Economic headwinds continue to mount, inflation remains problematically high and financial conditions are tightening. Asset prices have experienced a sharp decline in the face of rapidly rising interest rates, slowing growth and greater uncertainty in the macro outlook than usual.

Economy

• This quarter we have reduced our 2022 forecast even further and now expect growth in 2023 to be the weakest in over a decade excluding the 2020 pandemic shock. We gauge that the risk of recession is high over the next two years.
• The key headwinds to the economy include extremely high inflation, aggressive central-bank tightening, a global commodity shock caused by Russian sanctions, supply-chain challenges and damage from China’s zero-tolerance COVID-19 policy.
• Inflation pressures are broad-based but we expect them to calm as monetary and fiscal stimulus are dialed back, commodity and housing price growth at least slows.
• We forecast 2.5% GDP growth in 2022 for the developed world, less than half the 5.2% rate achieved in 2021, followed by just 1.2% growth in 2023.

RBC GAM GDP forecast for developed markets

Note: As of May 25, 2022. Source: RBC GAM

Fixed Income

• The rapid and significant re-alignment of interest-rate expectations caused a fixed-income sell-off of historic proportions over the past year.
• Valuation risk has been significantly reduced and yields are now at much more reasonable levels, according to our models, which suggests that yields may not need to rise much beyond current levels once near-term inflation distortions pass.
• Our base case is that inflation ultimately moderates which means that the bulk of the needed adjustment in yields has already occurred. We forecast 2.75% on the 10-year yield 12 months from now, which would mean no further sustained capital losses for bond holders over the year ahead.

U.S. 10-year Treasury note and returns

Note: As of June 1, 2022. Source: Deutsche Bank, Haver Analytics, RBC CM, RBC GAM

Equity markets

• Fear of inflation, aggressive monetary tightening and the increased risk of recession sent stocks lower in the past quarter and several major indexes fell into bear markets.
• Equity valuations fell from elevated levels, especially in high-priced technology stocks that were most sensitive to interest rates.
• If consensus estimates for profits come through, inflation pressures subside and investor confidence rebounds from extreme pessimism, stocks could deliver double digit gains over the year ahead.
• But should a downturn or recession play out, history suggests that earnings could be vulnerable to declines of more than 20%, likely sending stocks lower.

Global stock market composite

Equity market indexes relative to equilibrium

Note: As of May 31, 2022. GDP-weighted average of RBC GAM fair value models for a variety of countries. Fair value estimates are for illustrative purposes only. Corrections are always a possibility and valuations will not limit the risk of damage from systemic shocks. It is not possible to invest directly in an unmanaged index. Source: RBC GAM