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About this podcast

This episode, Chief Economist Eric Lascelles weighs in on the mixed macroeconomic outlook for the year ahead. Eric discusses the latest employment data, recession timing, whether interest rates will peak, and what it will take to revive the Canadian housing market. [21 minutes, 21 seconds] (Recorded: January 13, 2023)


Hello, and welcome to the Download. I'm your host, Dave Richardson. We had Stu Kedwell on earlier in the week and hopefully you had a chance to listen to that one. Stu really laid out his view on equity markets, particularly North American equity markets, which is his area of expertise, but he talked a little bit about fixed income. And we'll get somebody on over the next few days that's more of a specialist in the fixed-income area, but laying out a market view. So, of course, we want to get prepared for 2023 and what may or may not happen for investors this year. And when we talk about economics, we only go to one source, and that's Canada's hardest working economist, who's been off, I think, for much of the last month hanging out in the Dominican. That's Eric Lascelles. Eric, chief economist at RBC Global Asset Management, welcome back. Happy New Year.

I'm now the CIO. I'm the chief inflation officer as well, by the way, Dave.

I was trying to throw CIO in there, and you're usually reluctant to do that because we don't want to get your boss angry. But if he slipped that title over to you with all this inflation excitement, congratulations.

Thank you. I'm hoping we’ll all lose that title very soon, actually.

Well, once again, just more work for you. You're squeezing 25 hours into a 24-hour day. Now you're going to have to squeeze 26. It's just amazing.

I think Mars has slightly fewer hours. Remind me not to move to Mars.

Yeah. Don't move to Mars.

No, it's more! It's more; 37 more minutes. Remind me to move to Mars, Dave.

There we go. Might as well be on Mars.

Squeeze out those 37 extra minutes.

Yeah, but you're not going to get that beautiful tan on Mars, I don't think.

No inflation there, either. As it stands right now, that's a plus.

A whole big lack of supply and demand on Mars.

Well, we've knocked off our first topic, Dave. I mean, Mars, we can tick that one off. What else is on the agenda here?

Yeah, Mars is known for its weak or very easy monetary policy. I don't know if you know that. I'm sure you do as an economist.

I had no idea. How fascinating. I'm sure the listeners are loving our witty banter.

Our witty banter. So let's get down to business and let's go come back to Earth. Why don't we start with what's happened news wise over the last couple of weeks? Why don't we start with the jobs report last week and wow, things just stay pretty good. It's kind of amazing.

