Fundamentally, we think 2021 is set to remain a good news economic story, driven by vaccination efforts that are progressing quite nicely; driven by economies that are reopening as restrictions go away. And we are seeing that as we work our way through the latest wave and recognizing the risk of future waves and not forgetting about that we are seeing evidence of economic growth. Our real-time indicators are looking quite promising at this point in time. And keep in mind, there is still a fair amount of monetary and fiscal stimulus sloshing around that’s supportive to growth. We think there’s a natural buoyancy as well to economies in the sense that they have been underperforming.

There is generally an inclination to catch up to normality and we’re seeing that. And actually, in particular, we can see the beleaguered sectors, the ones that have been so restricted across the various waves of the pandemic, they’re the ones in some cases that are now seeing demand revive the most enthusiastically. People have missed those things and are pursuing them quite enthusiastically when that becomes an option. We see pent-up demand, there’s money on the sidelines that can be put to work as economies reopen, and we’re not looking for all that much economic scarring. We don’t look for all that much lasting damage from the pandemic.

From a regional perspective, I can say the U.S. has generally outperformed over the last several quarters, and it’s opened more, and vaccinated more, and so on. We think other countries now are in a position to start catching up. And so Canada and Europe perhaps even starting to outgrow the likes of the U.S. over the next few quarters just because they have more room to catch up. The emerging market story broadly similar, we think synchronized more or less with developed countries. It’s fair to say the rate of vaccination lags there but in the end, we’re seeing quite good growth in that space as well for the coming year.

I think investors are quite right to be looking at inflation very closely right now, and indeed it’s undeniably quite high, but there’s a very different story afoot, we think, whether you’re thinking over the short term, the medium run, or the long run. And so right now, and over the next few months, that’s the short term, we do see very high inflation. In the U.S., it’s more than 4%, it may even approach 5%. In Canada, it’s more than 3%, it may approach 4%. These are big numbers. They’re more than twice the normal rate and we haven’t seen them in the better part of a decade. Some of them are from benign sources, like base effects. But there’s some genuine heat here. We have seen commodity prices go up. We’ve seen people shift their demand preferences, and they’re buying electronics. And there are shortages and there are shortages of shipping containers, and port congestion, and this sort of thing.

We do think though many of those factors should fade as the pandemic itself goes away and as demand preferences normalize. And so we think much of that goes away. And so as we think over the medium run – the next few years – we do still expect a little more inflation than normal. And some of those pandemic effects should linger, but nevertheless not nearly as high as it is right now. We’re thinking something like 2.5% inflation, which is a little high, but I don’t think problematically so. We don’t think commodity prices keep pushing indefinitely. Yes, central banks have printed money, but they’ll start to pull that back and that’s probably less inflationary than people think. And so the bottom line is we’re looking for inflation of around 2.5%, and so more than we’ve been used to, but not like it is right now.

And then actually, when we think over the long run, we actually think there may be more deflationary forces than inflationary forces over that time frame. And the big reason is simply demographics. You look at old countries like Japan and places like the Eurozone, and you see inflation struggling to be normal, let alone being above normal. And so I don’t think there’s a long-term problem here. In short, it may get a little bit worse from here in the very short run, but we think we’re close to the peak and it probably becomes less problematic over time.

When we look at the business cycle, our scorecard system currently says this is still an early point in the cycle. And so that’s ultimately the final answer. I will add some colour though and say, though, it seems to be a cycle that is moving quickly, we’ve gone from recession to start of cycle now to early cycle quite quickly. We do have some inputs to our system that now claim mid-cycle, and so that’s not the best ultimate conclusion, but we do have a few that point a bit further ahead as well. And so early is still our best guess overall. Historically, an early point in the cycle has been a good time for risk assets like stocks. It’s been a time you would want to be invested in general. It’s worth acknowledging we do expect economies to race their way toward their potentials over the span of this year. We think the U.S. might even get there before 2021 is done. And so it is fair to say that the cycle is moving forward quickly, and perhaps we’ll even say something like mid-cycle before the year is out. But do remember that even when economies get back to their potential, normally there are a few more years of growth available even after that. That’s not the signal for the cycle to be over.

