The year 2022 was punctuated by multiple economic shocks: high inflation, the war in Ukraine, the sharp rises in interest rates, the stock market rout, the marked fall in the bond market, the collapse of cryptocurrencies, the gasoline, the escalation of the residential real estate market…
After dramatically raising their respective key rates to counter inflation, the US Federal Reserve (Fed), the European Central Bank and the Bank of Canada now risk plunging us into recession.
While the Bank of Canada seems to want to give us some respite by keeping its key rate at 4.25%, the Fed monks have hinted that they would continue to tighten US monetary policy. Their next turn of the screw could cause the key rate to jump to 5%.
Whether the global, American, Canadian or Quebec economies fall into recession in 2023, there is no doubt that the odds are very high.
The challenge for central banks? It is to slow down their respective economies sufficiently so as to bring inflation down to 2 to 3%, while not causing a serious economic crisis. Easy to say, but not easy to do!
The ideal
Ideally, under the circumstances, it would be a soft landing for the economy.
According to National Bank Financial economists, this scenario could be envisaged, since domestic demand has cooled, as well as the labor market and the housing market.
“Consumers are simultaneously suffering from a loss of purchasing power, an interest payment shock and an unprecedented negative wealth effect. In our view, it will not be necessary to keep interest rates at such high levels for long to calm inflation and we therefore expect the central bank to lower them in the second quarter of next year. »
Given the monetary tightening, they expect the economy to stagnate in the next three quarters. This would translate into anemic growth of 0.7% in 2023.
For their part, Desjardins Group economists predict a short and moderate recession. But a recession that could, they say, stretch into the third quarter.
“Risks to our outlook remain tilted to the downside as households increasingly face the reality of higher mortgage debt costs. »
The situation in Quebec
The Ministère des Finances du Québec is relatively optimistic, predicting real GDP growth of 0.7% and export growth in real terms of 1.6% in 2023. And we anticipate a rise in inflation of 3.7%, or 5 percentage points less than this year.
With such weak economic growth, job creation should have a modest year. The Ministry of Finance anticipates adding barely 31,000 jobs in the new year. This is 3.3 times less than in 2022 when job creation was expected to reach 103,400.
As for the unemployment rate, it should hover around 5%, up half a percentage point over the whole of 2022.
Wage growth will slow from 10.5% this year to a meager 3.5% in 2023.
Disposable per capita income is expected to stay flat or close to $35,537.
real estate
The sharp rise in interest rates has noticeably cooled the residential real estate market.
Many potential new buyers will now wait for mortgage rates to start falling again before buying a property.
As a result, the average price of properties should come under downward pressure in several regions of Quebec. Of the kind of 5 to 15% compared to the historical peak of last April.
Construction of new homes will inevitably slow down.
The obligations
After a really pocket year in 2022, the bond market for negotiable bonds and the market for other fixed-income securities should possibly return to its upward trend in 2023. Or in the worst case: stop losing feathers.
You should know that the market value of marketable bonds falls when interest rates rise, and vice versa, it rises when rates fall.
Barring an incredible surprise, interest rates will soon stop rising. And after several months of stability, they could start falling again in the last quarter of the new year. The decline would continue in 2024.
The Stock Exchange
Despite the global recession looming, 2023 is set to prove more “rewarding” for investors than 2022, a truly disastrous year for major equity indices like the Nasdaq and the world’s most popular index, the S&P 500 of the New York Stock Exchange.
Note that the profitability forecasts are still very modest.
Rather than end up with heavy losses, as is the case this year, investors should—at least see their portfolios stabilize in 2023 in order to reposition themselves when the bull market returns.
And with a bit of luck, investors might even reap modest gains.
Happy New Year 2023!