Yeah. Job numbers are still looking great. US had little over 200,000 jobs in December, and Canada had a little over 100,000 which, for anybody who knows the population ratio, is a crazy number, really good. So job numbers are holding together. As always, you could dice it different ways and make comments about this and that. You could say that, for instance, in the US, good robust numbers and yet also the weakest month of hiring in two years. That really says more about the last two years, by the way, which was incredible hiring. So it's sort of steadily decelerating. They couldn't really say that about Canada, I suppose. So job numbers holding together, I think is the big story here. Now, let the record show, job numbers tend to be a lagging, not a leading indicator. So that's not actually the first place we go when we're looking for downturns and recessions. Aaron Ma, who is split between Dan Chornous’ team and my team, did some nice work recently for us, and he found that historically, the first job loss is one to two months after the recession. So again, don't look for job losses and then say, hey, the recession is coming. It'll probably already be here if we're in that scenario. What we did find, though, was that you tend to see job creation descending below a normal rate about two months before a recession. So you can get a hint of what's coming if job creation is weaker than normal. And I guess the story right now is, it's not. Right now, we apparently are not within two months of a recession. That would be the way of interpreting that as it stands right now. So, yeah, labor market holding together. You did start to see in the US some of the tech sector job losses showing up in the actual numbers. The headlines have been there for a while, though a lot of those people actually have found other tech jobs. So the aggregate is not quite as bad as it looks. But we're seeing a bit of softness there. And as I guess I've said before, you can see job openings down a bit. They're still good. And you can see quits rates down a bit; they'll still good. Initial jobless claims are still really low, so really strong, but continuing claims are edging higher. And so as much as there are to an unusual number of people losing their job, I guess maybe it's proving a little harder to find a job if you did lose a job, which might be saying something. But I'm splitting hairs here. The labor market is holding together. If you want to see evidence of weakness, you need to look elsewhere. You can look elsewhere, by the way. And so, as an example— and again, maybe focusing to start with on the US—, US twin ISM numbers came out also quite recently, early in 2023, for December. And the manufacturing one for a second month is sub-50. So that is, strictly speaking, just a very tiny contraction in the manufacturing sector. But the news was that the service measure, which had been sitting at 56— which is, I know, not much apart from 50, but the range of operations is about 45 to 60— so 56 was actually a decent, if not robust signal of a service sector that was growing happily. That service PMI or ISM service number just fell from 56 to 49. So strictly speaking, you could say both the manufacturing and the service side of the US economy is contracting slightly. You need more evidence of that; you need more months of that. I wouldn't say the US economy is in recession right now by any means, but nevertheless, we are getting little bits of softness here, including in what we think are some pretty important indicators. And it was kind of similar for Canada, actually. The Can Stats has this business conditions index, I guess it's called— pretty new, it's just a pandemic-era creation, but it's a fresh, real time type stuff— and that's fallen pretty palpably across the last month in Canada as well. So businesses are feeling more cautious. I just saw a US survey recently that was also speaking to a pretty significant majority of US CEOs expecting a recession and adjusting capex plans in particular on that basis. And to some extent, expectations can be destiny. So when I think about 2023, I celebrate that the data has been still pretty supportive, particularly on the job side, but we still think there's a slowdown. We can still see it very much in rate-sensitive sectors like housing and so on. So, likely still a recession. A little bit less conviction. You know, we tend to deal in probabilities. It's much safer and much more useful, I think, to do that. We've been saying maybe 70% chance. We had been saying 80% chance. So, the diminishment is partially a reflection that, hey, things like the job market are still holding up, to our pleasant surprise. It's partially a statement about Europe and gas prices that are down; it’s been a milder winter and they're not going to suffer quite as much. It's partially a statement about China, which has reopened. We knew they were going to. The betting had been March; it was December— so, it's kind of a three-month surprise. It doesn't mean we're in a different place at the end of this year relative to where we would have been necessarily, but nevertheless, they've reopened earlier and that means a lot of really short-term acute pain, both in a health sense and an economic sense, as everybody gets sick and you have companies saying that a quarter of their workforce is showing up because everybody else is sick or isolating. But out of that, emerges a rebounding Chinese economy. And I'm concerned about Chinese long-term growth and long-term headwinds, but I have to say 2023 should be a better year for them than 2022. And as we talk about a global economy that's perhaps slowing in 2022, China is a nice counterweight to that and maybe does diminish the weight of the blow, if that makes sense. So I would say from an economic standpoint, we're still seeing a slowdown; we still expect a recession, but actually it's been more maybe good surprises than bad surprises in the last month on average, and inflation too. But I'm not sure if you want to talk about that.

Well, we're going to just tee up as a tease for the listeners; we're going to do a little Eric Lascelles’ special report on China later this month. We're going to get Eric back to do a deeper dive on China because it is pretty interesting; everything that's going on over there, near-term, longer-term, lots of stuff on an economy that definitely has an impact all over the globe. The other numbers that were out this morning— and as another tease, we'll go deep with this with Stu Kedwell on Stu’s days next week—, a couple of US bank earnings out this morning. And a little weakness there. Again, as you mentioned, CEOs talking about the risks in the economy and that a recession is likely. Jamie Dimon of JPMorgan says our base case scenario is now a mild recession. That's good. He's caught up to you?

He's been there for a while.

If you can just catch up to him on the pay level, then you'll really be doing something. But that was showing some signs of softness. Little uptick in the loan loss provisions there. But again, overall, the percentage you're putting on recession is down a little bit based on some of this; a little bit more optimistic projections, but still, your base case is a mild recession. Anything else changed or shifted significantly from where you were a month or two months ago?

