While productivity growth gets less attention than other major macro variables, it increases long-term economic and corporate margin growth potential without stoking dangerous inflationary pressures. In the current context, investments in artificial intelligence, cloud computing, autonomous vehicles etc. is poised to have a real-world impact on economic activity. As an example, The Economist recently stated that AI is raising productivity for salespeople and coders by at least 1/3rd at tech start-ups. This is far from trivial for companies that typically burn cash and are racing to generate positive cash flow. In our portfolios we maintained individual positioning in February while keeping our portfolios slightly overweight equities and underweight fixed income.
Looking closer at the economic data, it could pose a risk to inflation numbers bouncing higher instead of continuing their trend lower. Economic growth, for one, continues to surprise to the upside with Q4 2023 GDP showing a faster pace than initially anticipated, prompting many to even revise 2024 expectations higher, including our BMO economists. Reports of tighter bank credit standards and higher credit card loan delinquencies are worth monitoring but are normal signs of the impact of higher interest rates and should help moderate economic growth.
As we enter 2024 we continue to see optimistic signals for both fixed income and equities. First, recession probability models continue to show improvements with odds of a downturn in economic activity ticking further down. Secondly, as mentioned in previous monthly updates, securities markets are primarily influenced not by absolute numbers, but by the trajectory of key macro variables. On that note, the situation for inflation has improved significantly with the Bank of Canada’s 2% target range in sights for 2024. Two areas which still have room for progress, but are expected to improve in 2024, are economic growth and housing momentum.
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