Hello and welcome to The Download. I'm your host, Dave Richardson. And it is Jobs Friday with Canada's hardest working Economist, Eric Lascelles. Except it's not Friday, Eric. It's the following Tuesday. So it's not the hot-off-the-presses version of Jobs Friday that people are used to.

I bet even more jobs have been created since that date.

Well, that's true. Are you slacking off? Or is your New Year's resolution for 2025 that you're not going to be Canada's hardest working economist, that you're going to take it back a couple of notches?

Just down to the provincial hardest working level, is my thinking.

Oh, boy. So Canada's wittiest economist, at least in 2025, but now just Ontario's hardest working economist. You were under the weather, but I can see you're back to 100% already.

Yeah, that's right. Feeling good again. Thanks for accommodating me. Let's dig into those numbers, shall we?

Well, they're pretty good numbers, right? The jobs numbers, if we go back to Friday, Canada and the US, a pretty surprise to the upside, right?

For sure. We'll talk about the whole good-is-bad conversation maybe in a moment, which is yet again back on the table, but that's right. So in the US job numbers, 256,000 jobs. That was just about 100,000 more than expected. Sometimes the revisions eat away at that. They didn't in any serious way. You like to cross-check with unemployment obviously, and the unemployment rate fell from 4.2 to 4.1%. And so that's a good report through and through. You would struggle to poke too many holes in it. You could maybe say that a bunch of the hiring was in less economically sensitive areas, but a fair chunk was actually consumer focused. Retail employment went up a lot. Leisure and hospitality went up a lot. That was actually very much economically linked. And so on the net, strong. I will say that we believe that there are still some small positive distortions coming through in this December data, first from the hurricanes, which were back in late September, early October. The bounce back was mainly November, so you lost jobs relative to the normal trend in October, you rebounded in November. The thinking is there was probably a little bit more rebounding still happening in December, so that might have slightly flattered this. Another one is, and this is very obscure, but Black Friday, so the American Thanksgiving shopping season was unusually late in November this year. It came well after the reference week when most of this data is being collected. The long and the short of it is that we probably didn't see the usual seasonal hiring in the November data, we ended up getting it in the December data. It makes the December data look a little bit better than maybe it deserved to look. It sounds like I'm saying, oh, it wasn't all that great, but that's a good thing because, of course, people are worried right now about too much economic strength. The stock market wasn't that pleased with this report, and bond yields went up, and Fed rate cutting expectations went down. I guess what I'm saying is this was strong. I think those were probably directionally the right market responses sources, but it might not be quite as much overheating as it first looks. And that's the US side, anyhow.

Yeah, but markets were not good after it, stock market, and bond yields have continued to move higher. And we'll probably spend a few minutes on that after we get through some of these data announcements. But overall, it's just starting to feel like the optimism around rate cuts and lower rates and inflation being completely bottled up and under control, etc., is dissipating as we sit here in early 2025.

Yeah, that's right. So the big victory of last year was that the risk of recession fell pretty profoundly over the year. And as an aside, we've got it down to a mere 15% chance for the US over the next 12 months. That's a pretty low number. That's the lowest we've talked about in years and years. That risk isn't completely gone, but it's very much diminished. For most of the last few years, the debate has been that recession versus a soft landing, which was the good thing, which was an economy that moves at an okay rate and lets inflation settle and so on. That's still, I think, the best-case scenario. The risk that is mounted recently is the opposite side of the base case, which is instead of a recession, which is weaker growth, it's a no landing, which is stronger growth that then challenges inflation to come down and compromises the ability of central banks, the Fed, in this case, to cut rates. So that's the scenario we've been thinking a whole lot more about in recent months. And just in terms of numbers, we've got that at a 25% chance for the next year, the soft landing at a 60% chance. So we still think that prevails. But there are scenarios in which we end up with an economy maybe under some Trump-based stimulus or something like that, adding to the current trend that ends up really accelerating the economy and sending yields higher. And maybe that all sounds just fine to people, but making trouble later because you overheat, so that's the concern right now.

