A busy fall for the economy

Ashleay: Hello and welcome to the “In Your Interest!” podcast. My name is Ashleay and, as usual, I’m joined by my colleague Sébastien Mc Mahon, Chief Strategist. Today, we’re going to discuss the economic scene and what to expect in the fall of 2024. So, hi, Sébastien!

Sébastien: Hello, Ashleay. The seasons are changing. The leaves in the trees are not red yet, but—

Ashleay : It’s coming.

Sébastien: Yeah, it’s coming. You can feel it. You know, we always have this discussion to set the scene for the coming season, and, I have to say, this might be the busiest season we’ll have to discuss for a good while.

Ashleay: Absolutely. So, Sébastien, what’s the hot topic this fall?

Sébastien: Of course, the hottest topic of the autumn will be the American election on November 5.

Ashleay: Absolutely.

Sébastien: American politics is complicated, so I’ll try to make it easy on everyone out there. As of early September, Kamala Harris is leading in national polls and there are multiple polls released every single day. So, depending on which poll you look at, you might see different results. We tend to use the data from RealClearPolitics, which aggregates all those polls and looks at recent trends to get the central tendency, let’s say. As of now, Kamala Harris is leading 48.5% to Mr. Trump’s 46.9%. So, she’s leading in national polls. That doesn’t mean, however, that she’s ahead in the Electoral College. In the US, they have a different system than we have here in Canada. The way it works is that each state has a certain number of electoral seats, depending on the size of the population (for example, Rhode Island has a very small number of seats, while California has a large number of seats). Winning a state typically gives a candidate all the electoral seats of that state (except for Maine and Nebraska). Some states will always be blue, some states will always be red. So, the decision always comes down to a few key states or swing states, and this is where we need to look at the battle. Coming to mind is Georgia, Pennsylvania and North Carolina. If these all go to Mrs. Harris, the odds are in her favour. But if Mr. Trump takes, for example, Pennsylvania, it will be very hard for Mrs. Harris to win because of the composition of the Electoral College. Current estimates suggest that the Electoral College favours the Republican Party right now, and gives the equivalent of a 4% advantage for Mr. Trump in the polls. So as long as Mrs. Harris is not leading Mr. Trump by at least 4% in the polls, it makes winning this election an uphill battle.

Ashleay: Okay. And I think the American people love to bet on things.

Sébastien: Yeah, well, the Americans are very good at making commercial products out of thin air. There are betting markets (sites like PredictIt and Polymarket) that people can go to and bet on who they think will win—and not just for the presidential race, but for each state, the Senate and the Congress. These can give you an idea of where people are putting their money. Right now, they’re signalling that it’s a close race and are favouring Mr. Trump: betting odds are at 50% for Trump and 49% for Harris. So very tight but still favouring Mr. Trump. Mr. Trump was at 70% in July after the assassination attempt and when Hulk Hogan ripped off his shirt on stage at the National Conference. That was maybe the peak. Now, he’s fallen from 70% to 50%. So, the honeymoon with Kamala Harris continues, but it could be running out of steam, or, at least, the gains are getting less and less impressive there.

Ashleay: Okay.

Sébastien: The Senate should be going to the Republicans. There’s a 72% probability. According to the betting odds, Congress should remain with the Democrats, at 63%. Putting all of this together, it’s pretty much a coin toss for the presidency, as of today. Republicans should take the Senate; Congress should go to the Democrats. This suggests that the most likely scenario is a divided government, which tends to be favoured by the markets.

Ashleay: Okay. And what does this all mean?

Sébastien: Well, of course, if you have a landslide victory for the Republicans, you’ll have more tax cuts, more tariffs. All these things will be easy to pass. If it goes to the Democrats, likely the tax cuts from Mr. Trump’s mandate will expire, and we’ll be talking more about health care. These are obvious. But if we have a divided government, that likely means there won’t be any big reforms, it’ll be more of the status quo. And, as I said, markets tend to prefer less government intervention in business and typically perform better.

Ashleay: Got it. And what are we monitoring elsewhere in the world?

