~With contributions from Vivien Lee, Aaron Ma and Eric Savoie

Iran deal

Tell me if you’ve heard this line (about 40 times) before: the U.S. and Iran are on the cusp of a peace deal.

After so many past false starts over the past three months, at least a pip of skepticism is justified. For that matter, some details remain unresolved.

Fortunately, and despite all of that, something is different this time: both parties acknowledge a peace deal has been struck. The resulting memorandum of understanding is scheduled to be signed this coming Friday, June 19, in Switzerland. The pending deal was also confirmed by Pakistan and Qatar, which have served as intermediaries. There will then be a subsequent 60-day period in which further details are ironed out, largely concerning Iran’s nuclear program and sanctions on the country.

The agreement

Strait of Hormuz

The double blockade of the Strait of Hormuz is meant to end after the deal has been signed later this week, and thereafter gradually reopened as mine-clearing operations permit. Iran is supposed to clear mines, with some European countries also in a position to help. At least one version of the text talks of fully normalizing traffic through Hormuz within 30 days.

The text also includes language that Iran will not charge a toll for the 60-day period of final negotiations, which would seem to create some ambiguity around whether the country might then charge a toll later, especially given talk about reparation payments which would most logically seem to come from a revenue source such as this rather than direct payments by the U.S. or Israel. Still, the most likely outcome is that no toll is charged going forward.

Nuclear materials

Iran promises not to procure or develop nuclear weapons. A key element of the subsequent 60-day negotiation will be what to do about Iran’s nuclear stockpile. The minimum commitment is apparently to dilute it under the supervision of the International Energy Agency, but the material could alternately be transferred to the U.S.

Oil supply

The deal will reportedly grant Iran a waiver to sell its oil for the duration of the 60-day ceasefire period. In principle, this is more freedom than Iran had before the war, when sanctions limited such activities beyond the black market.

Sanctions

Iranian sanctions relief is expected to be phased, and dependent on progress with the scheduled nuclear talks. A Persian version of the text says all sanctions against Iran will end within a mutually agreed timeframe. If true, this would allow Iran to engage much more freely with the world than before the war. Differing expectations between the two parties here could yet be a source of conflict.

Reconstruction

There are some reports that the Iranian text includes expectations of US$300 billion in reparations via reconstruction and economic development. Some of this may simply represent the U.S. unfreezing US$25 billion in Iranian assets. It is not clear where the rest would come from. There has been talk of China investing more into Iran, but presumably not at that magnitude, and surely with its own commercial interests in mind. It seems unlikely that the U.S. and Israel would commit large-scale funding directly to Iran.

One might imagine an eventual toll on the Strait of Hormuz that allows Iran to recoup this over time, but there has been no direct reference to this. Indeed, many parties would strongly oppose the possibility and it is explicitly banned for the first 60 days. We assume it does not happen. The main point is just that there may still be differences between what the two parties think they are agreeing to.

Fighting

All fighting between the antagonists would naturally stop as part of the peace deal. This is meant to include fighting between Israel and Lebanon.

By extension, the deal seems unlikely to end Iran’s support of regional militias. Publicly available text also does not mention limiting Iran’s possession of missiles and drones.

Iranian regime

Despite Iran’s popular uprising that significantly motivated the U.S. to enter this war, it appears the conflict will end with the same Iranian regime left in place. The tentative deal includes explicit language not to interfere in one another’s domestic affairs.

Risks

There are several obvious risks that could stop the recent announcement from enduringly ending the war:

• The two countries have nearly reached a deal on several prior occasions but then failed to reach the finish line. The English and Persian texts appear to have several important differences, suggesting an agreement could still be elusive. The matter of US$300 billion in reparations is particularly important to sort out.

• Even if the memorandum of understanding is signed later this week, additional details then need to be agreed upon over the subsequent 60 days for the peace accord to stick.

• Israel might refuse to halt its military operations against Hezbollah. At a minimum, the country recently indicated it does not plan to reverse its occupation of Southern Lebanon.

Implications

Despite considerable uncertainty and some risk, we believe an imminent deal is nevertheless probable.

Oil prices have fallen by approximately 5% on the news, with the West Texas Intermediate price per barrel now down to US$81. That’s the lowest price since early March, though it’s still about US$20 above the pre-war norm.

Bond yields have fallen infinitesimally over the past day but are a notable nine basis points lower over the past week as inflation fears ease.

