August 4, 2023

Quarterly Newsletter - Summer 2023

Delayed recession or a soft landing?

Since the beginning of the year, the headlines have been filled with news about a looming recession. With strong inflation and multiple key rate hikes by central banks, the majority of economists had anticipated a recession in 2023. But with resilient economic performance and better-than-expected corporate earnings, most of them have postponed their recession calls to 2024. Will we avoid a recession altogether and see a soft landing of the economy instead?

Atypical factors

In theory, the aggressive key rate hikes by central banks aimed at reducing inflation should further cut down consumer spending and negatively impact corporate earnings. In the past few years, however, several atypical factors have reshaped historical economic trends. The aging of the population and labour shortages are just two examples. Will this situation become normalized? Surely not in the next few years. It's also important to keep in mind all the budgetary and monetary measures deployed to counter the negative economic impacts of the pandemic.

Even on the stock markets, those who anticipated a major downturn this year are still waiting for it to materialize. Meanwhile, we're seeing a recovery in growth investing in risk assets as opposed to value investing in safe-haven assets even as an economic slowdown looms. The enthusiasm around the growth of artificial intelligence has certainly boosted the equity markets, but are we missing something?

The only scenario where stocks and credit securities deliver solid returns over the next year would be one of "immaculate disinflation", where inflation returns to the 2% target without a recession occurring—you might as well believe that unicorns exist and the Earth is flat! Unfortunately, our economists still anticipate a mild recession in Canada and the United States starting in late 2023 or early 2024, and a soft landing looks very unlikely.

Economic scenario

Faced with economic activity that refuses to slow down and persistent inflationary pressure, the Bank of Canada looks set to pause interest rate hikes while the US Federal Reserve eyed an even higher terminal rate in September. Canada's economy continues to beat economists' forecasts. Real GDP growth in Q1 2023, up 3.1% (annualized) and far exceeding the 2.3% growth anticipated by the Bank of Canada, is just the most recent example.

US growth remains strong for now. The forecasts now call for modest real GDP gains in Q2 and Q3.

The eurozone has already posted two consecutive quarters of real GDP declines, and previous interest rate hikes will likely result in further contractions in the coming quarters. The UK has managed to stave off a recession so far, but its economic environment is also due for a more severe deterioration. Japan is now also seeing rising prices. But inflation is non-existent in China, where a faltering economic rebound is the main concern.

Is it time to sell off all your stocks and seek refuge in cash? Definitely not! It's better to stay invested while maintaining a larger cash position in order to take advantage of opportunities in a market downturn. Think of all the investors who missed out on the growth since the beginning of 2023 and failed to recover their 2022 losses.