Canada
Rising costs have begun to nibble into Canada’s economic growth, and inflation expectations are starting to change the purchasing behaviours of consumers and businesses. This is an important development, as reining in but not completely stifling the post-pandemic spending splurge on at first goods, and more recently services, such as travel and leisure, are likely to help corral price pressures over time. The Bank of Canada has moved emphatically to a tightening bias, rapidly reducing the extraordinary monetary policy stimulus that it implemented to combat the pandemic-induced economic downturn. Despite the mostly negative news and increasingly poor consumer confidence, employment and spending remain strong, defying – for now – rising calls for a recession in the not-to-distant future.
United States
With few tailwinds to sustain it, the post-COVID-19 economic surge in the world’s largest economy is beginning to show signs of petering out, while the cost of living, especially for gas, shelter and food, continues to rise at an alarming rate. Inflation rose almost 9% year-over-year in May, the fastest rate in over 40 years. This has led to a rapid pivot in U.S. monetary policy, as the U.S. Federal Reserve tries to stem inflation while avoiding a “hard landing” for the economy. The central bank is likely to continue to increase rates aggressively over the coming months. Bond yields have soared and stock prices have fallen, with the S&P 500 Index recently following the NASDAQ Index into bear-market territory.
Europe
Sharply rising inflation is rapidly reversing the economic bounce the region was experiencing as it emerged from the COVID-19 pandemic. The war in Ukraine is having a particularly painful impact on Europe, with an increasingly-embargoed Russia, the dominant oil and natural gas supplier in the region, threatening to cut off supply to NATO-member nations such as Germany, Poland and France, resulting in surging energy costs. The European Central Bank, faced with sharply rising bond yields and inflation, is threading a precarious path to avoid stagflation, as the economic picture dims and growth falls. To help counter the impact of energy-price inflation and rising interest rates, the EU is ramping up fiscal support, and it is likely that investments in defense and energy independence will rise.
Emerging Markets
Emerging market (EM) equities have traded largely in line with those in developed markets, as EM were supported by stronger corporate cash flows, resilient currencies and attractive valuations. Excluding Russia, China was the weakest-performing emerging market, while commodity-exporting EM countries posted positive results. Asian equities pulled back over the quarter, with a significant divergence in performance among markets. We expect Chinese growth to keep decelerating until the fourth quarter of this year, while across Asia, an export downturn is likely starting, as the impact of the Russia-Ukraine war has weakened global demand. Inflation is likely to rise further in the region.
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