you do actually reclaim part of the lost output. It's not just the level of output returning to the prior run rate. You can actually reclaim a little bit.

But not all furloughed workers, the workers who weren't working during that period, generally – and there's legislation now establishing that this is the law – receive back pay. So you could argue for them. It is a paid vacation in the sense that they are not working right now.

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In fairness, not being paid right now, but they should be paid later, even though they didn't work during that period of time. So, tricky from a cash flow perspective, one imagines, but nevertheless not necessarily net financially damaging to them.

And so that's where we are right now. I should mention, maybe the other twist is that, from an economics perspective, the economic data isn't being published by the government. For instance, in a couple of days from when I record this, we were meant to get the U.S. monthly job numbers. This is something that would be regarded with great interest because we've seen some weakness in the labour market numbers. Unless the shutdown is resolved very soon, we won't get those numbers, we’ll only get them later.

And so we've been forced to pivot to non-government data sources. For instance, the ADP employment report that just came out was a little bit soft. In theory it covers the same month, in theory with similar quality. We're going to have to lean on that a bit more.

It's similar for inflation, we won't get – it depends how long this government shutdown lasts, and it could be resolved by then – we won’t get the inflation numbers.

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So we look at price stats data, which is real-time inflation data over the internet. So we can keep tabs on the economy. It's not quite as clean as one might like. It does make it a little bit messier for the Federal Reserve in terms of making that next decision in October as to whether to cut rates or not.

Central banks easing on growth concerns – Fed and BoC: And so, indeed, let's pivot precisely to that. Central banks, of course, have been loosely in rate cutting mode since, you know, early 2024 or thereabouts. The Federal Reserve, though, had sat out 2025 up until quite recently. On September 17th it did deliver a 25 basis point rate cut.

The debate is whether there are more cuts to come. It looks pretty likely. In fact, the market is pricing a pretty good chance of another cut in October, another cut in December, and perhaps even a bit more in 2026. I don't think that's unreasonable. It is a bit tricky, though, because the U.S. economy, while maybe not in in perfect health, is hardly suffering in a major way.

00:11:54:18 - 00:12:37:18

Inflation is still a bit too high, and so the argument for cutting has as much to do with downside risks to the labour market as the reality of the situation. And really significantly, the policy rate is – and the dark blue line here sort of shows this – is fairly high relative to many peer developed nations. And so you can afford to cut rates without technically being in stimulative mode.

You're just removing restrictions but not actually stimulating the economy. And so it does look like they're probably able to cut.

As I mentioned, it is trickier that they're not going to have the full set of traditional economic data at their fingertips. I would say the the other data suggests that they would not be wrong to cut rates. And maybe one comment would be the Federal Reserve is not limited by the government shutdown.

00:12:37:18 - 00:13:16:29

They are actually self-funded and so they will continue operations. No halting there.

I'll just mention the Bank of Canada also did a rate cut, the policy rate in red, much lower already. We think that there is room for a little bit more easing, maybe, indeed before the end of this year, possibly even in October – but with probably less room for cutting than the U.S. has from here.

And so we think maybe the Bank of Canada rate could work its way down to a 2% kind of number from the 2.5% rate it's at right now. Meanwhile, in the U.S., you're sitting at a number just over 4%. It can probably work its way down in a year's time to closer to 3% or a little bit higher.

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U.S. long-dated yields actually show less stress than many peers: And I mentioned before that, for all of the concern about U.S. long-dated bond yields – and they're higher than one might normally expect – the 30-year yield has sort of flirted with 5% and so on at times. That dark blue line shows you that the change in the U.S. 30-year yield since the start of the year is essentially no change. It's essentially unchanged over the span of that period of time.

And while you might have thought that yields should fall at a time that the Fed has done a bit of cutting and a bit more rate cutting is expected, and there is maybe a bit of anxiety about the economic outlook, but of course, but we haven't seen a decline in yields. So that is notable.

But neither have we actually seen an increase. And in contrast to that, you look at many other developed countries – and indeed Canada, UK, France, Germany and Japan are depicted on this chart. They have all seen an increase in their 30-year yield. And several of these countries have fiscal excesses, and in the UK and France concerns there have been particularly acute and Japan is marching to its own drummer and has higher inflation and is, if anything, hiking rates.

