While summer thoughts are usually filled with long days, barbecues and beaches, we are focused on interest rates, inflation and economic growth. In our last correspondence in June, we’d mentioned that the economy had the potential to move into a shallow recession. Since our last note, economists at RBC have announced that they are now forecasting the country will move into a moderate, but short lived recession in 2023. We wanted to connect with you to put context around what this means.

 

Recessions are a normal part of the business cycle in that they stop the economy from getting too far ahead of itself and overheating. The definition of a recession is an economy that contracts over a period of two quarters. It is important to also note that this growth is measured on an annualized basis, quarter over quarter. This is particularly important during this cycle as the impact of the pandemic continues to be felt today.

 

What does a “moderate and short lived recession” mean for you? Simply, this means that the effects of a traditional downturn in our economy are not expected to be present this time. Employment remains high, as do corporate earnings and, while interest rates are rising, they remain at historic lows. We must also keep in mind that, as we emerged from the pandemic in 2020, all of the pent up demand created a rapid economic expansion in 2021. As this demand works its way through the system, there can be periods where the economy moves back to “normal” and a contraction occurs, technically creating a recession.

 

We all know we are in a period of increasing interest rates designed to curb inflation. In fact, the latest move by the Bank of Canada was an unusual 1% rate increase. Our view continues to be that we are close to peak inflation and that you will likely see some easing of inflation towards the end of 2022. As we mentioned in June, higher interest rates are already having an effect on housing prices, and the demand for goods is starting to decrease, which should alleviate pricing pressure as well in the coming months.

 

Our goal for your portfolio is to own quality businesses and to participate in their earnings and dividends over the long term. We seek to invest in strong management teams that have the ability to navigate challenging environments. Equity markets are leading indicators of economic strength or weakness. Market strength usually occurs in advance of a recession officially being announced. At this time, we reiterate our message to remain invested in the businesses that you own within your portfolio.