The year 2022 was marked by several economic shocks: high inflation, the war in Ukraine, the sharp rise in interest rates, the stock market crisis, the sharp decline in the bond market, the collapse of cryptocurrencies, gasoline, the escalation of the housing market…
After the US Federal Reserve (Fed), the European Central Bank and the Bank of Canada raised their respective interest rates sharply to counter inflation, they now risk plunging us into recession.
While the Bank of Canada appears to be giving us a breather by keeping interest rates on hold at 4.25%, the Fed monks have hinted that they would tighten US monetary policy further. Your next tweak could take the prime rate to 5%.
Whether the economies of the world, America, Canada or Quebec fall into recession in 2023, the odds are undoubtedly very good.
The challenge for central banks? It aims to slow their respective economies enough to bring inflation down to 2-3% without triggering a serious economic crisis. Easily said, but not easily done!
The ideal
Ideally, given the circumstances, it would be a soft landing for the economy.
According to the financial economists at the National Bank, this scenario is conceivable since domestic demand, the labor market and the housing market have cooled off.
“Consumers are simultaneously suffering from a loss of purchasing power, an interest payment shock and an unprecedented negative wealth effect. In our view, it will not be necessary to keep interest rates at such high levels for long to calm inflation, and we therefore expect the central bank to cut them in the second quarter of next year. »
Given the monetary tightening, they expect the economy to stagnate over the next three quarters. This would result in anemic growth of 0.7% in 2023.
For their part, the economists at the Desjardins Group are forecasting a short and moderate recession. But a recession that could stretch into the third quarter.
“The risks to our outlook remain tilted to the downside as households increasingly face the reality of higher mortgage debt. »
The situation in Quebec
The Ministère des Finances du Québec is relatively optimistic, forecasting real GDP growth of 0.7% and real export growth of 1.6% in 2023. And we expect inflation to rise by 3.7%, or 5 percentage points less than this year.
With economic growth this weak, job creation should have a modest year. For the new year, the Ministry of Finance expects almost 31,000 job growth. That’s 3.3 times less than in 2022, when job creation was projected to reach 103,400.
As for the unemployment rate, it is likely to be around 5%, up half a percentage point throughout 2022.
Wage growth will slow to a meager 3.5% in 2023 from 10.5% this year.
Per capita disposable income is expected to remain flat or close to $35,537.
property
The sharp rise in interest rates has noticeably cooled the residential real estate market.
Many potential new buyers will now wait to buy a property until mortgage rates fall again.
As a result, average house prices are likely to come under downward pressure in several regions of Quebec. About 5 to 15% compared to the historical high of last April.
The construction of new houses will inevitably slow down.
The Obligations
After a real pocket year in 2022, the bond market for tradable bonds and the market for other fixed income securities could potentially return to the uptrend in 2023. Or in the worst case: no more spring loss.
You should know that the market value of marketable bonds decreases when interest rates rise and vice versa when interest rates fall.
Without an incredible surprise, interest rates will soon stop rising. And after several months of stability, they could fall again in the last quarter of the new year. The decline would continue in 2024.
The stock exchange
Despite the looming global recession, 2023 will prove more “rewarding” for investors than 2022, a truly disastrous year for major stock indexes like the Nasdaq and the world’s most popular index, the New York Stock Exchange’s S&P 500.
Note that profitability projections are still very modest.
Rather than ending up with heavy losses like this year, investors should see their portfolios stabilize at least in 2023 to reposition when the bull market returns.
And with a bit of luck, investors can even make modest gains.
Happy New Year 2023!