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So perhaps not a shock that yields are rising in Japan. But nevertheless, for all of the talk of declining U.S. exceptionalism and so on, we still think there's something to that. And that's something that could continue to play out over the next few years.

But actually, when push comes to shove, U.S. long term yields are fairly well behaved versus other countries and bond investors are proving more willing to tolerate U.S. fiscal excesses and the like, than in some other countries.

And so we shouldn't overstate that shift in investor sentiment vis-a-vis the U.S.

Trade policy uncertainty: I mentioned, uncertainty has declined. Importantly, this is, I guess a quantitative reflection of that.

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U.S. trade policy uncertainty has declined substantially: And so here is a trade policy uncertainty metric. It was at unbelievable heights when tariffs were coming fast and furious earlier in the year of terror threats, mostly as opposed to implementation. As the implementation has come in at least below threats and as we just got a better sense for things, it's not that tariffs don't hurt, it's just that we have a better sense that the U.S. is probably in a 15-20% kind of tariff world.

That's what they're aspiring to and that's what they're delivering. So the level of uncertainty does go down. It's hardly zero. It's still significant. There will, I'm sure, still be surprises. But the bottom line is it's not as extreme as it was.

And in theory, that would allow businesses and households to make decisions about the future in a way that just wasn't possible over the prior few quarters. And usually that's economically helpful.

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U.S. average tariff rate now up to 18.3% – a bit above expectations: Just to check in on the average U.S. tariff rate, the number we're seeing now is about 18.3%. It's actually a hair lower than it was estimated a few weeks ago. Not because any tariffs have been really eliminated, but more because Japan and the EU (European Union) managed to sort of lock in – and just to clarify, in some cases we have an auto tariff agreement.

On that basis, the number is actually a hair lower, therefore, retroactively, than it was before. But that the same story applies, which is you're in sort of an 18-19% tariff mode. That number is going to go up a little bit as we get some extra clarity on the pharmaceutical and some of those forestry and forestry-adjacent tariffs. Computer chips may yet be pending as well.

I should mention on the pharma side, it seems like there are a lot of outs. In terms of businesses being able to avoid that 100% pharmaceutical tariff. Generic products are excluded. It seems like companies that are building plants in the U.S. may also have their own brand patented medicines excluded. And so it's not clear really how much pharmaceuticals will ultimately be hit by this.

When we talk about the forestry side, while there are, I think it's a new 10% tariff on sort of timber and timber-type products. There are upholstered, furniture products that are seeing a tariff increase. There are kitchen cabinets, I believe, that are as well. And so that's very real for those sectors, but just subsets of forestry, you might say.

And then heavy trucks being hit a bit more heavily as well. So we are seeing additional tariffs come on and they will move the needle a little bit higher but not in a in a massive way. We think it'll be a number not too different than where we are right now. And of course that does real economic damage and it does increase prices as well.

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Evidence of tariff pass-through is surfacing: And I suppose, pivoting to our next chart, we can talk about the price increase. These are 10 different products that in theory would be affected by tariffs. They’re goods that are often imported to a significant extent. The numbers here are a bit hard to interpret. These are annualized numbers.

So no, the cost of jewelry and watches did not rise by 90% over the last month. That's an annualized increase. But nevertheless, maybe the way I would summarize it is when we look at the one month change in these theoretically tariff-affected products, you know, six of 10 over the last month moved unusually quickly higher.

So we're seeing some of these really move. On a three-month basis, which may be more useful, a bit of a smoother reading, seven of 10 of these products are seeing unusually fast price increases. And so all of that is to say, we are, we think, seeing the effect of tariffs on inflation – with the caveats that we're getting an opposing helping hand from lower oil prices and an opposing helping hand from softer shelter inflation as well.

And so it's not blowing up the inflation numbers. But we are seeing some extra inflation from this nevertheless.

Why tariff inflation is not large (stylized explanation): Now in terms of magnitudes, let's do a thought exercise or a conceptual or stylized explanation here. Don't feel like you need to memorize every number on this page, but I'm just going to speak to it and say, let's pretend that the average U.S. tariff rate was 20% just for ease of calculation.

It's not actually, as I mentioned, it's more like 18% right now. But let's stick with a round number. The question I often get is, okay, you know, the average U.S. tariff rate is something approaching 20%. How come U.S. inflation isn't 20%? How come the prices of everything isn't 20% higher?

