Canada
While employment numbers continue to defy expectations with their strength, the economy is clearly slowing. Aimed at combatting stubbornly high inflation, historically fast and large increases in interest rates by the Bank of Canada over 2022 have significantly driven up borrowing costs for both consumers and businesses. In turn, this has stalled the housing market and slowed overall spending and economic activity. With few exceptions, equity markets have provided little room to hide from the continuing downturn in stock prices, and rising bond yields have sideswiped prices. A relatively shallow recession is anticipated for 2023, and hopes are rising that the latter half of the year will turn more positive as inflation abates, interest rates moderate and the economy begins to regain its footing.
United States
Efforts by the Federal Reserve (the Fed) to rein in inflation from decades-high levels continues apace, as the economy remains too vibrant to ensure a return to the Fed’s inflation target of 2%. The Fed’s determination to slay inflation with higher interest rates has undermined stock valuations, while raising expectations that the economy will eventually succumb under the weight of sharply higher borrowing costs, in turn reducing employment and spending by consumers and businesses. This is likely to continue to affect stock prices as companies are expected to see profits fall over the coming months. However, these adverse conditions are likely to begin to ease as the year progresses, providing some hope for a recovery in the latter half of the year.
Europe
Russia’s invasion of Ukraine has led to an energy crisis in Europe, as oil and natural gas supplies have been drastically reduced. The surge in energy prices has significantly contributed to overall inflation in the region, and has sent a chill through the housing market, while significantly reducing business borrowing and investment activity. Europe’s bourses have continued to slip as the European Central Bank raises interest rates to combat inflation, while also depressing bond prices in the process. With the global economy showing signs of sliding into recession in the first half of 2023, tourism is not expected to be the growth driver it was over the last two years, but hope still remains that the situation will ease in the latter half of the year.
Emerging Markets
2022 brought with it an exceptionally strong U.S. dollar, which drove up the cost of Emerging Markets (EM) countries’ products and services in the world’s largest economy, while hurting borrowers financed in U.S. dollars. China’s COVID zero-tolerance policy has damaged the economy’s productivity and growth and contributed to the region’s and the global economy’s slowdown. With most EM nations’ leading indicators flashing warning signs of a sharp slowdown in production, borrowing and housing, and a likely recession the forecast for most of its key North American and European markets, the first half of the year looks to be challenging for EM, before giving way to a more positive outlook for the rest of 2023.
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