Head of investment strategy, Andrew Pease, considers the outlook for Canada and the global economy
A cocktail of concerning stats do not suggest the best months ahead for the Canadian economy.
Russell Investments’ global head of investment strategy has been looking at the global outlook and highlights some headwinds that could weaken growth in Canada and beyond.
Canada first, and Andrew Pease points to the data which reveals:
- Contraction of monthly employment in two of the last four months
- Canadians switching jobs less frequently as vacancies decline
- Immigration appears to have reduced labour market tightness
- GDP per capita lower year-over-year for three consecutive quarters
- Rising debt especially credit cards
- Increased consumer insolvencies
“The Canadian economy is downshifting,” he concludes.
The Bank of Canada has a challenging balancing act with rates likely to remain restrictive while inflation remains well above the 2% target rate. With wages and core inflation still too high, it may be forced to hike again.
However, it will not be able to keep hiking and is near the end of the cycle due to the slowing economy.
For investors, Pease says that a slowing economy – and certainly recession - would limit the upside for bonds.
“A double-digit total return from fixed income is possible in such a scenario,” he said. “Importantly, fixed income will be crucial in diversifying an asset allocation as the macro outlook becomes more challenging.”
For Canadian equities, the firm remains neutral despite reasonable valuations.
United States
Can the US really avoid recession while rates are high, and inflation remains elevated?
“It would be unprecedented to avoid recession after more than 500 basis points of Fed tightening, but not impossible,” Pease said.
However, Russell Investments believes that a US recession in 2024 is more likely than not, although it should be mild.
With markets pricing-in a soft landing, the firm favours a slightly cautious approach to US markets with “with selective opportunities in quality equities, front-end Treasuries, curve steepeners, and agency mortgage-backed securities.”
Global outlook
For the global economy, Russell Investment’s president and CIO, Kate El-Hillow, also sees a mixed outlook with the European Central Bank signalling higher rates for longer, and China’s debt and property concerns remaining with Beijing stalling on stimulus.
Australia is singled-out as a bright spot with its recession risk lower and less restrictive monetary policy.