So Eric, I love it when I can prod you to criticize your economic colleagues on the podcast here. But what was the Fed thinking when they cut rates 50 basis points in September and followed through post the election? One, maybe they don't know who's going to win. And they're not really sure where policy is. And so err on the side of caution. And the first cut is just the first cut, whatever. But the second cut, they follow through. And even then, we were starting to see the odds of a recession shrink and inflation, although down. We know historically, we've talked about this a lot, it's that last little bit. So from 9 to 3% happens pretty quick, but from 3 to 2%, where they want to get it, that's the real tough digging and tough work. So is this already looking like they may have made a bit of a mistake, or is it just we're going to err on the side of caution? Let's make sure we wipe out the recession, then we'll deal with inflation later? What do you think they were thinking there?

It's not working the greatest right now. I would say that. We were a little surprised when they started with that 50-basis point rate guide. It wasn't screamingly obvious that it was necessary, or you could have just started a month or two before if you really wanted to. So it's fair maybe to level a little bit of criticism. I do you think, though, that the fundamental uncertainty for central banks—and I shouldn't say the fundamentals, there are big questions around the economy and inflation and politics and policy right now, so there are plenty of uncertainties—but a pretty big one, though, is just what is a neutral, non-stimulative, non-restrictive policy rate, and nobody has a very good sense of that. You will find people arguing it could be as low as 2%, which would have been maybe the argument going into the pandemic. You will find others these days arguing, just based on visual evidence for the economy, that maybe it's 5%, maybe somehow the neutral rate has increased so much that we're in the 4% here, and that's stimulating the economy too much and needs to be undone, which isn't the best case right now, but there's a small chance, maybe more than a small chance, a chance of rate hikes in 2025. The real debate is, is it 3% or 4%, I think, in terms of what that neutral rate is. No one's saying we need to be there right now, but the idea just is it does inform how much rate cutting you can get away with without inflation picking up and things like that. The market thinking is shifted there and the view is, well, gee, if things are still so hot, even in the 4%, then I guess we can't go any further. I think that's the right interpretation for the moment. I do still think, though, that in my view, a neutral rate is probably closer to 3 or the low 3s. I think that it's fair to say it doesn't appear that we're going to get a whole lot of rate cutting in the first half of this year. The market's priced in literally one rate cut now for 2025, that's it. It doesn't get fully priced till October. I think it gets a little bit over 50% priced in June. That's worth keeping in mind. It's not as if the market's saying there's no chance of anything. But the point is not a lot of cutting priced in. Then you look at some error bars around that, and there are scenarios where there's no cutting, and there are scenarios where there's hiking as well. That's probably the correct interpretation, given how hot the economy has proven to be and just how inflation is really proving to be pretty sticky. We got another number coming out tomorrow on that front that we can talk about maybe. I'll just say that if given the liberty of thinking out over the next couple of years, I do still think a neutral rate is a fair bit lower than we are. I think that there is scope for inflation still to settle, and I don't think it's automatic. The labor market is going to churn out 256,000 jobs a month as it has been recently. And so I do think that they can do a little bit of cutting. And I do wonder whether we're towards one extreme of the mood swings that the markets have taken as it pertains to the policy rate because we've had other moments in the last year where the market said there's not going to be any cutting. There are moments where they thought there's going to be an absurd amount of cutting, and probably the truth lies in the middle. It makes sense to not cut for the next couple of months, I would think, just to see where things settle and whether inflation gets back on track. I guess we'll see from there. But again, over the next couple of years, I do believe that a normal policy rate is still a fair distance below where we are right now. The main argument, Dave, not at all supportive by the data recently, which is so strong, even with high rates, but it's just interest rates are a clearing rate for the economy. And businesses make decisions, and they're financing with bonds and loans and things, and people make decisions as well on a similar basis. And so interest rates are pretty central to decision making. And I struggle so much with the idea that somehow the clearing rate for the economy has more than doubled in the last five years. And so it makes sense that it's a little higher than it was a few years ago. But if the clearing rate was 2% in the late 2010s, I just don't know how it can be possibly 5% today. That's such a radical difference. And so I think as distortion settle, we'll get to see that fall a bit more.