Sébastien: A few things. The Chinese economy is where we have our biggest question mark right now. (We always say that the world should be seen as a tripod, with the three most important economies being the US, the eurozone and China. As long as you have two out of three that are sitting upright, well, you have a global economy that holds strong). Now, with the Chinese economy, there’s a big question mark because of the importance of the residential sector over there. It continues to weigh on post-Covid economic recovery despite some pretty strong regulatory changes recently that were designed to clean up the excesses. For example, local governments can now purchase unsold housing, the minimum interest rates on mortgages were abolished and they reduced the payment for potential buyers. But even though there were these reforms, new home prices year over year are still down 5% and resale prices are down 10%. Let’s think about this for a moment. In Canada, it’s estimated that about 45% of a household’s wealth is tied to real estate. In the US, it’s 50%. In China, 70% of a household’s wealth is tied to the value of the house. That means that if the price or value of the house falls by 10% year over year, well, you feel poorer, you feel less confident, you’re less willing to buy things, you’re saving more. Basically, you can’t have economic growth pick up when you have no contribution from the household sector because they’re losing so much of their value or their wealth, since it’s tied to real estate. So timid stimulus measures are holding back the global economy, but we’re expecting some more from the Chinese government in the coming months.

Ashleay: Okay. And what about Europe?

Sébastien: Well, Germany remains stagnant with zero real growth—so, zero growth in economic activity since 2022. It’s been a bit of a lull. But positive signs are appearing in the credit cycle. It’s very important to look at the credit cycle because this is the economy’s transmission belt. If you’re a household and you’re buying a new house, furniture or car, then, of course, there’s going to be credit involved at some point; if you’re a business and you invest in a new plant, a new investment project, there’s going to be credit involved there. So, the credit cycle is very important for economic growth. Europe also has close economic ties with China, so our expectations are moderate. Overall, the economy has been stagnating; the credit cycle is timidly picking up; ties with China may hold it back. The jury is still out, but let’s say we’re cautiously optimistic on Europe.

Ashleay: Okay. And finally, let’s talk about Canada.

Sébastien: Okay. Canada was the first G7 country to cut its interest rates. We started in June, then followed in July. As we’re recording this, there will be a decision by the Bank of Canada tomorrow, September 4. We, along with the markets, are fully expecting a rate cut. We’re also expecting rate cuts in October, December and January. So, there will be cuts into 2025 because the conditions are ripe to continue normalizing monetary policy. We should start to feeling the positive effects. And, indeed, the Canadian Federation of Independent Businesses (CFIB) index recently started to pick up a little bit. We may be starting to see those positive effects in play. Another thing we’ve been looking for is immigration policy reform, and we’re seeing it starting to take shape. The goal is to reduce pressure on the residential market in metropolitan areas. There should be some pressure for a good while still, but it should start to subside slowly now. The idea is to encourage companies to spend on training to increase productivity and reduce our dependence on foreign workers. All of these things are happening at once.

Ashleay: Got it. And finally, what about the markets?

Sébastien: Yeah, markets should definitely continue to be volatile. In September, the seasonality for equities tends to be negative; September tends to be the worst month of the year. Data since 1954 shows that especially the second half of September tends to be tough. The reasons are idiosyncratic, but there’s less share buybacks at the end of September because of the blackout season for multiple sectors. So, there’s that. This also leads to a weaker US dollar. But gold generally tends to do well in September. So, we’ll see. But typically, September gives us a run for our money.

Ashleay: Fantastic. And what about elections?

Sébastien: A lot of studies have been done around the market reaction around elections. Since 1948, we see that only three scenarios tend to have a significant impact. And this is when we have a divided government, which, as I explained earlier, isn’t a guarantee but is the most likely scenario as of right now. And when we have that, typically markets tend to rally behind a divided result or divided election. We should maybe have some pickup following the election in early November. The last topic that we will be looking at during the fall is, of course, central banks. We’ve been discussing central banks extensively since we started doing this podcast, as interest rates rose quickly and in synchronization; now we’re talking about synchronized cuts around the world—outside of Japan, which has put in place many structural reforms. Japan didn’t have to fight an inflation wave, but now they’re seeing inflation starting to perk up, but this inflation is desired, it’s by design. Now, while everyone is cutting rates, Japan should be hiking. We saw in August how that can cause some volatility. This is, I’d say, a wild card that could bring some more volatility to the markets.

Ashleay: Got it. Well, that concludes today’s episode. Thank you, Sébastien, for telling us what we should expect on the economic scene for the fall of 2024. And thank you to our listeners. Don’t hesitate to drop us a line if you have any questions. We’ll see you next week.

Sébastien: Thank you Ashleay.