Should investors consider a global recession avoided or delayed?
July 01, 2023
In September 2022, we identified an increased probability the global economy would experience a recession over the following 12 months. This became our baseline and most likely scenario. Since then, the recession has not materialized. Equity markets took this as a sign a soft landing was underway, and they rebounded strongly from late-2022 lows.
Has a global recession been avoided, or has it just been delayed? Our baseline scenario still calls for a global recession. Although inflation is slowing, it’s still uncomfortably high. For any credible inflation-fighting central bank, this means policy tightening campaigns are not over. It also means the monetary policy stance will have to stay in restrictive territory for a while longer to completely wash out inflationary imbalances.
Asset class highlights
Equity: Although some specific segments of the market might be stretched, this is not necessarily the case for the overall market. Europe is now in a technical recession. Canada’s valuation is more attractive, but it’s a cyclical market dependent on the US economy. In addition, some regions appear more attractive than others, such as emerging markets outside China.
Fixed Income: Global bonds are likely to offer positive returns over the next 12 months. The yield of 10-year treasuries should trade in a range of 3.00% to 4.25%, around a pivot of 3.50%.
Currencies: We’re in the late stages of the global tightening cycle. In this stage, the risk of a financial system shock is relatively higher than normal. FX volatility is expected to increase considerably over the second half of the year.
China: Although underlying economic growth in China is expected to remain weak, additional policy stimulus is likely to limit downside risks. We expect GDP growth to average approximately 5% in the next four quarters. This projection is in line with the consensus but also embeds total policy support of about 1%-1.5% of GDP.
Authors
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