Yeah. And before we go to the Canadian jobs report, because Canada is particularly interesting right now. Not necessarily all positive, but particularly interesting at the very least. So don't worry, we'll spend lots of time on Canada. Let's just go to that PPI number, producer price index number, out of the US today, which was okay, right?

Yeah, that's right. So the PPI number, so this is one step before CPI. It's producer prices. It's companies charging each other, these sorts of prices. Those for December were a little more favorable. So that's the one tick mark we've got in that, hey, maybe inflation is cooling after all. So overall, producer prices rose by a fairly sedate 0.2% in December. The core was up by zero. So we actually saw, I shouldn't say «up by», it was flat. And that's welcome. That's a nice little bit of information. We look at some of the real-time metrics as well, like the daily internet-based trawling inflation data. You can take that either way. There has been an uptick recently suggesting that we shouldn't expect a great improvement in CPI when that number—I guess, it’s going to be out after we're talking about this. I don't know quite how to handle that, Dave, but anyhow, we don't know the answer. You all do, perhaps—but the actual absolute rate is predicting isn't all that radically high. But I would just say as it stands, I'm not expecting fireworks in December. I think December is still going to leave some pretty big questions around inflation. And so we're going to have to wait into the numbers that start coming out for January, February, and beyond. And of course, generally, you'd like to get a couple of months of good data before you have the confidence to cut again. And so that's why rate cutting is not certain.

Well, and those numbers are even before oil starts ticking back up again, because oil is now closer to 80 than 60 like it was a month and a half ago. Some of the other underlying commodities have gone a little bit higher. Natural gas is up. So there's lots of stuff going on. And that number overall is still not a 2% number. These year-over-year numbers are still in the 3%, which is, again, after what we thought was a battle that might have been won, starts to raise some of those questions.

Yeah, that's exactly right. So big question, disproportionally US questions, it should be said. So this is another one of these US exceptionalism stories. And a lot of other countries have inflation prints that are closer to 2% type targets and have not seen quite the same extent of revival recently. And their central banks are still plausibly on track to continue cutting. So it's not quite an everybody's story, though it is interesting that on the bond yield side, we have seen a notable sell-off everywhere. And I think part of it is just valuation-wise, the gap between, as an example, Canadian bond yields and US bond yields that did get so stretched. I think there's been a bit of an elastic pullback. But fundamentally, we're not seeing the same degree of economic strength outside of the US, and we're not seeing quite the same degree of inflation pick up as well. And so I think the soft-landing argument still holds there. The questions are US-specific right now. And again, for the moment, we still think that a soft landing is more likely. We think that gets pulled off. But again, that no landing certainly is a rising risk and one that is more significant than a recession risk, which was, of course, the obsession of the last few years.

And then we come to our favorite country, Canada. And the jobs report there was strong.

It sure was. So 91,000 more jobs in December. So it was famously jumpy. The consensus was 25,000. So you quadrupled it, which is always a good day, I guess, in terms of hiring, anyhow. And it came after a pretty strong month as well. There was a 50,000 gain the prior month, though nobody really knows how to define strong and weak in the Canadian labor market these days, just because, of course, we've seen such unbelievable population growth from immigration that suddenly you needed 60,000 jobs a month just to keep pace with population growth. It used to be you feel pretty good about a 15,000 or 20,000 job month. And suddenly, I can say precisely, the 50,000 jobs created the prior month in November, nevertheless, the unemployment rate rise. So that wasn't enough. So I guess we can say 91,000 was enough in the sense that the unemployment rate did fall in Canada from 6.8 to 6.7%. So it was a pretty strong report. You can take that, I guess, more purely positively in Canada. Obviously, any time you get stronger data, it does argue a little bit less central bank help and so on. That's unavoidable. But in Canada, we've been worried about that unemployment rate. It's gone from 4.8% a few years ago to 6.8%. That's where it was in November and December. And so that was undesirable. It was clearly a position of insufficient demand in the economy. And by no means is this the victory celebration song or anything. We'll see where this lands exactly in our best prediction for Canada for this year is a remarkable amount of choppiness, particularly over the first half of the year, as we theoretically see population growth collapse based on some of the immigration policy changes. We're hoping productivity growth revives. Some of that should be mechanically linked to the slower population growth. Some of that is a bit more wishful or could arrive with a lag. And so we are braced for the possibility of some pretty weird and maybe even weak quarters as we sort through some of that with, of course, tariffs uncertainty and lower rates waging battle against one another on a different level of the economy. But this particular month was strong. It was mostly full-time jobs, which is nice. Again, if you wanted to poke holes like with the US, you could say a fair chunk of those were public-sector type jobs, or at least not economically sensitive, which are great jobs. I mean, if you're talking about the ability of households to spend, it's wonderful. If you're saying, what does it tell me about the economy and whether people are feeling good or not, it's a bit less clear. But bottom line, we got some strength there. And again, as much as the risk of bad economic outcomes outside of the US is still greater than inside, Canadian economy has been chugging along okay, actually, in recent months. It's been moving forward, and we see businesses becoming a little bit more optimistic as opposed to less optimistic. Braced for, as we record this for a US inauguration that's less than a week away and the potential for some scary proposals to be made of a tariff nature toward Canada. But I'm still of the view that those are a negotiating tool, and we will hear maximal threats at the start, and those will likely be whittled down. And as we saw in 2018, 2019, ultimately, the tariff hit was fairly short term and more targeted, and Canada likely to survive that.

