RBC’s $326 Billion Asset Management Unit Sees More U.S. Growth

(Bloomberg) -- Recession fears may be brewing but there’s good reasons to believe the longest economic expansion in U.S. history can keep on rolling for another three or four years, according to RBC Global Asset Management Inc.

“I can’t claim to be worry free, but if we tally up all of the various headwinds out there, it’d be pretty hard to come anywhere near a recession out of that,” said Eric Lascelles, chief economist at the Royal Bank of Canada unit which manages C$430 billion ($326 billion).

With the Federal Reserve poised to cut interest rates for the first time in a decade on Wednesday, potential pitfalls from trade tariffs to an Iran-induced oil shock abound, concedes Lascelles, 41.

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“Less growth in 2019 is a logical outcome” he said in an interview at Bloomberg’s Toronto office. “However, it makes sense that growth would be off half a percentage point. It doesn’t make sense that it would be off two-and-a-half percentage points, which is what you need to get all the way down to trouble.”

Here’s some reasons why he thinks the cycle can continue longer than in decades past:

• A variety of special factors: expansions usually last longer when they come after a financial crisis and when growth is unusually sluggish; an expanded social safety net that supports growth; better financial regulations, more professional central banking and a rising service-sector share of GDP
• The two-to-10-year yield curve hasn’t inverted and the absence of a term premium in the bond market muddies the interpretation of the inverted three-month-to-10-year spread.
• The threat of a sudden burst of inflation prompting a rate hike and economic decline seems unusually small due to the intense downward pressures from an aging population and rapid technological change.
• A Fed cut should reduce recession risk.
• The current expansion is hardly without vulnerabilities –- leveraged loans being one –- but the magnitude of these risks seem much smaller than previous catalysts of past cycles such as the housing and tech bubble

For his part, Lascelles sees a 25 basis point cut from the Fed on Wednesday for a total of 75 basis points over the next year. He expects 50 basis points in easing in two cuts from the Bank of Canada.

To contact the reporter on this story: Paula Sambo in Toronto at psambo@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, ;David Scanlan at dscanlan@bloomberg.net, Jacqueline Thorpe

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