Canada
Despite demonstrating remarkable resilience over the last year, the Canadian economy has finally begun to show signs of fatigue. Employment has begun to contract and wage growth is moderating. While labour markets remain tight, sharply higher interest rates are weighing on consumer demand for goods and services. The Bank of Canada surprised markets at its most recent meeting by deciding that inflation and demand remained high enough to warrant another 0.25% increase in its trend-setting rate, and it remains poised to hike again if the economy does not show more signs of cooling. The S&P/TSX Composite struggled to move higher this quarter, with a recession seen as increasingly likely by end of the year.
United States
While U.S. inflation remains elevated, signs are pointing to a meaningful slowing, with May’s rate coming in at 4% year-over-year. As a result, the U.S. Federal Reserve (the Fed) indicated that it is at long last ready to slow down its pace of interest rate hikes, which were intended to fight inflation. The Fed has raised its rate sharply to 5.25% from just 0.25% in early 2022, and plans to raise rates by another 0.25% to 0.5% in the months ahead. While consumer spending remains resilient, and the housing market is showing signs of strength, rising debt levels and slowing wage growth are likely to rein in spending for the rest of 2023. Equity indices have continued their rebound, but most of the strength has been concentrated in the AI-dominated tech sector, with the broader market lagging behind.
Europe
The eurozone sank into a recession, as GDP fell by 0.1% in both the final three months of 2022 and the first three months of 2023. To date, the contraction represents a mild technical recession, but nevertheless it casts a pall over the area’s economy. However, the economy has performed better than expected after it was hit by an energy and cost of living crisis. In other positive news, the recession could make the European Central Bank more hesitant to continue hiking borrowing costs after raising interest rates by another 0.25% in June. European equities continue to trade at historically extreme discounts versus the U.S., and companies are generally still exceeding analysts’ earnings expectations and delivering earnings growth.
Emerging Markets
Asian central banks appear to have largely completed their rate-hiking cycles and are expected to begin easing as soon as later this year. Asia’s regional growth weakened in the first half of 2023 given a slowdown in exports to Europe and decreased manufacturing demand. The area’s economy is expected to strengthen in the second half of 2023 reflecting a rebound in Chinese growth, with the caveat that tighter financial conditions in the U.S. are a risk to Asian growth. With an improving inflation and monetary-policy backdrop, emerging-market equities are expected to benefit from improving returns on equity and earnings growth, with anticipated U.S. dollar weakness adding a further boost to economic and market growth.
This information is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ® / TM Trademark(s) of Royal Bank of Canada. Used under license.