Yeah. So just overall, though, and you've been doing this for a while now, what do you make of this Canadian economy overall? It just doesn't seem to be doing as well as it should, given the strength of the US economy and our attachment to them through trade, given now where we've already come with interest rates—and interest rates never really got that high to begin with. When does the Canadian economy really start to show some strength? Or are we just now, as Stu Kedwell suggested, at a peak of pessimism? And let's throw in all the political uncertainty, too. We're not even going to go there. The one question I promise I'm never going to ask you because I think it's a ridiculous question, which would be, how would Canada fare as the 51st state? We're never going to ask that question on this podcast because that's not happening. We are not going to be the 51st state. I'm saying that right now as a proud Canadian. Never going to happen. So we're not even going to broach the subject. So Canada as a stand-alone, amazing country. But this economy has got to, at some point, get moving, and it just doesn't. And it's ultimately landed with the political uncertainty we're seeing, an election that's coming up. At what point are we going to get on this podcast, Eric, and just say, wow, Canada is just rocking and rolling? When does that happen?

I'm going to throw a random ear for you. I'm with Stu in the sense that I do think, and I've said before, I think that we are in the realm of, or approaching, or coming out of peak pessimism about Canada. So not to say it's smooth sailing, and it's a dangerous thing to say the week before we might get tariffs and things. We might not quite be there yet. It's hard to say, but I do think there's an awful lot of pessimism. And I think that some of that pessimism can afford to fade over the coming year. So we're thinking, again, it might be extraordinarily choppy the first half of the year, with tariffs and population changes, and does productivity pick up, and all sorts of swirling forces that are hard to disentangle and are not purely positive. But then we think the second half of the year—and this might just be, we don't know what crazy stuff is going to happen way out then—but nevertheless, plausibly, just given that interest rates cuts have happened, they may continue in Canada. The benefit is lagged. It seems to us we can start to talk a bit more confidently about the Canadian economy. We think over the second half of the year, again, lower rates, very helpful. Weaker currency, not loving it, obviously. And of course, it's a reflection of concern and pessimism and so on. And we wouldn't suggest necessarily this is the absolute bottom. That's hard to say. And there is clearly the risk with tariffs come on that there could be a bit more to go. But I will say that this is a weak Canadian dollar, and that's not the worst thing in the world at a time like this. Currencies are shock absorbers. The Canadian economy is weak. The currency market is reflecting that, that is helping Canadian competitiveness. And there are lags with these sorts of things, but at least to countries that would like Canadian products, we should see exports rising and these sorts of things. And so there is a helping hand that comes from that that should not be underestimated, albeit with a lag, just like with interest rates. And so, yeah, I do think we're going to start to feel a little better, at least over the second half of this year. We were doing a little study recently, normally the Canadian and US economies look very similar and move at roughly similar growth rates and have the same undulations to them. And Canada has distinctly underperformed over the last two years the US. That's unusual. We were looking back saying, well, when else did something like that happen? One was in the 2016 time period. That was an oil shock. And the other we noticed was in the late '80s, early '90s, where it was just consistent over a number of years. And both economies slowed, but Canada slowed more; both picked up, but Canada picked up less. And there was a good four- or so-year period when Canada underperformed. Totally different set of reasons, again. So there's no commonality for this. This one would be greater sensitivity to interest rates. It might be the argument right now with immigration distortions. And then you had the oil shock in 2016. And there was a bit of a resource shock back in the late '80s, early '90s in terms of lower resource prices, and the Bank of Canada started inflation targeting first. It was a bit more hawkish, and yet housing bust in Canada as well in the early '90s. And so different set of factors. But the common theme was that the convergence did return eventually. And in those prior two instances, the Canadian economy caught up to the US or accelerated toward the US rate of growth, as opposed to the US slowing to Canada. It might all just be complete coincidences. And there are some structural challenges in Canada right now. We will have an election this year. There's a pretty high probability based on polls that it's a change of government. I would argue that there could be a fighting chance of a more tax-friendly, regulatory-friendly environment for business and growth that emerges from that. And so it wouldn't surprise me if over the next year, year and a half, we did see the Canadian economy start to grow at a more familiar rate in the context of the US.

