But advisors still need to provide the 'lighthouse to guide clients to their destination'
While there is a lot of talk about recession these days, Vanguard says that Canada has a resilient economy and will actually fare much better than most other countries in a global slowdown.
“We still believe that Canada will be a resilient economy because it is a net energy exporter,” Bilal Hasanjee, Vanguard Canada’s senior investment strategist told Wealth Professional while sharing Vanguard’s Midyear Economic and Market Outlook. “It’s in a better situation than most countries going into this because of the higher oil and gas prices.
“The Bank of Canada, as we saw last week, is looking to front-load the overnight rate as it increases interest rates. We’re seeing they’re going to take the neutral rate to the level of about 3% by the end of 2022. It might go slightly higher than 3%, but definitely 3%.”
While Vanguard has had to adjust some of its predictions from the beginning of the year, its report is generally positive on the Canadian economy.
It is forecasting a 4% gross domestic product (GDP) growth, which is less than the 5% that it began the year with. But, it sees the higher oil and gas prices boosting the GDP, even as they undermine consumers’ purchasing power. It also noted that population growth is supporting the real estate sector, despite the pressure from rising interest rates, and Hasanjee felt that what’s happening in the real estate market would be a “healthy correction”.
Vanguard is also predicting that the Canadian inflation rate, which has been steadily climbing, will drop to 4.5% to 5% by the end of the year. It noted that economic and labour market strength will likely keep headline inflation elevated through 2022 with energy, food, and shelter prices remaining high. But, the anticipated Bank of Canada rate hikes should help to temper core inflation to this level by the end of 022 with further normalization toward a 2% target expected in 2023 and 2024.
Finally, Vanguard predicted that despite near record lows in the unemployment rate at this midyear point, it may rise to 5.5% in the second half of the year as financial conditions tighten domestically and globally. But, it felt currently elevated job vacancies and accelerating wage growth suggest that the labour market should remain healthy even as the Bank of Canada continues to rein in inflation.
Hasanjee said this is a better picture than what other countries are expecting by year-end.
The United States is only expecting 1.5% GDP growth, 7% to 7.5% inflation, a 3.25% to 3.75% interest rate, and 3% to 3.5% unemployment.
Europe, meanwhile, is expecting 2% to 3% GDP growth, 8% to 8.5% inflation, a 0.5% to 0.75% interest rates, and 4% unemployment rates.
“We believe a period of high inflation and stagnating growth is more likely than an economic soft landing,” he said, noting there’s a rising probability of a recession in the coming two years.
Hasanjee said that Vanguard anticipates there is a 25% probability of recession in the U.S. in the next year and a 65% in the next two years, a 50% probability in Europe in the next year and 60% in the next two years, and only a 30% probability in China n the next year and 35% in the next two years.
Given what’s unfolding, he recommended that advisors continue to talk to their clients and develop their long-range financial plans, so there’s a “lighthouse to guide them to their destination”. But, they can also focus on the positive, even if clients want to sell at a loss, so they can continue to provide them with guidance and support.
