Economic growth likely to slow by Q4

By September, the Canadian economy’s peak growth rate for the year will likely be behind us, says investment strategist Brent Joyce.

But in an assessment of the investment year so far, the Mackenzie Investments vice-president added that slower growth in the fourth quarter would not necessarily be a step backward for the economy, just a return to a more sustainable pace.

“People need see the forest for the trees here,” he said. “Things are still moving in the right direction. This just means that the big boost is behind us.”

Joyce’s mid-year economic analysis painted a picture of a strong economic recovery, with conditions that continue to be supportive for investments and capital markets. He said declines in GDP and corporate earnings were eye-popping last year, but this year’s rebound has been every bit as remarkable.

In fact, he suggested markets may need time to digest their gains.

“I think equity markets probably need a period of consolidation, some time to catch their breath after all of this fabulous news and these fairly sharp moves higher,” he said.

The stock market was correct in anticipating better-than-average earnings from corporations this year, he added, saying the S&P 500 and S&P/TSX composite still have room to grow, albeit at a slower rate.

“That isn’t as good as acceleration, but it isn’t a recession either,” he said. “Markets prefer good and growing. But they can live with good and stable.”

While he acknowledged the role that vaccines have played in the economic recovery, he said virus variants still pose a risk to economic and social normalization. In addition, there are supply chain problems like manufacturing bottlenecks and shipping delays, as well as rising inflation and labour market shortages.

Ultimately, however, these are good problems to have.

“They’re problems that capitalism can and does fix,” he said. “They are signs of robust demand and recovery. And corporations are on this planet to tackle these problems.”

If anything, the bigger concern is one of perception: all the good news has now been priced into the market.

“There’s a lot of good news that has buoyed stock prices. But now that’s in the rearview mirror,” he pointed out. “There’s an often-cited quip that equity markets like to climb a wall of worry. And certainly 12 months ago there were a lot more things to worry about in the world than there are today.”

He believes inflation through 2021 is likely to be “higher than anything Canadians have seen in a decade,” but that’s not unexpected given the rollercoaster ride of the past 16 months.

Joyce said it would not be a stretch to see headline inflation hit 3.5% by September, but core inflation — which the Bank of Canada pays closer attention to — is likely to fall within a more acceptable range.

“We need to not get caught up in ‘Oh my gosh, inflation is running away!’ You do have to peel back the onion a little bit,” he said.

He pointed out that 2021 is a renewal year for the government’s inflation targeting regime, so there could be adjustments to the Bank of Canada’s inflation mandate going forward, but he doubts it will change.

“There is a small crack open for the Bank of Canada to perhaps tweak their view,” he acknowledged. “But, given that I think core inflation is going to be something that they can live with, I think it’s a low probability.”

Read more mid-year insights from Brent Joyce.

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.