The S&P 500 surged by nearly 2%, confirming that despite the market’s strength in recent months, the war had been acting as a mild depressant.

One supposes that the actual implementation of the deal should unlock further movement in the same direction for each of these assets.

From an economic standpoint, we are not presently looking to upgrade our growth forecasts or downgrade our inflation forecasts, despite the tentative good news. This is because our base-case outlook had already assumed a near-term resolution to the war. The danger would have been if the war lasted additional months, which would then require us to downgrade the growth outlook and upgrade the inflation outlook.

-EL

U.S. resilience

Despite the energy shock, the U.S. economy continues to look quite healthy. In fact, Citi’s U.S. Data Change Index, which measures whether economic data is broadly improving or deteriorating relative to the year before, is now at its highest level since 2021 (see chart).

U.S. economic data is generally improving

As of 06/09/2026. Sources: Citi, Macrobond, RBC GAM

A previously cooling U.S. labour market appears to have stabilized with the unemployment rate around levels consistent with full employment. Monthly job gains have averaged a healthy 114,000 year-to-date – well above the expected pace given demographic and immigration trends. Job openings are also rising (and once again exceed the number of unemployed persons) and initial jobless claims remain low.

Survey data has been mixed with consumer and small business confidence taking a hit from rising energy costs. But sentiment metrics are notoriously unreliable gauges of actual activity.

Of note, the closely watched Institute for Supply Management (ISM) manufacturing and non-manufacturing surveys have improved sharply and are firmly in expansionary territory. Some of that strength reflects front-loaded orders ahead of anticipated price increases and supply chain delays (which are typically a sign of strong demand). But we’re not entirely dismissing recent readings as the pickup in the survey began prior to the distortions arising from the Iran conflict (see chart).

Institute for Supply Management surveys are well into expansionary territory

As of May 2026. Sources: Institute for Supply Management (ISM), Macrobond, RBC GAM

Business investment continues to surge, led by tech investment (as discussed in the U.S. productivity section of this report). The big five hyperscalers are now expected to spend $738 billion this year, 78% more than last year and 38% more than the consensus estimate at the start of the year. As discussed in a separate section, consumer spending is holding up well in the face of higher gasoline prices.

Overall, the Atlanta Fed is tracking a muscular 3.3% annualized increase in Q2 gross domestic product (GDP). That aligns with our view that the U.S. economy is little impacted by higher energy prices given its net energy exporter status. Tailwinds like AI CapEx, stock market wealth effects, and tax cuts remain supportive as well. We are above consensus in our U.S. growth forecast this year, anticipating a 2.2% gain on a Q4 over Q4 basis.

-JN

What’s driving U.S. productivity growth?

U.S. labour productivity growth accelerated to nearly 3% year-over-year in the first quarter. This is the fastest pace in two decades outside of post-recession rebounds and pandemic-era volatility. With this unexpected pickup, the level of labour productivity is now almost 2% higher than expected at the start of the decade (see chart).

U.S. labour productivity growth has outperformed expectations

As at 06/02/2026. Congressional Budget Office (CBO) forecast is re-indexed to Q4 2019 actual. Sources: CBO, U.S. Bureau of Labor Statistics (BLS), RBC GAM

Productivity data can be volatile and revision-prone, but researchers at the San Francisco Fed, using a regime-switching model, suggest it’s more likely than not that the U.S. has shifted into a high labour productivity growth regime. The last such regime lasted from the mid-1990s to the early-2000s – coinciding with the computer and internet tech boom – with productivity growth averaging 3% annually over that period.

What’s driving this regime shift? It’s tempting to attribute the entirety of the pickup to AI, which we think will make a meaningful contribution to productivity growth over the next decade. One can neatly point out that the U.S.’s unexpectedly strong productivity gains (relative to the CBO’s forecast and pre-pandemic trends) began right around the time ChatGPT burst onto the scene in late-2022.

But general-purpose technologies like AI don’t always deliver productivity gains right away. In 1987, economist Robert Solow famously quipped that “you can see the computer age everywhere but in the productivity statistics.” Indeed, it wasn’t until the second half of the 1990s that productivity clearly accelerated.

In fact, productivity can initially decline in a “J-curve” effect as companies undertake intangible investment like reorganizing their processes and retraining workers to take advantage of a new technology. But given the unusually rapid adoption of generative AI relative to past technologies, we might already be shifting from that investment phase to the harvesting phase in which AI begins to boost productivity.

