As the economy began to choke and sputter in the latter half of 2023, the Bank of Canada (BoC) moved to the sidelines in mid-summer, and now appears to be considering rate cuts in the months ahead. Negative GDP growth for the third quarter and the gradual fall in the rate of inflation demonstrate that the BoC’s restrictive monetary policy has worked to cool spending. However, in doing so, it has also substantially raised the risk of recession in 2024. While wide-spread labour unrest has dissipated, it took its toll on economic growth in 2023, while higher interest rates and bond yields drove funding costs higher, dampening the real estate sector. Equities ended the year mixed, lagging their U.S. counterparts, but saw strength at year-end as the outlook brightened for the year ahead.
The economy has remained remarkably resilient in the face of the highest interest rates in more than two decades, growing at a pace that was above the historical average during the first half of 2023 year. However, economic data over the last months of last year continue to suggest that the world’s largest economy is slowing, with a recession still possible in the first half of this year. U.S. Federal Reserve Chairman Powell used his last Federal Open Market Committee meeting of the year to suggest that the central bank would cut its discount rate in 2024, lighting a fire under stock prices and driving bond yields down sharply. Technology stocks continued to lead the way higher in 2023, driving the S&P 500 Index back to its pre-bear market highs.
The region’s economy continues to face recession risks, as growth slowed over the last months of 2023, and interest rates remained relatively high to combat rapidly falling but still-high inflation. European stocks continue to face headwinds from this weak macroeconomic backdrop, with a besieged consumer pulling in spending and the post-COVID tourism boost fading. Global uncertainty and rising geo-political risk have also worked to keep a lid on both markets and the economy, with worries persisting over the impact of the war between Russia and Ukraine. However, with the increasing likelihood of rate cuts in 2024, markets are expected to see some relief as the year progresses and the global economy begins to find its footing again, driving up demand for the region’s goods and services.
Emerging-market equities largely underperformed developed markets ones in 2023, with much of the relative weakness driven by the poor performance of China, which accounts for 28.6% of the emerging-market equity benchmark. China’s economy has experienced broad weakness following its reopening from the pandemic in late 2022. We expect earnings growth in emerging markets to rise faster than in developed markets over the next two years, with that growth being driven by countries such as technology leaders South Korea and Taiwan. Falling inflation combined with a moderating outlook on global growth will likely prompt many emerging-market central banks to focus on lowering interest rates rather than increasing them over the next 12 months, spurring a recovery in equities.
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