The answer is there's sort of four things happening here, that nibble away at that 20% number and make it ultimately about 20 times less, believe it or not.

00:19:01:14 - 00:20:04:15

One would just be markups. For instance, okay, a 20% tariff gets applied to the imported goods. But that's not the price consumers are paying. Wholesalers might mark up by 25%. The retailer marks up by 45%. They're probably not marking up the tariff part. They're marking up the rest of the price. And so, you know, the tariff share goes from being 20% (of the price increase) to being about 11% on the average imported retail good. And each of those adjectives and the noun are very important because, let's recognize a few other things.

One would be, there is some burden sharing. So not every penny of the tariff accrues to the consumer. We have seen some accrue to the foreign manufacturer. We have seen, in some sectors, the profit margin has diminished.

Let's pretend that three quarters of the tariff shows up. A quarter doesn't, is the point. So your 11% increase turns into an 8.3% increase in imported consumer goods prices.

Let's recognize though, that not all consumer goods are imported. In fact, only about a third of them are imported. The other two thirds are not imported. They're not affected by tariffs. And so there's no extra inflation there.

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And so if we say, well, what would the average just consumer goods price go up by? The answer is about 2.8%. And then you would say, well, actually of the things that you and I buy, or I guess Americans in this case, what fraction are goods? And only about a third of what American consumers buy our goods.

Two thirds are services. Services are not directly affected by the tariffs. And so we can effectively divide by three again, and you end up with something like a 0.9% increase in consumer prices. So a 20% tariff just mechanically should result in something like a 0.9% increase in consumer prices.

Now, you know, we're forgetting that some products are inputs to other things. And maybe service costs do go up if there's an input to the service provider, that's become more expensive.

Conversely, if the economy is weaker, that's deflationary. So there are lots of competing forces behind the scenes. But the main thrust is this. And it just helps to explain how the inflation impact is about 1/20 of the actual announced tariffs.

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So, do be aware of that. And that's what we're forecasting. We have a sort of a one percentage point or slightly higher assumed effect on U.S. consumer prices, and that that would suggest we're roughly in line with this kind of theory.

Okay. Let's pivot a little bit. We’ll stay in the policy landscape but away from tariffs.

U.S. political decisions  corporations: And so just to flag that, you know, there have been all sorts of policy decisions.

And we’ve worked our way through these, often, in prior webcasts. We've talked a lot about tariffs. We've talked about tax cuts and deregulation and accelerated depreciation. We've talked about immigration constraints. All sorts of pretty major policy decisions have been made. And many of them are very relevant to the economy. This one's a little murkier in terms of how you could connect it to the economy.

It's more of a “Let's watch this space,” as opposed to one that you mechanically change your economic outlook on the basis of. Nevertheless, it would be fair to say that political decisions and policy decisions mostly are made at a level where they would affect either the entire economy equally, or at least different sectors of the economy.

00:21:59:18 - 00:24:06:23

The occupants of each sector would be roughly equally affected. And so tax rate changes, deregulation, tariffs: it would be fair to say that all of the businesses in a particular category would be affected roughly to the same extent. It's more rare for governments to make decisions at the corporate level and treat different companies within a sector differently.

You can argue that did happen during the financial crisis. You had certain banks bailed out and certain automakers bailed out, and others were not bailed out. And, similarly, during the pandemic, you had Operation Warp Speed in 2020, and so advanced contracts were given to certain vaccine developers, but not all vaccine developers. So it's not unheard of for companies to be singled out.

Equally you could say that, to some extent, Operation Warp Speed might have been motivated by who seemed to have the most promising vaccines being developed. The financial crisis bailouts were certainly motivated by the companies that were in the biggest trouble. And you can argue that, if a different bank had been in that same amount of trouble, it might have been treated similarly.

So perhaps it's not a perfect argument that the government was treating companies differently, but maybe a bit of precedent for that. If you look at where we are now, it does seem to be, and we'll see where this goes, but it does seem to be another era where individual, significantly American companies are being singled out and treated differently from other companies, perhaps in the same sector.

And so, you know, in the pharma space, if you are promising to build a new plant in the U.S., you do not pay the pharma tariff. Someone else might. And so that, of course, is scope for different companies being treated differently.