There is no shortage of micro studies finding task or role-specific productivity gains from AI. Goldman Sachs notes a median 20% productivity gain from AI adoption across 28 academic studies. Anecdotes from two dozen companies suggest an even stronger 30% median productivity boost. But at the macro level, there isn’t yet conclusive evidence that AI is driving productivity growth.

Perhaps the strongest tentative support comes from a study by the Federal Reserve Bank of St. Louis late last year that suggested generative AI might have increased U.S. labour productivity by 1.3% since ChatGPT was introduced. This would account for about two thirds of excess productivity growth (relative to pre-pandemic trends) observed over that period. But that paper relied on self-reported time savings from AI adoption, which a separate study suggests might overstate actual productivity gains (respondents think AI save them more time than it actually does).

While definitive evidence is lacking, there seems to be growing recognition among economists that AI is playing a role in productivity growth. As the chart below shows, industries with higher AI adoption are generally seeing stronger productivity growth relative to pre-pandemic trends. On average, a 10% increase in AI adoption is associated with a 1% pickup in productivity growth.

This positive correlation has only emerged recently. Similarly, analysis by Morgan Stanley found the top quartile of most AI-exposed industries accounted for 70% of productivity growth last year, up from around 40% in 2024.

Industries with greater AI adoption are generally seeing productivity accelerate

As of 06/04/2026. Size of bubble corresponds to industry share of GDP. Productivity measured as real value added per hours worked. Sources: BLS, U.S. Census Bureau, RBC GAM

We think AI is already contributing to stronger U.S. productivity growth, but probably isn’t the only driver. Here are a few other factors that might be at play:

• Non-AI tech investment: Business investment (or “capital deepening”) has been a key driver of stronger labour productivity growth. Workers are more efficient because they have better tools for the job. Recent business CapEx growth has been almost entirely in technology products like software and computers (see chart below). While that acceleration partially stems from the pickup in CapEx by AI hyperscalers, not all tech investment is necessarily AI-related. Business adoption of cloud infrastructure, remote and hybrid work technologies, and investment in supply chain digitalization are likely contributing as well. Better digital tools, not necessarily generative AI, are probably also making workers more productive.

• The AI buildout itself (not just adoption): Sectors that are benefiting from the CapEx noted above – computer systems design, software, data processing and computer and electronic product manufacturing – are themselves seeing strong and accelerating productivity growth. AI is making coders more productive, but that probably doesn’t explain strength throughout the tech supply chain. The buildout of AI data centres (and broader tech investment), rather than AI adoption, could itself be adding to productivity growth. That said, the sectors benefiting from this investment make up a relatively small share of the overall economy, so it is unlikely that this is the central driver of economy-wide productivity gains.

• Unwind of post-pandemic labour hoarding: Burned by labour shortages following the initial COVID shock, many companies over-hired post-pandemic and held onto workers even as an overheating economy started to cool. Bloated payrolls resulted in labour underutilization, which weighed on productivity growth in 2022-23. But as businesses have gradually shed excess workers, underutilization has begun to reverse, supporting productivity gains more recently. Barclays Research suggests this factor has been a strong contributor to productivity growth since mid-2024 but has mostly run its course and will be less of a tailwind going forward.

• Workforce composition changes: Strong immigration post-pandemic likely shifted the composition of employment toward lower wage, less productive jobs – thus weighing on average productivity – while the recent immigration reversal might now be supporting productivity growth. But researchers at the St. Louis Fed suggest this effect has been modest. Their measure of worker quality, which captures changes in the composition of the workforce, declined by 0.6% between Q1 2023 and Q3 2024, a period during which the U.S.-born share of employment fell by one percentage point (ppt). The decline in workforce quality has now fully reversed, supporting recent productivity gains. But workforce composition has had a net neutral effect over the past 3 years and thus doesn’t explain the pickup in productivity over that full period.

Technology investment has been a key driver of business CapEx

As of 06/04/2026. Sources: U.S. Bureau of Economic Analysis (BEA), RBC GAM

In conclusion, recent stronger productivity growth in the U.S. likely reflects a handful of factors. It is not just AI. But we see growing evidence that AI is an important part of the mix.

