There are still quite significant supply chain issues in the world today and while supply is part of the story—that is to say virus waves have disrupted factories and electricity outages have been a problem and there have been just fewer migrant workers available to Chinese factories—it is more a function of strong demand.

The world is simply buying more things, in particular buying more goods, and there’s been a shift in the sort of goods being bought, toward objects like electronics and so on. And it’s quite incredible. There are actually 27% more products right now being shipped from China to North America. And so speaking to demand being the dominant factor here.

But regardless of the source, it’s resulted in outages. There are not enough products that people want, and supply chains are not well-positioned to address those sorts of problems. They’re not built with much slack, and so they can’t catch up very easily. They’re not built with much redundancy. And so when one factory goes out, that’s it for a certain product.

And so this has very much limited economic activity. And it’s also increased the cost of things, in some cases, very significantly, like for used and new cars.

We think supply chain problems are in the realm of peaking right now. And so I think we can say that from a theoretical standpoint, in that normally Christmas and Chinese New Years are where you see maximum demand, and as you move beyond that you start to see conditions ease a little bit. In fact, traditionally, the first quarter of each year is when you see consumer spending coming off and it’s an opportunity for supply chains to breathe or to catch up a little bit.

And then empirically, we can say as well we see some small evidence of improvement here. And so the cost of shipping goods overseas has declined a little bit. Manufacturers are a little bit less concerned than they were before. Certainly not fully resolved. We expect some issues to persist across 2022 and structural demand for chips in particular is set to remain high and needs to be addressed for some time. But supply chain issues should begin to fade and should be significantly less problematic by the end of the year.

Our business cycle scorecard work suggests we have now transitioned from early cycle to mid cycle. And I should say mid cycle is still a perfectly fine place to be. It’s consistent with good economic growth. It means we are still, on all likelihood, several years away from the end of the business cycle, so it’s, again, a perfectly fine place to be. But I must say this cycle has been moving awfully quickly and we’ve transitioned from recession to start of cycle to early cycle and now to mid cycle over a very short period of time.

And that makes sense in that we had artificial government constraints slamming the economy into recession. We’ve had those restraints significantly lifted. It’s allowed the economy to snap back in a way that you normally wouldn’t see during an organic recession. But nevertheless, it does suggest that perhaps this is a shorter and faster business cycle than usual.

And so in our own mind, we’re thinking that maybe this is something like a five-year expansion instead of a ten-year expansion. And that’s not a problem for today in a sense that a five-year expansion would still take us into a 2024 or 2025 kind of time frame, and so not an immediate concern. But nevertheless, we have been in 10-year expansions over the last few cycles, and so that would represent something of a shorter one, and it’s something to begin thinking about over the next few years.

As I said though, economic growth tends to be fine at this phase. By no means is the recession risk suddenly greatly elevated given this state of the cycle. And from a financial market perspective, I can say that it still usually generates positive returns for risk assets like equities.

The stock market generally likes to be as close to the front of a cycle as possible, and so the most lucrative time is right when the expansion begins, and then it tends to be quite good in early cycle as well. It’s a more moderate kind of return you’d normally expect mid cycle, but still positive and actually, even when we eventually get to late cycle, that’s normally modestly positive as well.

Developed world consumers look pretty good to us as we gaze forward into 2022 and there are a number of reasons why. We see a big increase in employment over the last year, and we believe some significant further hiring can occur, and so the most important driver of spending is usually whether people have jobs or not, and so that’s a good signal.

But there are some other very helpful and very important sources of strength as well. And so, for instance, we saw massive household savings over the last few years across most of the developed world and to the tune of literally trillions of dollars of extra money sitting in the bank accounts of American households, hundreds of billions of dollars more than usual sitting in the bank accounts of Canadian households, and a lot of that actually sitting in chequing and savings accounts, and so, theoretically, capable of being spent.

We can also say given this seems to be a very low interest rate world, that financial obligations ratios and debt-to-service costs are quite low right now as well, which is another enabler for spending. And as supply chain problems begin to ease, it would make a lot of sense if consumers were then finally able to actualize their demand to spend. And so the bottom line is we do expect strong consumer spending.

I would warn there are a few headwinds on the flip side of the ledger, and so I should warn that in particular, if what could be another COVID wave rises significantly, that could interfere with spending for a time. And so perhaps you’d see a back weighting of spending toward the second half of the year.

