The economy has so far remained remarkably resilient in the face of sharply higher interest rates. However, it is this very strength, combined with inflationary pressures, that has pushed central banks to aggressively tighten monetary policy over the past year. While the central banks appear to be winning the inflation war – February’s Canadian reading was 5%, a huge improvement from the February 2022 peak of 8.2% – it still remains stubbornly high given the Bank of Canada’s 2% target rate. Stronger-than-expected employment and GDP numbers also suggest that it will take some time to cool the economy sufficiently.
Despite the economy’s strength, we continue to forecast that a recession is on the horizon, likely in the second or third quarter of this year, and that inflation will fall faster than the market anticipates, thus making the need for any further central bank tightening increasingly unnecessary. Looking forward, it makes sense that a structurally low interest-rate environment gradually reasserts itself given elevated global debt levels, demographics, and a low “speed limit” for economic growth.
The market’s recent performance has certainly been challenging, testing investors’ resolve to remain on track with their investment plans. With both bond and equity prices falling substantially, the last year has been highly unusual, and sharply higher interest rates have recently even rattled the global banking system.
Despite these many challenges, we continue to see this as a period of notable transition, as we move from the low inflation and interest rate environment that has developed over the last 40-plus years, to one that reflects historically normal – and higher – levels for both. Importantly, periods of transition often represent excellent investment opportunities for those who take a long-term view and remain patient and composed through volatility. As stewards of your wealth, we remain vigilant as the economy and markets go through this period of transition, while also maintaining our cautiously optimistic outlook.
Happy spring!
Regards,
Vijay Parmar
President
RBC PH&N Investment Counsel
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