2024 Economic Review

Sébastien: Welcome to a new episode of the “In Your Interest!” podcast. My name is Sébastien Mc Mahon, and today I have the immense privilege of being joined by my colleague, stock picker extraordinaire: Marc Gagnon. Hello Marc!

Marc: Hello, Sébastien!

Sébastien:  It's a pleasure to have you here for not just one episode, but two episodes!

Marc: Two episodes in a row.

Sébastien: Yeah. So we'll review 2024. We'll start by this episode here. Let's review the economic landscape. And next week, you'll be back and we'll cover the markets in 2024, which were pretty good, I think?

Marc: Oh, I think it's a good year.

Sébastien: Yeah, yeah, yeah.

Marc: Especially for stocks.

Sébastien: Like 25, 30%. That's always a good vintage here. But before we get going with all of those themes, let's play the game of going back to the expectations that we made last year. So I'm looking at my sheet here. I have some red, some green. I think you did better than I did. I was expecting a recession in Canada. Not a severe recession, but still a recession,  and also one in the US. You were more positive on the US economy, though.

Marc: It was slightly more positive on the US, but I thought we would, you know, have a soft landing. And I think we can say now that there was no landing at all, it was just losing a bit of altitude, but cruising along, still.

Sébastien: Yeah. And you know, we can always play with words. In Canadian recession, well, there was one per capita but not really so much one overall. But let's put this as a red. But if the Canadian economy was to underperform, which it did, that would lead to rate cuts in Canada, maybe quicker in Canada than in the US starting in the middle of the year. So, this is what we were expecting. We're pretty right on this one.

Marc: And that was the important one, I guess, because it started everything. You know, just having that prediction okay was, to me, the beginning of  success for investing in 2024. Of course, ending with a better economy, especially in the US, was the second part, the second leg that probably brought such a good year in terms of stock market performance. But those rate cuts, they were the trigger of everything.

Sébastien: Yeah. And the Bank of Canada started cutting first in the G7. And we had to go back, if you remember, and check. Yeah. We were thinking that maybe the European Central Bank would be cutting first. The Bank of Canada did, but actually the ECB was one day late on the Bank of Canada. So, we kind of were lucky and got that one in.

Marc: They call each other and they decided “Let's go together!”

Sébastien: Yeah, yeah. So let's say they were pretty much neck and neck. But where I was the most wrong was calling the Canadian dollar. I was expecting it to rise during the year, mostly to $0.78 to $0.80 at the end of this year. We're closer to $0.70, $0.71. But, you know, maybe I'll surprise you, but in a few weeks, when we'll do the outlook for 2025, I will come back with the same prediction, still thinking that the Canadian dollar will be higher at the end of 2025. But this is a story for next time.

Marc: Next time.

Sébastien: All right. So, what were your main surprises in the year on the economic front, Marc?

Marc: Yeah. We already touched on it because it was really important to see the US economy continuing to perform like that. It really helped, you know, to avoid the earnings recession. That was, you know, the counterpart of having those rate cuts. On one hand, it's always positive to see the interest rate going down. But on the other hand, if earnings are also coming down, you know, you win, but not that much. In Canada. I would say that seeing the inflation coming down so well, well below the target of 2%, really cleared the way for the Bank of Canada to be able to cut interest rates, even though the Canadian dollar was not maybe as strong as expected. So that was also a positive surprise.

Sébastien: Yeah. I would say on my end, the US economy was much stronger than I was expecting. And I wasn't expecting necessarily a recession, but you know, we had this stellar growth mostly on the back of  fiscal stimulus again, and the growth in the deficit. Likely at some point this will be a headwind. But, you know, we just had the Trump election. Likely, it's not the story for 2025, 2026. Even they’ll be reining in the deficit. But we'll see. But the main surprise on my end mostly was the lack of pragmatism by China. They are facing asset bubbles left and right. Lots of debt. The Chinese government usually is very pragmatic on this just to keep growth afloat. It took for most of the year the hard line on this issue. Now we're starting to see some hope for 2025. Maybe they will be more pragmatic than they've been in 2024. But you know, we'll see.

Marc: Yeah. That situation is really interesting because that liquidity trap that we are seeing right now, where people don't want to consume, because they see their investments, because there's a lot of investment by everybody in real estate, you know, that's losing value. The Chinese government took really long to really acknowledge that and act on that. But what we're seeing now, and hopefully it's not going to be too late because they're going to have to suffer from tariffs from the US, but we're seeing some action at least, now. I think that's important to be a positive, let's say. 

Sébastien: And the quick fix of just using monetary policy doesn't work. It's really pushing on a string here.

