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Economic growth has recovered from the pandemic low, and the Bank of Canada sees higher-than-consensus growth for Canada based on the country’s healthy labour market, strong business investment and higher immigration levels. Meanwhile, the slower pace of expected earnings growth coupled with fair valuations will make it challenging for equities to achieve their historical returns in the near term.

The consistent macroeconomic backdrop that existed since the end of 2009 until the end of 2021 is fading. The Fed is offside on its mandate to maintain price stability and is taking swift and aggressive action to bring inflation down. It is now expected the Fed will increase short-term interest rates by another 1.5 to 2.0 percentage points this year. Over the next several months, we expect growth to slow.

Europe’s economic exposure to Russia is relatively low in terms of GDP, market capitalization and company revenues. However, Russia accounts for 40% of Europe’s natural-gas imports and 24% of its crude-oil imports. To help counter the impact of energy-price inflation and rising interest rates, the EU is ramping up fiscal support, and we are likely to see increased investments in defense and energy independence.

Asian equities pulled back over the three-month period ended May 31, 2022, with a significant divergence in performance among markets. We believe that Chinese growth will keep decelerating until the fourth quarter of this year. Across Asia, an export downturn is likely starting, as the impact of the Russia-Ukraine war has weakened global demand. Inflation is likely to rise further in the region.

Excluding Russia, China was the weakest-performing emerging market. Emerging markets excluding China performed better as commodity-exporting countries posted positive results. One very important area to consider is inflation, and food inflation in particular. After a decade of almost no inflation, the next 10 years may be characterized by a higher level of inflation.

Executive summary

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.

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The risk of recession is heightened over the next two years. We forecast 2.5% GDP growth in 2022 for the developed world, followed by just 1.2% growth in 2023.

Fixed income

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.

Equity markets

Should a downturn or recession play out, history suggests that earnings could be vulnerable to declines of more than 20%, likely sending stocks lower.


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