We have seen a bit of a drop in confidence recently among consumers, and we think that’s a high inflation story, but nevertheless, that could weigh a little bit. And don’t forget that government support is being lost a little bit, so central banks thinking about raising rates and fiscal stimulus becoming a little bit less generous.

And so not convinced we’ll see consumers spend all of their excess savings, and maybe not as much as you’d expect if you were told that households are sitting on trillions of dollars around the world, but nevertheless, it should be a fairly robust consumer spending environment.

The bond market has been extremely volatile. Recently, we had yields rising enthusiastically in the late summer, into the early fall as central banks became more hawkish. And they were becoming more hawkish in large part because inflation was so high and they were being forced to revisit their thinking about that. More recently though, we’ve seen bond yields fall back down, and that’s been largely on COVID wave concerns, and so worries the economy might be in for a rough ride if there were to be a particularly big wave.

We felt the prior yield increase was probably overdone. We feel this recent retreat probably also overdone. So we’ve been sitting somewhere in the middle, I suppose, throughout. And as we think forward to the next year, really, it’s a story in which we do expect yields to rise, but to rise fairly gradually, to rise fairly modestly as well, and ultimately, to land at around a 1.75% to maybe as much as a 2% level for the 10-year yield for the U.S. and Canada.

And let’s keep in mind in all of this that a neutral definition of interest rates is a lot lower than it would have been before the pandemic, certainly than before the global financial crisis. And so we’re not talking about an eventual endpoint of 4% and 5%; we’re talking about eventual endpoints that might be somewhere in the 2s at best as it stands right now.

Now, turning back to central banks. Central banks are still thinking of raising rates. They haven’t abandoned that whatsoever. They’re right now broadly reducing the rate at which they’re buying bonds, so that’s a process that should be complete by the middle of next year. And then they’re thinking about raising rates. And as it stands right now, we think it’s more likely that happens in the second half of 2022, as opposed to the first half of 2022.

We wonder whether markets might be pricing in a little bit too much tightening, particularly as we see some damage to growth from the next COVID variant. The market, for instance, is pricing nearly three rate hikes for the U.S. in 2022. We think it might be a little less. The market is pricing around five for Canada. We think it could be somewhat less as well. And so some tightening coming. A little less support for borrowers, but it should be ultimately a fairly gradual process.

The Canadian housing market has had quite a remarkable journey over the pandemic and so it was extraordinarily hot during the first year in particular of the pandemic, and that was a function of ultra-low interest rates and people perhaps revisiting where they wanted to live and these sorts of things. And more recently, we’ve seen a bit of a mini-surge again. And so, as interest rates had risen, we saw people rushing to take advantage of mortgage rates they had locked in at a low level.

But I would say in general, it makes sense to us and, indeed, we’re forecasting the housing market to cool somewhat over the next year and beyond. And in terms of factors that argue in favour of this view, well, the first one would just be that it’s realistic to think that mortgage rates will be somewhat higher over the next year as central banks begin to tighten as bond yields in general go up. And so that’s probably the most salient consideration. And keep in mind that was maybe the biggest driver for the housing boom over the last few years.

Affordability now, not great in the U.S., pretty poor in Canada, and so that’s a limit as well, a governor on how far housing can go. But I should emphasize we’re not looking for a bust here. We’re not looking for home prices to go back to where they were two years ago or anything quite as extreme as that. I would say instead, we think that housing simply cools down a little bit. And we’re just not seeing the kind of financial distress that you would need to see to expect housing to actually significantly correct.

Don’t forget that over the last decade-plus, we’ve seen governments impost ever-stricter rules on qualifying for mortgages, particularly insured mortgages, and so anybody who has a high-ratio mortgage right now has already been tested against a mortgage rate that’s several percentage points higher than the mortgage rate they actually got. And so they should be capable of handling that.

Similarly, people who have had houses for some time whose mortgages are going to renew, many of them will still be renewing at a lower rate than they paid perhaps five years ago. And so we’re not overly concerned about that as a constraint.

We can say as well that immigration is actually accelerating in Canada. And so the biggest driver perhaps of housing demand is how many people a country has. And on that front, Canada’s set for 50% more immigration than normal. And so we, again, expect a cooler housing market over the next year or two, but not an outright correction or reversal.