March 7, 2023

Quarterly Newsletter - Winter 2023

WHAT'S IN STORE FOR 2023?

A new year usually comes with a measure of hope and a handful of resolutions. But all the good intentions in the world won't help overcome inflation. However, central banks are promising to fight this battle to the end, no matter what. Although the short-term cost of this crusade seems high, leaving inflation unchecked and potentially unmooring households' inflation expectations would cost so much more, and needs to be avoided at all costs. However, we're already seeing signs that the Canadian economy is slowing, which leads us to believe that we're close to the end of the monetary tightening cycle. How long rates need to remain at their current levels and how long households can handle the higher costs remains to be seen.

Recession or soft landing?

Most economists, including those at Desjardins, expect a mild recession in Canada and the US in 2023, with weak economic growth in the coming months. Discount rates are expected to rise slightly at the beginning of the year before pausing or even falling in late 2023 or 2024. In the US, the consensus among economists puts the likelihood of a recession at 65%. However, the International Monetary Fund (IMF) expects global growth of 2.3% and doesn't foresee a recession in the US, Europe or China. The economy's resilience to rising rates with a labour shortage and low unemployment could save us from a recession and possibly allow for a soft landing in 2023. So, who's right?

Risks inherent to our scenarios

Ironically for investors, the best news in the coming months may come from job losses. On the other hand, a resilient labour market with strong hiring and sustained wage increases may well encourage central banks to keep the pressure on even harder, and for longer.

In February, Desjardins economists made some adjustments to their economic and financial forecasts. "The resilience of some economic indicators suggests a better-than-expected performance of real GDP in the short term. We've upgraded our 2023 GDP forecasts accordingly." In essence, the probability of a recession is now lagging by one quarter. Instead of Q1 2023, it could start in Q2 in Canada and the US. In Canada, it will be short-lived, lasting only 2 quarters (Q2: -1.2% and Q3: -1.9%). Nevertheless, GDP is expected to grow by 0.7% in 2023. The unemployment rate is expected to end the year at 6.9%. While some recent data has been more positive, the economic slowdown may still be worse than expected. Consumption and investment could contract more severely, especially if interest rate hikes continue for longer than anticipated. Inflation is showing signs of slowing but remains high worldwide. This could prompt many central banks to continue raising interest rates or keep them higher for longer. So far, Europe's economy has avoided a deepening energy crisis, but it will continue to struggle to meet its energy needs and will remain vulnerable to price fluctuations due to the war in Ukraine. Finally, the current diplomatic tensions between the US and China that could lead to additional trade restrictions must be monitored.