Yeah. And I remember that period in the late '80s, early '90s, because that's when I graduated from university and faced, I think it was a 13% unemployment rate. So we're nowhere near in around there. But it was a subdued period. And then ultimately, the price of oil gave us some wind, and we killed inflation, got debt under control. And then, as you say, Canada improved. And then through the decade, from 2001 to about 2011, the Canadian economy and markets outperform those of the US. So you do get that bounce back because, again, there is that sync between the two. But it just feels similar to that. And that's why I brought it up. It feels more like we're in a period like that where we're just, for whatever reason, underperforming. And again, then you see it on the investment side, particularly in the stock market. You see that disparate performance between Canadian and US markets, which is frustrating for Canadian investors.

Yeah, it's undeniable. I'll just say I do think things get a little bit less bad from here, maybe from a policy standpoint, from a rate standpoint, from a currency standpoint, and a few other forces as well.

So Eric, just let us finish off. We've got the Trump inauguration on the 20th, so it's not too far away. Any new thoughts on adjustments in what the policies may be, or is it still we're going to find out over the next two, three months, and that's going to set up the year from an investment perspective and certainly from a Canadian economic perspective?

I think all that's right. We do have some assumptions, and the assumptions are we get the more moderate form of Trump policies when the dust settles, and there are some negatives in there as it pertains to tariffs and population growth and that sort of things. There are some notable positives when it comes to tax cuts and deregulation and a pretty enormous surge in animal spirits that we've seen since the election as well. That continued with some data that just came out actually this morning as we were recording this. The Small Business Optimism Index for the US is now the highest it's been going back many, many years. That's pretty impressive. We do have on the net the economy being a bit more supportive than not. As much as the stock market has retreated recently, we still think a Trump win is probably more supportive of stocks than it is antagonizing them, with obvious choppiness. But here we are right before the inauguration. I think everyone's gotten a little bit nervous in recent weeks. I suspect that nervousness may increase a little more in the immediate offing after the election in the sense that the way he negotiates is to propose big radical things and then negotiate down to somewhat less radical things. And so I suspect, we'll all be a little bit nervous in the coming week as we hear some of the initial plans. As it happens, just in terms of sequencing, it's likely that things that are maybe economically supportive, like tax cuts and deregulation, maybe show up a little bit later. The things that we might be hearing most about happen to be the less desirable elements, at least economically. And so it might be more about deportations and tariffs and, I guess government spending cuts of mixed implications, but nevertheless, it might be more on those files, if that makes sense. So I guess the point being, there is a lot of uncertainty. I don't think we're going to have a clear sense for a while. We might feel a bit more scared before we feel less scared. But at the end of the day, I do think that Trump cares a lot about the stock market and the level of yields. And he has all these C-suite advisors. And so I don't think he's going to tank the economy if that's the fear.