Marc: They need a big fiscal intervention.

Sébastien: Yeah. Exactly. So again, we'll cover more of that in the 2025 episodes that are coming in a few weeks. But, you know, the lack of pragmatism was a big surprise on my end. So, we've touched on inflation, central banks. So maybe if I ask you the question: “Do you think that central banks have won their fight against inflation?”

Marc: Yeah, I think in Canada that's clear. You know, at 1.6, it's quite an achievement. Like I said, it allowed us to lower interest rates aggressively. In the US, we did a lot of work. We're probably going to continue to get closer to 2, especially that some relief is coming from household costs. But I'm a little worried, though, about the structural view of what will happen on inflation. And I think that's a debate that we will see a lot in 2025. Where is the interest rate that will allow the economy to grow, but without inflation? And it's important to realize that the basis of inflation, labour costs, is always very, very important. So, labour costs it's the supply and demand of labour. So, if there’s less people being able to work, that's not going to help inflation. And that's one of the maybe dark sides, if I can say, of the immigration policy that we are going to witness probably from Trump in 2025. So, it's going to be important to monitor what will happen to that. There's a couple of positive things though on the other side. Productivity improving probably coming from AI. You have also deregulation. So the debate, as I said, will be quite interesting in 2025 to figure out where we’re going to land in terms of sustaining inflation.

Sébastien: Yeah, I agree with that. You know, there's a lot of uncertainty on where the neutral rates are and how the world will look in 2025, 2026 with all of those threats of tariffs and stimulus and government debt. But, you know, if you look at the picture right now, I also think that the disinflationary forces seem to be strong. China is contributing by exporting a lot of deflation. So there's this positive, let's say, element from China's slump that we’re reaping around the world. The strikes that we've seen and the wage growth that was characteristic of the last few years, which was a response to the inflationary impulse that we've seen, seems to be behind us. So, I would expect that maybe we could see a few more strikes, like the Canada Post strike that we're seeing now. Maybe there's a few in the books, but I would say that the main impact of that is likely behind us. In the US, you know, the AI situation, the gains in productivity, this is also deflationary. So of course Trump is likely to come in with inflationary policies. But I don't think we're going back into an inflationary spiral here. Likely inflation has been tamed mostly. Now it could be flaring up a little bit, but I don't think that we're going back into a world where you know central banks have to hike and, you know, here we go again.

Marc: Yeah, the Fed will have to be vigilant, though.

Sébastien: Yeah, and communication is going to be again very important by the Fed. But it's always the case, you know, there's nothing new there.

Marc: Yeah.

Sébastien: So, let's talk about Trump. The message that was sent on the night of the election. You know, on our end, we were looking at this, saying: “Well, this is a decisive win, mostly because of the outperformance of Trump versus the polls.” But it's not, you know, as crushing a victory as what it's been made recently. Of course, he won the popular vote, majority in the Senate, majority in the House. But those majorities are not that large. There's still the balance of power that's there. That doesn't mean that Trump can do whatever he wants. And we've had a dose of that with the nominations of Matt Gaetz, for example, which had to be unwound. So, on your end, how do you see the message that was sent on November 5th?

Marc: Well, I think that Trump will feel that he has the legitimacy to do a lot of things with that message. I think he will feel that he has the power to put in place most of his program. And we already saw him talk two days ago to the Americans and explain that yes, tariffs might bring higher prices. That's the way they work. So you have to realize that this man was dragged into court for several weeks. He suffered a lot from the loss of 2020. His ego. You know, we know that Trump has some ego. So I think he will come back being much better organized and really decided to make sure that his agenda is really put to work. And I think he's going to be more successful than he was in his first term. So it's going to be quite interesting. He's going to be sworn into power January 20th. So I don't think it will take that long. It's a matter of weeks, and weeks more closer to days than months before we know what are his plans. And I'm really looking forward, but I think it will be very decisive in terms of actions.

Sébastien: Yeah. So a vengeful Trump, and a very organized Trump with all of the nominations here, his policy hawks, people who are willing to go deep into reforms. So I agree with you that the face of the US government and the US relationship with the rest of the world likely will be taking a U-turn here. All right! So, thank you very much, Marc, for part one of our review. We've discussed the shape of the world economy as 2024 is ending here. If you're okay with that, maybe we'll have you again next week to discuss how the markets fared.

Marc: It will be my pleasure.

Sébastien: All right. Thank you. Thank you everyone here, to our listeners. If you have any questions or comments, feel free to write, and we'll see you again next week. Loved this podcast? Want to know more about economic news? Follow our “In Your Interest!” podcast, available on all platforms. Visit the economic news page on ia.ca or follow us on social media.