You're right. Let me answer that, but first, as the distractible person that I am— I think we both might fit into that box quite nicely, actually, which is probably not good for these conversations; sorry, listener— but I will start by saying that of course, in a banking context, Stu would be the expert, not me. But nevertheless, it's such an intriguing situation as rates go up, like the net interest margins do better, that's nice. But of course, it hurts housing and it ultimately hurts the economy, and that's not so nice. And I guess that eventually does dominate. But what's intriguing is that so far— it's not a recession, so I can't say it's been a white-collar recession because it isn't a recession at this juncture—, but it's been kind of a white-collar blow recently, hasn't it? I mean, it's the tech sectors that are losing jobs and it's now US banks that are starting to engage in layoffs, it seems. And so, it's quite fascinating. It's not the normal sequence of events. Often, it's very much the opposite; the low-skilled workers who lose their jobs first. Often, it's capital-intensive businesses investing in factories and things like that. And so, it's been a bit different so far. I'm not sure it's going to stay different, but it has been a bit different so far, which is interesting. And I guess you could say, from a purely economic standpoint, to the extent these are maybe higher income jobs being shed, that does actually have an outsized effect on the economy. Though equally, you could say that higher-income people often have a bigger savings buffer and so there's less cataclysmic effect. So, it does slice both ways. But to your question, about other things that have changed or changed our thinking, let's make sure we talk about Japan for a moment because of course they've pivoted out— or they're claiming they're not pivoting out of anything— in terms of monetary stimulus. But I think, functionally speaking, the action is underway with the bank of Japan and with interest rates there. But the other one is on the inflation file. And so, inflation is still the biggest issue here. Let's not forget that's the thing that's forced all the rate hikes, that's the thing that's probably setting up a recession and all the other bad things that we don't like. And so, we need to watch that and it's behaving nicely. Now I'm happy about this one on every front because it's good that it's behaving for all of us, just personally and as investors, but it's also good because I've been predicting it. We've been calling for inflation not just to come down, but to come down a little quicker than the market would think. And so, I guess the latest hook would be December CPI. December CPI just came out for the US and looked pretty good. It came down further. It didn't beat expectations or anything, but the expectations were for a nice improvement. And so we are getting that. American CPI peaked at 9.1%, year over year. It's now down to 6.5%. We're more than a third of the way back to where we want to be, which is quite good. And importantly, the breadth of inflation was narrowing as well. We knew gas prices were down in December, that was a known quantity going in and that's a big part of CPI, so you knew it was going to look better. But a lot of smaller items were looking better. Food inflation really continued to decelerate. I've noticed that a little bit in the grocery store; a couple of things became less expensive recently and it's not rising quite as quickly as before. So we are getting some cooperation there, which is really important. And so, the thinking is that the Fed maybe just does a 25 in February instead of a 50. And it does have some positive cascading consequences as well. So that's a happy trend and one that we think has a pretty good chance of continuing.

Yeah, I even saw a tweet this morning that Tesla is lowering prices on their cars. You’d think that's almost impossible. You look even more broadly across used cars. You talked about natural gas. Natural gas in August kissed almost $10. Now it's about $3,50. That's a 65% reduction. So there's all kinds of examples across the economy of where prices have even moderated or downright come down, some of the building blocks of the economy. And that's fundamentally good news. You say maybe the Fed only goes 25, but where's your thoughts now in terms of where you think the Fed peaks out? Where bank of Canada peaks out? Are we pretty much there?

We're close. I wouldn't see the view has changed radically. We're still thinking around 5% for the Fed, around 4.5% for the bank of Canada. But that's really close. We're a quarter point away from that in Canada. We're a half-percentage point away from that in the US. This is getting to the short strokes here. And so, we're not far, we think. Now, there's uncertainty here and let's see how the inflation does evolve and how the economy evolves and other things. China rebounding, in theory, could push oil prices higher to the extent that they haven't been traveling around as much. There are some offsets that need to be factored in. We've had an unusual sequence of good news here that doesn't always persist indefinitely. But as it stands right now, central banks are likely quite close to being done, wherever that precise finishing point is, which is good. And the other thought I always like to share when we talk about that is just: don't think this is the new normal. This is emergency setting for an emergency inflation situation. And to the extent that inflation emergency gets resolved and/or the economy starts to look pretty weak, we can start to talk about rates eventually coming down. And it's still a provocative subject whether they would actually cut this year or not. Central banks will tell you, no, we won't, but they might. There's a chance. And 2024 is completely fair game for that sort of thing. And at some point, they do need to get back to a 2.5% policy rate, which is some distance lower. So I won't make mortgage recommendations or anything like that, but I will say I do appreciate that current policy rates and prime rates and other things like that probably are not the norm going forward over the long run.