Yeah. And again, I think a really important point you're making relating to the way markets have been in the last couple of weeks, early in 2025, it would have generally been negative. Bond markets have been bad. Yields have gone higher. The stock market has been at best mixed, but generally negative. That you've just seen that ramping up in the days before that inauguration of, okay, what is really going to happen? And as long as that uncertainty there, it's going to create more volatility in markets. And that's what we're seeing. And just sit tight. We're going to get the answers in the not-too-distant future. And they're more than likely going to be market supportive answers.

I believe so. With fairly large error bars, but that's our best guess.

And then Eric, maybe just take a step back because we're looking forward into 2025. Global economy, is it poised to rebound if we start to get to China and India and Europe? They're likely better this year than last year?

I think so. That's what our forecast say in any event. That may yet curse the outlook, but that's what we think. For other developed countries, be it Canada, Eurozone, UK—Japan is its own slightly special story—but we do have lower rates being helpful and becoming more visibly helpful, in particular over the second half of the year. All of those regions we have growing a little faster in 2025 than in 2024. Sustained economic growth and even a slight acceleration is an important theme, I think. You mentioned China. So lots of concern about China. We do believe there's room for a fair amount more stimulus. We do think China is a bit less vulnerable to US tariffs than imagined. Literally only 2.5% of what China makes is sold to the US. The other 97.5% is largely unaffected by this. And so they should survive that. And the rumblings are that we should get some more stimulus there. And so that's certainly welcome. We do still assume a degree of US exceptionalism that's been valid for the last few years, and the US economy sailed along and others have been weaker. Actually, I think the gap could be a bit smaller in the year ahead, but we do still budget for a bit of a gap. And it's fair to say that White House policy is probably going to be net favorable to the US and net slightly unfavorable to everyone else. And so that's part of the equation as well. But the US hangs in as well, we think. I guess what's changed in a less favorable way is just inflation has gotten tricky again. It's no longer quite as simple as, say, it settles right down to 2%. I would emphasize that 3% inflation, while undesirable, isn't a killer for economies. 8% and 10% was just unsustainable and incompatible with prosperity and economic growth. If you wanted to, you could survive at a 3% rate. It's okay. Economies can function. We don't like it. Central banks do still want to get to 2%. Therefore, interest rates are going to have to be a little bit higher than everybody guessed three or six months ago to achieve that. That's the main consequence. But 3% inflation by itself isn't brutally painful. That's okay. And we do think inflation can come down a little bit, but I would admit it's been a less favorable narrative in recent months. It does slow the rate cutting story down. I think the hope had been that 2024 was the appetizer, and 2025 was maybe the entree when it came to the rate cuts, and maybe we got things reversed. The biggest cutting was last year, and it's going to be maybe a slower affair this year. I just wouldn't want to prejudge too much because you see some of these crazy charts in terms of the market expects this for the Fed, and then this actually happens, and the market is so wrong every single time, or at least not precisely right. And I think the market isn't far from the best guess as to what's the best, most likely path right now, but just be aware of how often, in fact, most of the time it ends up being a bit different. We don't know what different that is exactly, but nevertheless, I wouldn't say it's exactly locked in. There are still very much scenarios in which there's a fair amount of cutting the Fed can do. You just need to acknowledge there's also a couple scenarios hiding in there where there could even be a little bit of hiking. I think it's unlikely. No one would have discussed that three or six months ago, and it needs to be acknowledged, at least right now, and that no-landing scenario needs to be acknowledged as well. And so, yeah, those are some of the bigger things for 2025 from a purely macro standpoint.

Yeah. So we had the appetizer in 2024, and now we're just sitting in between the actual election day and inauguration. They've given us a lovely little sorbet as a palate cleanser before the entree. And now the entree is coming and we'll see what we get.

Let's see if it's overcooked or what we'll find out.

Exactly. We're about to find out. And you will be with us all through the year to help us make sense of it. Eric, always great to catch up with you. Glad you're feeling better. We'll check in with you in a couple of weeks.

That sounds great. Thanks very much. Thanks, everybody.