Television networks have been under some measure of licensing pressure over their content recently with some recent flare ups. And so you can argue that that's another angle that we haven't seen pursued at least in recent years.

Some law firms have, have been targeted by the White House for their involvement in prosecuting the president, in between his two presidential terms, and so different law firms being treated differently.

Some AI companies are being blocked, or perhaps there's a threat of blocking them from government contracts if their ideological bias runs in a certain direction.

And then in the semiconductor space, Nvidia is now paying 15% of certain Chinese chip revenue streams directly to the U.S. government. That’s a fairly unconventional dealing.

00:24:06:23 - 00:24:47:04

The government, of course, has claimed a 10% stake in Intel. It should be noted Intel’s stock price went up. Investors would seem to think that having a government at their back is not the worst thing in the world. But nevertheless, this is pretty unconventional stuff as well.

And so no real precise takeaway other than, again, it matters whether the government likes your sector. It also matters whether the government likes your company in particular.

There's this extra angle to consider, I suppose, for investors. And as active managers, we're certainly scrambling to understand this as best we can. But it's just another level of granularity that matters in a policy context right now.

00:24:47:04 - 00:25:59:27

Okay. Let's talk about the U.S. labor market for a moment.

Despite slower hiring, U.S. labour market remains OK: I guess I'm starting with the good news first, which is if we just look at weekly jobless claims, these have been very flat for a number of years, and we're not seeing particular signs of distress. Job losses have not surged.

What we are seeing is notably less hiring than before. And so that's concerning to an extent. We're not seeing firings pick up or other metrics that suggest a great deal of distress.

In fact, what you see right now is very little hiring and very little firing. That's unusual. Normally you get a lot of hiring and not much firing, or a lot of firing and not much hiring when the economy is strong or weak, respectively.

This is kind of a more curious place. One way we've tried to think about this is that the economy was expected and sort of is expected to be somewhat underwhelming. The hiring side has cooled. There's also been a big drop in immigration. So just the population growth is cooler too. But you could argue companies are not confident enough to do big hiring.

Equally, the reality on the ground is that for most businesses and sectors, the economic situation isn't bad enough to motivate the sort of layoffs that might otherwise have occurred. And so you're in this kind of funny, very stable period where it's hard to get a job if you're not already in the labour market. But ultimately, neither are there big layoffs happening.

00:25:59:27 - 00:26:50:17

So, again, jobless claims are low. We don't think the labor market is collapsing. It is weakening a little bit according to some metrics, and we would take some heed of that.

U.S. cyclical hiring weak / non-cyclical hiring slowing: It would be worth mentioning that it's been an unusual labor market. You look at the hiring over the last few years, actually very little of it has come from cyclical industries.

That's the blue line, that employment has been roughly flat. That's not ideal. You'd love for the cyclical sort of pro-growth industries to be the ones driving things. It's actually been the non-cyclical industries including health care, education, government and these sorts of things. And of course that's now slowing to some extent as well, speaking to slower job growth overall.

It's been curious and maybe not ideal but the cyclical job creation has been actually abnormally low. When you look at that blue line, normally you don't see too many periods where job creation was zero in the cyclical sectors. Normally it's running happily positive or you're in a recession. We're not in a recession right now.

We don't think that blue line is not arcing downward in any kind of worrying way, but it's just an unusual place to be right now.

00:26:50:17 - 00:28:14:13

AI and employment: Let's talk about employment and AI for a moment. So this is looking at the overall unemployment rate. I should say the core age unemployment rate is in gold, versus younger worker unemployment rate in blue.

And so younger workers always have a higher unemployment rate. It is very much the norm for the unemployment rate even to go up more during more challenging economic times for younger workers than for the overall workforce. So none of this is completely out of line.

Nevertheless, it is fair to say that in the last year or so we have seen early career unemployment rising disproportionately. For instance, it would be normal to see a 1.7 times larger increase in the young worker unemployment rate than the core unemployment rate.

It's actually been a five times increase this time. So a much bigger increase for younger workers.

It does appear and I wouldn't say this is all AI. I in fact, I would argue that it's not all AI. And I would argue part of it is that if companies are hiring and they're not firing, if you're in the workforce, you're great.