Yeah. And just another tease for the upcoming special report «Eric Lascelles on China», if Chinese travel just returned to normal, it would increase the demand for oil around the world by 2 million barrels a day. Did you see that?

I have seen the 2 million stats over and over again. Send it to me because I'm a little bit skeptical just because we did some work. I've seen the claims that Chinese oil demand fell by 2 million barrels when they locked down, but I haven't quite seen that. It seemed to us it was less than a million, but maybe I’m missing something. In any event, I totally agree that there is an increase in demand that comes and it is palpable. So maybe that's the main point. By the way, Chinese New Year, at least as we record this, is very soon, Dave, not much more than a week away. We could wait for that, if we are clever.

That's exactly right because this is our New Year's report on our New Year. And then for the Chinese New Year, we’ll have your special China report. Let's just finish up on one more thing, just a quick flyover, always of interest to Canadians: housing market. You touched on it a little bit. I know you've been, I'd say, maybe a touch more pessimistic than some on the Canadian housing market. Is that still your view as we're seeing interest rates again potentially peaking out? Do you still think we're going to see a pretty soft market at least in the first half of the year?

That is what I'm assuming. It just seems to me it would be hard to stage a big revival if mortgage rates stay pretty high. And I know the term rates do have some movement in them and there is scope for maybe the bond yields to fall a bit over the span of the year and so, conceivably term mortgage rates could fall a bit as well, and that might prove to be a supportive factor. But between the idea that we could have a recession in there with some extra unemployment and the idea that policymakers, even if they do cut rates, it would be pretty tentative, towards the end of the year, I don't know if there'd be a huge reprieve there. And so, we're assuming there is still some housing market weakness. Not catastrophe, but weakness. More manifested through home prices just coming down somewhat more. We think we're probably at this point at least half, if not more than halfway through the home price decline. So I think a lot of that heavy lifting is done and so everyone's got a different perspective. If you own a home, you breathe a sigh of relief. If you're looking to buy, I guess you're queuing things up or something like that. But in any event, we do think there probably is some further decline. This is not an exact science, as I hope everyone appreciates. There's a lot of psychology involved in these sorts of things that are not precise at all, trying to gauge the extent to which people look beyond their city to other cities and other suburbs and things like this. And so it's not quite as easy as a precise supply and a precise demand meeting in the middle. I will certainly concede that on the demand side, my goodness, Canada is running a very hot immigration rate right now. Their target is 500,000 a year going forward, which is about double what it was not long ago. But it is already almost 500,000 a year as they play catch up after a low year in 2020. And that actually— not from a housing perspective—, but it actually underestimates the real influx of people. For instance, in 2021, another 200,000 people came in, though temporarily, in the sense of being foreign students and being temporary foreign workers. But the thing is, those programs just keep growing every year. And so as much as those particular people might go home the next year or maybe four years later, if they're students, the next cohort is even bigger. And so, it actually does add to the population in quite a significant way. And those people do need to live somewhere as they live here. And so, I wouldn't want to underestimate the underpinning of demand for a housing market and the inherent attractiveness of some of the big cities in Canada. But equally, just sorting through the mortgage rates and the affordability issues suggests you could have a little more softness first.

Yeah, and just how successful the immigration program in Canada has been, arguably over the last several decades, a big underpinning to the Canadian economy, economic growth, and of course, the housing market.

Yeah, that's right. More immigration does mean, all else equal, more GDP growth, which does mean more earnings growth and more customers for the bank and for all the other businesses. And so, there are clear economic positives. You could always quibble a little bit and say, well, listen, GDP per capita doesn't necessarily go any faster, so the individual person's salary doesn't necessarily go up. And that's not necessarily a positive to every human being. And of course, it does make housing more expensive and maybe depress low-income wages. So there are costs too. But on the aggregate, Canada has been very successful over the long run at that, and integrating people into the country, and the surveys would suggest Canadians are still feeling fairly favorable toward that. And politicians, I suppose, are responding in kind.

But anyways, Eric, that is a terrific quick summary. It’s always really clear and straightforward, which is why everyone loves you. And thank you for being so gracious with your time, last year. And it looks like you'll be back regularly this year. Always great to catch up to you. Thank you.

Thanks so much. Bye, everyone.


Recorded: Jan 13, 2023

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