Looking to the future, we expect AI will ultimately prove to be a transformative, general-purpose technology that boosts productivity to an even greater degree in the coming years as adoption continues to rise, and models and users become more proficient. While the U.S. is at the epicenter of the development of AI and many of its companies are proving to be especially early adopters, the productivity benefits should accrue over time to users and businesses right around the world, providing an important tailwind to global growth.

-JN

U.S. consumer spending checkup

Consumer concerns

The past few years have been unusual in the way that the normally almighty U.S. consumer has taken a back seat to the extraordinary capital expenditure growth being undertaken as part of the AI revolution. Reflecting this, the rate of growth in U.S. non-residential CapEx has substantially outpaced personal consumption growth over the bulk of the past four years (see next chart).

U.S. CapEx growth minus consumption growth tells positive story

As of Q1 2026. Sources: BEA, Macrobond, RBC GAM

Of course, that doesn’t render the consumer unimportant. Even uninspired U.S. consumer spending growth is a bigger contributor to overall economic growth than rapid capital expenditure growth (see next chart), due to its enormous share of the economy.

Consumer spending growth contributes enormously to U.S. GDP growth

As of Q1 2026. Sources: BEA, Macrobond, RBC GAM

As such, it is important to extend our gaze beyond the undeniably remarkable hyperscalers, data centres and large language models, and toward what the American consumer has been up to, and what the future might hold for this still-important segment of the economy.

It is not hard to be pessimistic about the consumer. The surge in energy prices in 2026 has eroded households’ purchasing power. Consumer confidence is accordingly low. More enduringly, low immigration in the U.S. constrains the pace of population growth, limiting top-line spending growth.

Surprisingly decent consumer resilience

But the situation is not quite as grim as it seems. Proving yet again that confidence rarely correlates with actual behavior, nominal consumer spending growth is actually running at a fairly good rate of +4.9% year-over-year (YoY). It even appears to be accelerating slightly (see next chart). While the acceleration is something of a fiction, reflecting higher spending on the same amount of energy products, real consumer spending growth is nevertheless holding steady. Although real consumer spending growth of 2.1% per year is unexciting, it isn’t bad.

U.S. consumer spending remains steady after adjusting for inflation

As of April 2026. Sources: BEA, Macrobond, RBC GAM

Optimistically, Bank of America’s real-time consumer spending tracker even argues there has been a significant acceleration in consumer spending growth (ex gas) in the U.S. over the past six months (see next chart).

U.S. consumer credit card spending is growing rapidly

As of 06/06/2026. Total card spending includes total BAC card activity which captures retail sales and services paid with card. Does not include ACH payments. Sources: Bank of America Global Research, RBC GAM

Not that it matters for companies geared toward overall consumer spending growth, but it is nevertheless important to recognize that individual Americans are spending at a pretty good rate. The official U.S. Bureau of Economic Analysis data shows inflation-adjusted consumer spending growth per capita of +1.8% YoY, which is in line with the norm in recent years (see next chart). “Normal” is not usually something to celebrate, but amid fears of a consumer wash-out, it is nevertheless welcome news.

U.S. consumer spending remains resilient

As of April 2026. Sources: BEA, U.S. Consumer Bureau, Macrobond, RBC GAM

Why so resilient?

Why is the American consumer holding together despite the aforementioned headwinds? There are several reasons.

A helpful phenomenon is that hiring has recently been quite strong, substantially exceeding expectations and approximately tripling the rate needed to maintain a steady employment rate since the start of 2026. More workers equal more aggregate-level spending. Hiring probably can’t remain quite this fast, but the general observation that the U.S. economy is in good health argues that the number of income-earning Americans should continue to rise at an adequate clip.

Wage growth is the other half of the standard equation determining the consumer spending environment. There is something for everyone in the numbers (see next chart). Pessimists will rightly note that the rate of nominal wage growth has been decelerating steadily, and that real wage growth has now turned negative. But the overall picture isn’t quite as bad as that. 

Nominal wage growth is still quite rapid relative to the pre-pandemic norm. Real wage growth was stable and entirely respectable prior to the energy shock and should revive as soon as that shock has ended.

U.S. wage growth has turned negative

As of May 2026. Sources: BLS, Macrobond, RBC GAM

A key reason consumer spending growth is holding up is that households are opting to save less (see next chart). This is to say, consumer spending growth is outpacing personal income growth. This is not sustainable over a lengthy period of time but is tolerable for the moment. Although the resulting household savings rate is now low relative to history, some decline over time is appropriate as the percentage of retirees rises. Further, as discussed next, less saving is needed when Americans’ financial assets are rising rapidly.