But if you're trying to get in, regardless of your age, it's not so great. And so some of it seems to be that funny level of caution that businesses are displaying and maybe even a greater appreciation for their existing workers. Because it was so hard to find workers a few years ago, I think companies more appreciate someone with tenure and work experience and with specific knowledge of their company.

00:28:14:13 - 00:29:27:27

And so, again, not laying off a lot, therefore not hiring a lot, but there is seemingly an AI connection as well. And as AI advances, in theory, you could imagine some jobs being displaced.

In practice, a recent Stanford study has come to the tentative conclusion that when you look at workers aged 22 to 25 – that's not the exact group in blue there, but it’s a similar group – working in AI vulnerable occupations, which they would define as computer programing, customer service, this sort of thing.

They've seen a 13% job decline for that particular cohort. Again, it is a small cohort. It is a four-year cohort. It's not moving the needle overall in a major way. But for that particular group, it does suggest that things are changing here.

And so, the fear that AI could result in job losses seems to be happening in certain spaces. It remains to be seen whether there is a structural increase in overall employment.

You know, these are highly competent people. There are likely other industries that will absorb them over time. That has been the experience with past technological changes. But, you know, this is a pretty profound technological change, and we shouldn't prejudge that it will be similar this time.

So we are seeing a little bit of AI associated unemployment now. On the other hand, of course, AI is very exciting, very positive for the economy in other ways.

00:29:27:27 - 00:30:31:14

U.S. tech-led cap ex boom provides helping hand: This is the amount of cap ex (capital expenditures) that just the big four AI-connected American companies are engaging in. So Microsoft, Amazon, Google and Meta. And you can see there's been remarkable growth over the last several years.

You can see the growth has been particularly impressive since some of the natural language AI models really burst onto the scene, in late 2022. Roughly speaking, about $90 billion is being spent per quarter just by these four companies.

So multiply by four and you're getting some pretty big numbers, $350-$400 billion a year kind of annual spending. That is a lot. That is more than 1% of U.S. GDP. And this has gone from being a pretty small number just a few years ago.

So this is a very real driver of U.S. economic growth. It is a very real share of U.S. economic activity right now. And our best guess is that there is still likely some growth yet to come. It's not a forever upward thing, but there is still some upside here. So likely it does continue to provide a helping hand. And over the long run, we think there will be some productivity gains as well, in addition and beyond just the simple spending on machinery and equipment and chips that's going on right now,

00:30:31:14 - 00:31:29:21

U.S. consumption a source of recent strength: Let's acknowledge that for the U.S. consumption spending growth has been pretty good.

So I pay particular attention to the blue bars there. If you look at the last three or so, those are pretty handsome-looking gains. I know they don't look wild, but they're normal to a little bit above normal kind of gains.

At a minimum, it would suggest consumers are handling pandemic pain fairly well so far, though we haven't written the last chapter on that yet, it would be fair to concede,

Looking forward, we're assuming consumer spending growth slows. Hiring has absolutely slowed. And so that would be a big motivator.

But, you know, interest rates are falling. Stock market is going up. These are also contributors to spending decisions.

We would still assume consumer spending growth decelerates from here. But it's been a pleasant upward surprise so far. And so it could be that we just continue to be pleasantly surprised by consumer spending strength.

00:31:29:21 - 00:32:29:07

Argentina’s economic reform efforts achieving tentative success: Here's my slide on Argentina. How to cram a country's worth of information into a slide. Probably not very successfully.

But I'll just say at the turn of the 20th century, Argentina was a rich country by the standards of the time. And Argentina has struggled enormously since then. It's been through bouts of hyperinflation and bouts of economic depression and quite a number of financial crises and, and debt defaults and IMF (International Monetary Fund) bailouts and the like.

It has been, to put it lightly, a very rocky road. And so it was with considerable interest that many economists began to track Argentina quite closely a few years ago when President Milei took power and he had a vision of fairly radical reforms. He has in a significant way delivered on those.

So the question is, are they working or are they not working?

This chart says that at least part of it seems to be working. This is the monthly and annual inflation rate for Argentina. And you can see inflation really did peak, at least on a monthly basis, around when he came in in late 2023. It has decelerated quite importantly. It's not low by developed country standards, but it's a whole lot better than it was.

