With the economic outlooks for China and Europe both deteriorating, a global recession looks to be inevitable, says Scotia Economics in a new report.
The combination of the effects of drought, strict pandemic controls and turmoil in its residential construction sector have China on track for its weakest economic growth since 1980, the report said.
At the same time, Europe is facing tougher economic conditions as the ongoing fallout from Russia’s invasion of Ukraine, a looming energy crunch, drought and wildfires, and rising interest rates portend recessions in that region, too.
“With these major economic powers registering very weak economic performance, a global recession is assured,” the report said.
Conditions are better closer to home, it noted, with signs that inflation pressure has started to ease — and, as a result, that central bank rate tightening will take a break soon, too.
For Canada and the U.S., Scotia said it continues to view recession “as a risk, not a certainty,” noting that it has downgraded its forecasts for both countries due to weaker commodity prices and equity markets.
Nevertheless, Canada is expected to register 3.1% growth this year before slowing sharply to 1% in 2023.
“We expect household spending to slow, but remain reasonably resilient owing to re-opening effects, historically high pent-up demand, high liquidity and strong household balances. This view flies in the face of numerous surveys which point to concern about finances in light of rising inflation and interest rates,” it said. “Yet, the hard data do not yet demonstrate a major impact on spending per the softer data.”
On the monetary policy front, Scotia forecasts that the Bank of Canada will stop raising rates at the 3.75% mark in October, and that the U.S. Federal Reserve will top out at 3.5% in November.
“In both cases, we anticipate that policy rates will remain unchanged throughout 2023,” the report said. This will allow time for the higher rates to bring inflation down closer to the central banks’ targets, it added.
“Risks are tilted to the upside for policy rates as they depend on imminent confirmation that inflation is indeed slowing,” the report said.
“If that isn’t confirmed soon, we may need to reconsider our views on terminal policy rates in both countries,” it said, adding that its inflation concerns are “shifting away from global factors and towards developments in labour markets.”