U.S. personal saving rate is fairly low and falling

As of April 2026. Shaded area represents recession. Sources: BEA, Macrobond, RBC GAM

There are also special factors helping (and in some cases, diminishing the pain felt by) the U.S. consumer. Tax cuts have so far put more into the pockets of American households in 2026 than higher gasoline prices have taken out (see next chart). The gas spend could eventually outpace the tax refunds if the shock were to unexpectedly persist through to the end of the year. However, the personal income tax (PIT) refunds are arguably undercounted in the chart. The lower tax rates provide not just the calculated refunds from 2025 tax filings, but also a similar quantity of tax savings spread across every paycheck in 2026.

Tariff refunds are shown in the chart to provide a sense of scale, though of course they accrue directly to businesses rather than households.

Tariff refunds will be bigger than incremental PIT refunds from One Big Beautiful Bill Act

As of 06/01/2026. Incremental PIT = YoY change in FYTD PIT refunds. Sources: U.S. Department of Treasury, U.S. Customs and Border Protection, RBC GAM

Households usually convert a fraction of the wealth created by a rising stock market into consumer spending. Critically, the total amount of equity wealth held by American households has roughly doubled since 2019, rendering this tailwind theoretically twice as powerful today for every percentage point of additional stock market return. It shouldn’t be underestimated.

The headwind of high oil prices, while painful, hurts the economy – and by extension, households – much less than in the past (see next chart).

Global economy has become much less oil intensive over the past 50 years

As of 03/18/2026. Sources: BP Statistical Review of World Energy, UN Trade and Development, Macrobond, RBC GAM

While consumer confidence has fallen substantially, we are inclined to discount it. It has been shown time and time again to be a very poor predictor of actual human behaviour.

The bottom line is that consumer spending growth is holding up better than one might imagine and there are some legitimate reasons for the buoyancy. Again, this is actually very important for the overall U.S. economy because business investment is too small a share of GDP to carry the load all by itself.

Lower-income households

What about lower-income households? The story in recent years has been that they are faring worse than their fellow Americans. They suffered more from tariffs and benefited less from tax cuts. They also benefit much less from rising stock prices due to lower stock market holdings and fair worse in an environment of rising fuel prices due to a larger spending orientation toward essential goods such as gasoline.

Despite all of that, there has been some chatter recently that lower-income households are nevertheless opting to spend more. Some of that is just because the cost of their gasoline has gone up. But a real-time measure of overall spending for lower-income households that excludes gas and groceries is also accelerating. That is interesting, though it is still the case that higher-income Americans are managing even faster growth, and the underperformance of lower-income spenders has now persisted for a full year (see next chart).

Spending gap persists between lower- and higher-income U.S. households

As of 06/06/2026. Total card spending includes total Bank of America (BofA) card activity which captures retail sales and services paid with cards. Does not include Automated Clearing House (ACH) payments. Income groups based on BofA quantitative estimates of household income. Lower (higher) income group represents the lowest/highest tercile. Sources: BofA Global Research, RBC GAM

There are not a lot of things helping lower-income households, but one exception is the fact that the cost of rent is rising less quickly than normal – and even falling outright, according to one metric. Lower-income households are more likely to rent than other cohorts, which is helpful in this context.

One might also argue that lower-income households may also be less anxious about being displaced out of their jobs by artificial intelligence. That appears to be a greater risk for white-collar professionals.

U.S. consumer loan delinquency rates were declining through the first quarter of the year. This argues that – regardless of income level – fewer households are struggling to make ends meet (see next chart). But this predates the energy shock: the data for the next quarter will be important to watch.

U.S. consumer loan delinquencies were edging lower prior to energy shock

As of Q1 2026. Sources: Federal Reserve Bank of New York, Macrobond, RBC GAM

The conclusion is that lower-income households are still doing worse than other cohorts, but they have nevertheless increased their non-energy spending in recent months. The popular narrative has been somewhat worse than this.

-EL & VL

Refreshing our fiscal health scorecard

We recently updated our fiscal health scorecard with the latest data. We also extended the series back in time to formally assess the deterioration of fiscal positioning over the past several decades. The scorecard covers 27 major economies, with each assigned a 1-5 score (higher = worse fiscal health) based on 9 key indicators.

Here is the picture that emerges with the latest data.