00:32:29:07 - 00:34:01:05

When we look at the fiscal situation, the country has gone from a big, big deficit to a primary surplus, which means that they are, in theory, in a more sustainable position. You can poke holes in that and say they just downloaded costs to the states, which would be fair. You can argue that their lack of investment in infrastructure is going to backfire later.

So all sorts of critiques could be leveled. But they have, on the surface, brought the fiscal position into better shape. The economy was shrinking initially during this shock therapy and is now seemingly growing again. The poverty rate rose initially, but it seems, according to government metrics, to have fallen and to now be lower than it was before he took power.

And so you can say tentatively, this does seem to be working. One of the big challenges, is the Argentine peso was continuing to decline. The U.S. government has recently stepped in and sort of pledged or at least talked about providing something of a backstop. And so that could help to stabilize that and that would be very helpful for inflation if it happened.

I would say it’s unclear whether that happens. The challenge for Argentina, though, is that there is some real pain from these reforms. The political will seems to be diminishing. Recent elections are going against Melei. So it's just not clear how much more rope he will have to deliver these reforms. I would say if they were to continue on this path, arguably Argentina could be on a more stable economic footing. It's made some strides in that direction.

We're going to have to see in particular over the next few months, whether voters are just willing to tolerate the upfront pain associated with that. So it's fascinating, certainly, to watch.

Let's talk Canada for a few slides here as we work our way to the finish line.

00:34:01:05 - 00:34:21:01

Canada’s immigration reversal continues: I think it's well understood Canada's population growth was incredible a few years ago, on the basis of mostly temporary residents coming in, the international student and the temporary foreign worker tracks. Those rules have been changed. We've seen population growth really slow. We've had another quarter come out quite slow as well.

And so population growth has gone from a big number – at one point, it was as much as 3.5% a year – to a pretty small number right now, that’s not much more than zero. And so of course, that does limit economic growth on the aggregate.

In theory, though, the average Canadian could be becoming more prosperous, even though the overall rate of economic growth perhaps has underwhelmed at times.

00:34:38:23 - 00:35:18:18

But it is quite a switch. I think the hope is that productivity growth starts to move higher again. We've seen sort of mixed billings on that so far. I can't say that there's overwhelming evidence so far on that front.

Canadian labour market is quite soft: It is worth noting that Canada's labor market has been quite soft. And so you can see notable job losses in the last couple of months, not a whole lot of job creation over a period of time prior to that.

Some of that is just normal because the population is no longer growing. You don't really need many new jobs per month. The fact that it's been negative nevertheless does certainly speak to the idea that the labour market is cooling and Canada does have an unemployment rate that's probably about a percentage point higher than you would normally like it to sustainably be.

So there is some pain, again, motivating the Bank of Canada's return to rate cutting recently.

00:35:18:18 - 00:35:35:13

Canadian economy ticked higher in latest month after weakness: One curious thing, though for Canada, is – and I'm just going to click forward. This is the monthly GDP (gross domestic product) trend. The information is a little bit stale here and there, but nevertheless, we've seen some real weakness.

Indeed, the Canadian economy shrank early in the year for a quarter. And your tongues have been wagging, including this person's tongue, about the possibility of a recession. And that's still possible.

Tariffs hurt and the population decline has some short-term pain and so on. But I must say, when the latest monthly GDP print came out – and you can see that last blue bar on the right pointing significantly upward – that does suggest that it's much less likely that Canada's third quarter GDP numbers will be negative.

And so that mechanical two consecutive quarters of GDP decline story suddenly seems less likely. And so we'll see where this goes from here. Tariffs are hurting Canada all the same. They did come in a bit lighter than initially feared. And some of the initial economic contraction was this recoil of fear and uncertainty and worry as to what might happen.

And some parts of that haven't happened. Of course, for some sectors like steel and aluminum and copper and autos and a few others – forestry, in particular – there has been real pain. And so we are very much forecasting sluggish growth, weak growth at this point in time. It's not clear that the third quarter will be negative, though.

And so perhaps the economy is not quite as badly as feared, as recently as a month or two ago.

Okay, I will stop there. Hopefully you got something out of that round the world trip. If you found this useful, do consider following us online. As always, we have a website, rbcgam.com/insights. You can use your phone to pick that up right there with the QR code.

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