May 14, 2022

Quarterly Newsletter - Spring 2022

Inflation, recession, stagflation

The first quarter of 2022 was quite challenging for most stock markets. After ending 2021 on an enthusiastic note, inflationary pressures and expected rate hikes by the Bank of Canada and the Federal Reserve (the Fed) have undermined investor confidence. The big surprise this quarter was Russia's invasion of Ukraine, which caused prices of oil, natural gas, wheat and several other commodities to soar.

Inflation

After more than 2 years of public health measures and accommodative monetary policies to counter the effects of COVID and its variants, inflation is now stepping in to do its work and sow concern about economic growth. In Canada, CPI inflation stood at 5.7% in February, driven by rising energy and food prices, as well as supply disruptions combined with strong global and domestic demand. The Bank of Canada now expects inflation to reach an average of almost 6% in the first half of 2022. It is then expected to ease to about 2.5% in the second half of 2023 and return to the 2% target in 2024.

Recession

The big challenge for central banks in the coming months will be to normalize key rates to reduce inflation while avoiding a recession. Unless the Fed slows down the economic cycle by slamming on the monetary brakes, a recession is unlikely in the next 12 to 18 months. The recession models produced by the New York Fed and the Cleveland Fed assign a probability of just 6% to this possibility. In addition, the labour market is buoyant as evidenced by the creation of 1.2 million jobs in February and March, and demand for goods and services remains strong. However, we believe that Europe, which is affected by the conflict in Ukraine, is more likely to fall into a recession in 2023.

Stagflation

The word stagflation is gaining in popularity. Could we experience a period with little to no economic growth and high inflation in Canada and the United States? That will be a very strong possibility in the coming months if inflation continues and corporate profits decline as a result of rate hikes and supply chain problems. We're keeping that situation in mind but are instead hoping for a soft landing for North America's economy in the coming year. Will high demand and the low unemployment rate save us from stagflation? The economic data from the next few months will tell.

In conclusion, we remain optimistic and confident that central bank policies will remain accommodative in a changing economic world. The current conflict in Ukraine could alter the economic outlook. The geopolitical landscape is changing: the war brought Europe closer to the United States and strengthened NATO's role. It also seems to have transformed the relationship between China and Russia. To put it simply, their friendship may have no limits but cooperation is another story.