Fiscal health of more than half of major economies has worsened in 2025

Note: 2025 data for all indicators except interest payments (2024) and GDP growth (IMF forecast for 2031 used as proxy for "normal"). Fiscal adjustment refers to the necessary reduction in fiscal deficit to stabilize debt-to-GDP ratio. Source: IMF, Macrobond, RBC GAM

• Fiscal health generally deteriorated: Of the 27 major economies tracked in our scorecard, 14 saw their fiscal health worsen in 2025, while 8 saw some improvement and 5 experienced no change relative to 2024. Larger budget deficits (driven by fiscal stimulus and increased defense spending) contributed to these worsening fiscal conditions. So did higher interest costs generally.

• U.S. retains worst fiscal health: Our scorecard continues to show the U.S. in the worst fiscal health among major economies, although its index level declined slightly relative to a year ago, indicating modest improvement. The government’s budget deficit declined slightly in 2025 – although that could reverse this year given higher defense spending and tariff refunds. The country’s current account deficit narrowed, offsetting a further increase in debt and interest cost burdens. Still, the U.S. continues to run a very large deficit, has now accumulated a large public debt load and requires one of the largest fiscal consolidations just to stabilize its debt ratio.

• Europe re-shuffling: The UK also saw a slight improvement in its fiscal health, thanks to a lower budget deficit. That was enough for it to slip down the rankings from #2 to #4 on our scorecard. France jumped to #2 from #5 as its debt and interest burden rose and its current account flipped from surplus to deficit. Belgium remained in the #3 spot with a slight deterioration in its index.

• Japan improves: Japan’s fiscal health improved somewhat as strong nominal GDP growth reduced its debt burden relative to the size of its economy. Some of that improvement could be reversed this year amid fiscal stimulus and energy support programs. Japan ranks a surprising #10 on the list despite having the largest debt load. Its interest burden is relatively low, most debt is held domestically, and its budget deficits are small enough to shrink its high debt ratio over time.

• Canada remains steady: Canada’s index was unchanged as a smaller budget deficit in 2025 and a better growth outlook offset a higher debt level and wider current account deficit. But Canada still moved up by one place in the rankings to #11. The country has since made further fiscal commitments for 2026 both at the federal and provincial level which could increase the deficit in future years.

At the global level, the general worsening in fiscal health last year is part of a longer-term trend. It is driven by factors like:

• demographic headwinds and the costs of an ageing population

• fiscal responses to major crises (the global financial crisis and COVID pandemic)

• populist economic policies.

The median debt- and deficit-to-GDP ratios of the 27 countries in our fiscal health scorecard have doubled over the past two decades. Slower nominal GDP growth has exacerbated fiscal challenges, and rising interest rates are reversing the long-term downward trend in debt servicing costs.

We have now reconstructed each country’s fiscal health index going back to 2007, just before the global financial crisis (GFC). Nineteen of the 27 countries have experienced a fiscal deterioration since then. Some of the rare cases of improving fiscal health were achieved via painful fiscal adjustment in countries like Greece, Ireland and Portugal that were at the centre of the European debt crisis of the 2010s.

While advanced economies are generally in worse absolute fiscal health as shown in the scorecard above, emerging markets have suffered the most significant deterioration over the past two decades (see chart below). South Africa, Russia and China top the list of worsening fiscal positions. Brazil and Mexico are also in the top 10. The average emerging market score has increased by nearly three times as much as the average advanced economy score.

Most of the fiscal deterioration in advanced economies occurred pre-pandemic, whereas emerging markets saw their fiscal health deteriorate post-GFC and post-pandemic.

Emerging markets saw greater fiscal deterioration over the past two decades

As of 06/10/2026. Source: RBC GAM

Deteriorating government finances have contributed to steepening yield curves and larger term premiums. In turn, higher government borrowing costs cascade down to businesses and households and can restrain economic activity. Persistent deficits and high debt loads raise the risk of fiscal consolidation that could act as a headwind to growth but might be necessary to put government finances on a more sustainable path.

Alternatively, a lack of credible adjustment plans raises the risk of inflation and perhaps even partial debt monetization. Such concerns have contributed to the rise in gold prices in recent years.

-JN & DM

European recession?

An updated estimate of Eurozone GDP now shows the economy contracted by 0.2% (non-annualized) in Q1, the first decline in 10 quarters. S&P says Purchasing Managers’ Index data for April and May are consistent with a further 0.2% decline in Q2, barring a significant recovery in June. That raises the risk of the “technical” recession definition being triggered in Europe as well.

