Pallett Wealth Management Team
Global Economic Update
09/20/2021
Equity markets have been relatively resilient over the past few weeks, despite moderating economic growth momentum and upcoming changes to central bank policy, particularly the U.S. Federal Reserve. Canadian investors have understandably been more preoccupied with issues at home. Provinces are now in the thick of a fourth wave of the pandemic (with crises in Alberta and Saskatchewan), inflation has been making headlines and the federal election is just days away. Below, we share some brief thoughts on these issues.
Canada is now experiencing its fourth wave of rising infections of Covid-19. Based on the expected impact of seasonal factors and the experiences seen elsewhere in the world, it is possible that the situation will worsen. The consensus view, however, is that expanding vaccination rates will ensure that the rate of ICU hospitalizations and mortality will not reach the levels of prior waves. Experiences will vary from province to province based on differing vaccination rates and policies, as we have seen illustrated recently in Alberta and Saskatchewan. The onset of the new wave is frustrating and tiring, and represents a familiar headwind to many businesses, large and small. The overall negative economic impact of the fourth wave, however, is expected to be significantly more limited on a national basis than previous waves.
Evidence continues to point to inflation being alive and well in North America. The core Canadian consumer price index (CPI) for August, which excludes food and energy, rose by 2.7% year-over-year, representing the highest rate of inflation seen in nearly twenty years. The strength in inflation data was expected, given the comparisons to the year-ago period where prices were still relatively depressed. Moreover, only a few sectors drove a significant amount of price gains. For example, the “transportation” component of CPI, measuring vehicle prices among other transportation items, was up significantly. The automotive global supply chain remains in a fragile state, owing to the shortage of microchips. This shortage has forced most manufacturers to reduce production, which in turn has driven vehicle prices materially higher. There is no clear forecast of when the supply chain pressures will ease, suggesting that elevated sector-specific inflation may persist for longer than was previously expected.
The federal election is upon us. There is a wide range of issues on the minds of voters. The next government will need to balance nurturing and navigating the Canadian economy through the ongoing pandemic while at the same time addressing longer-term structural issues such as climate and energy, innovation, competitiveness and government debt levels. There are significant challenges ahead for whichever party prevails.
It is important to remind ourselves that history suggests that politics may have minimal impacts on the investment outlook. Throughout the past century, the Liberal Party has spent nearly two-thirds of the time in power, compared to nearly one-third for the Conservative Party. There have been poor, average and good years for Canadian stocks during periods in which both parties were in power. Rather than politics, we believe that monetary conditions, the economic climate and corporate fundamentals have been, and will remain, the predominant factors driving equity returns in the future.
Should you have any questions, please do not hesitate to contact us. Drew Pallett www.pallett.ca