And so I guess we would say it seems plausible that this business cycle could ultimately be shorter than the past several cycles. The last few cycles have been 10 years long, which actually has been quite long. Maybe this is something like a five-year cycle, but I’m not seeing things that make me think it’s a one-year cycle or a two-year cycle. We still think there is some room to grow. And actually, we think there could be faster productivity growth down the line as well, which puts a little bit less pressure on the sorts of things that make an economy overheat.

So far during this pandemic recovery, the U.S. economy has absolutely led the way. It’s enjoyed more fiscal stimulus than almost any country. It’s enjoyed a faster rate of vaccination than almost anyone else, and it’s had fewer restrictions on daily life and on businesses, particularly over the last several months. And so it’s no surprise the U.S. economy has moved especially quickly. And as we look to the future, there may yet be more fiscal stimulus in particular from the U.S. There is still quite detailed discussion of a potential infrastructure bill that would unleash trillions of dollars of additional spending over the coming years. There may be a separate spending bill as well, though I should warn there may also be some tax hikes to partially pay for this and those tax hikes would be disproportionately tilted toward companies and toward investors and so not entirely positive from an investment standpoint.

In the end, I do think the U.S. will get some of these proposals out the door, probably not as much as the White House wants. There’s only a small Democrat majority, particularly in the Senate, but we do think there’s some more stimulus coming for the U.S. and it does continue to drive their economy forward. We think the U.S. economy is actually already in fact, as of late May, back to its prior peak level of economic output. So it’s moved very nicely so far. We’re budgeting for it getting all the way to its potential, meaning more normal-looking unemployment rates toward the end of this year, which is extremely fast. We have a 6.4% growth forecast for this year, 4.1% for next. So some deceleration but still quite good growth set for next year and, ultimately, pretty amazing stuff. We are aware that stimulus will then fade over time. We’re aware inflation is not a trivial issue, but we think probably these things are okay and the U.S. economy remains a fairly bright spot for the world.

After a brief lull in the spring of 2020, there has been an incredible boom in housing markets globally, certainly in Canada as well. The level of activity has soared to unusually high levels. Home prices have also moved remarkably higher, in Canada’s case a 23% increase relative to before the pandemic and considerably more in some local markets. And I have to admit, humbly, that it was contrary to expectations and historical experience. Normally, recessions mean a weak housing market, high unemployment rates, high levels of risk aversion, but we got a boom instead. And, of course, it’s been helpful to the economic recovery, and so I don’t think we’ll complain about it from that perspective.

And undeniably, mortgage rates have been extremely low, though one might observe they’re always low during recessions. But ultimately, this pandemic has made people think differently, and people are spending a lot of time in their homes, they want more space. It’s something that Canadians have maybe embraced even more than the average country, and so we’ve seen this housing boom. And in some countries, the housing boom has still kept affordability better than normal. In other words, mortgage rates fell quite a bit, home prices went up quite a lot. And in some countries, including in the U.S., the affordability is still better than it was before the pandemic. That’s not the case in Canada. In Canada’s case, affordability has gotten notably worse.

And so I think the question is what happens next? And it would make sense if the housing market cools off to some extent from here. It’s just not sustainable to continue rising as it has, affordability being a key concern, some tighter rules on mortgages recently, as well. But I have to say the experience of the last two decades argues against predicting an outright bust, and let’s keep in mind as well, there are a few other tailwinds set to come. So one would be we do think the Canadian unemployment rate can fall from here, we do have immigration rising very significantly in Canada over the next few years. The government wants to play catch-up to make up for lost time. And so as much as we predict a cooler housing market, I don’t think I would predict outright lower home prices or any kind of bust. I think the way to view it is that it may just simply moderate to some extent and, from an economic standpoint, be a little bit less help to the economy in terms of future growth.