But again, context is important. The Q1 decline reflected a record 12% pullback in Irish GDP, which is highly volatile due to the activities of multinationals domiciled in the country. That subtracted nearly half a percent from Eurozone Q1 GDP and masked what otherwise would have been a healthy increase. Looking at the currency bloc’s four largest economies, Germany, Italy and Spain all recorded solid gains in Q1 GDP, while France saw a marginal decline.

Q2 could be more challenging. Sentiment indicators fell sharply following the Iran conflict and energy shock, to which Europe (along with Asia) is more exposed than North America. Surveys for May and early June showed tentative signs of stabilization, though, and a potential reversal of the artificial pullback in Irish GDP could help avoid another decline in Q2. While the recession risk is greater in Europe than most other regions given its energy importer status, we think an economic downturn can be avoided assuming the Strait of Hormuz reopens and energy and refined product prices don’t rise significantly further.

Most recent Eurozone surveys showed tentative signs of stabilization

As of 06/08/2026. Shading is based on 3-year history. Sources: European Commission (Directorate-General for Economic and Financial Affairs), Sentix, S&P Global ZEW (Centre for European Economic Research), Information Institute

-JN

Canadian recession?

Canada’s economy got off to an unexpectedly slow start to the year. Q1 GDP declined by 0.1% quarter-over-quarter (on an annualized basis). Despite falling by the narrowest of margins, it represented a second consecutive quarterly contraction, meeting one overly simplistic definition of a recession (a so-called “technical” recession).

We take a more holistic view when assessing whether an economy has experienced a recession, using the 3 Ds: depth, duration and dispersion (alternatively, the 3 Ps: pronounced, persistent and pervasive). Based on the following observations, we don’t think those conditions are met:

• The 0.1% decline is well within the margin of error for such estimates, and a separate industry add-up of Canadian GDP suggests the economy actually grew by 0.5% in Q1 (see yellow dots in first chart below).

• The Q1 decline was due to a shrinking population rather than a pullback in per capita demand. Canada’s economy expanded by a relatively healthy 0.9% (annualized) on a per capita basis (see light blue squares in first chart below).

• Slightly more than half of Canada’s industries were still expanding over the past two quarters. This is hardly robust breadth, but it isn’t as bad as one normally sees during past recessions when most industries experienced contractions (see second chart below).

• Canada’s unemployment rate has declined in each of the past two quarters, whereas unemployment typically rises during a recession.

• Consumer spending grew in each of the past two quarters and the household savings rate declined, suggesting consumers aren’t retrenching.

• More broadly, final domestic demand (GDP excluding net trade and inventories, which is a better indicator of domestic spending) posted a strong increase in Q4 and is higher on net over the past two quarters.

• StatCan’s flash estimate for April GDP (+0.4%) is the strongest in 9 months and suggests a return to growth in Q2.

Canadian GDP increased on a per capita and industry basis in Q1

As of Q1 2026. Per capita is based on the income and expenditure approach. Sources: Statistics Canada, Macrobond, RBC GAM

Canadian GDP diffusion index shows more than half of Canadian industries were growing over the past two quarters

As of 06/01/2026. Diffusion index indicates the share of industries growing on a 6 month-over-6 month basis. Shaded areas indicate Canadian recessions. Sources: Statistics Canada, C.D. Howe Institute, RBC GAM

We don’t think Canada’s economy is in a recession, but it isn’t exactly booming. Even if the latest quarter is charitably described as a period of flat output, two of the past four quarters have experienced an indisputable decline.

While unemployment appears to have stabilized, it remains elevated, suggesting economic slack persists. Slower population growth has significantly reduced the speed limit for GDP growth and makes quarterly declines more likely. The pullback in final domestic demand in Q1 was partly due to a near-term reversal of government spending growth, highlighting the extent to which Canada’s economy is reliant on fiscal support.

That said, we think Canada’s economy will gain a degree of momentum in the coming quarters. Business and consumer confidence have improved. Higher oil prices are boosting exports. Housing is showing tentative signs of stabilization. Government spending should return to making positive contributions to growth.

Our forecast assumes Canada’s economy will grow by 1.4% on Q4 over Q4 basis this year, slightly better than the aforementioned speed limit for growth (potential GDP).

-JN