Economic headwinds continue to mount, inflation remains problematically high, financial indicators are tightening and asset prices have fallen sharply, fueling greater economic uncertainty around the world, says RBC Dominion Securities (RBCDS).
Economic headwinds continue to mount, inflation remains problematically high, financial indicators are tightening and asset prices have fallen sharply, fueling greater economic uncertainty around the world, says RBC Dominion Securities (RBCDS).
“Our GDP forecasts have been below consensus for several quarters as we expected economic growth to slow in 2022. This (second) quarter, we have further reduced our guidance and now expect growth to be particularly weak in 2023,” the company said in its second-quarter Global Investment Outlook report, presented during the city council’s recent meeting.
Top economic headwinds include high inflation, aggressive central bank tightening, a global commodity shock, continued supply chain challenges and damage from China’s zero-tolerance COVID-19 policy, the report said. This combination of headwinds means that “the risk of a recession is increasing over the next two years.”
RBCDS believes this bleak outlook means developed countries will post combined economic-to-GDP growth of 2.5 percent for the remainder of 2022 – down less than half from 5.2 percent year-on-year – followed by growth of 1.2 percent next year. Barring the pandemic shock in 2020, the forecast for 2023 represents the weakest annual performance in more than a decade.
The company is also lowering its growth outlook for emerging markets, expecting overall growth in developing countries to be 3.3 percent for the remainder of 2022 and 3.7 percent next year.
“These growth rates remain well below historical levels for emerging markets,” the report said.
Unacceptably high inflation
Inflation, which has been at multi-decade highs, is the dominant challenge, with RBC Dominion Securities forecasts beating consensus and projected price pressures to remain elevated in the short-term before easing towards longer-term norms, the report said.
In the near term, supply chain issues, a housing boom and continued tailwinds from monetary and fiscal stimulus are likely to keep inflation high. RBCDS expects inflation for the remainder of 2022 to be between 6% and 8% in developed markets, while inflation for 2023 will “remain above normal” but be slightly lower.
The company expects inflation to calm down as governments scale back monetary and fiscal stimulus, commodity prices fall and real estate prices feel the weight of interest rates. In the longer term, RBCDS expects inflation to continue to fall due to factors such as demographics limiting pressure on consumer prices.
“But we also recognize that forces such as climate change, a partial reversal of globalization and a rebalancing of powers between employers and workers can provide a balance,” the report says.
As a result, RBC Dominion Securities expects long-term inflation to be slightly above 2%, compared to below 2% over the past decade.
weakening US dollar
The US dollar benefited from risk aversion over Russia’s invasion of Ukraine and expectations that the Federal Reserve will hike interest rates faster than its peers, the report said.
RBCDS expects the greenback to fall in the medium to long term as the dollar is well above its buying parity against other world currencies. In addition, the Fed’s dovish stance and expected economic weakness abroad are priced in.
Key indicators pointing to a US dollar high include a slowdown in economic activity there, a hawkish change in tone from the European Central Bank, signs that Asian policymakers may support their currencies, and/or a de-escalation of the war in the US Ukraine.
“Our forecasts are for the US dollar to weaken against a basket of major developed market currencies over the course of the coming year,” RBC said.
RBCDS also pointed out that interest rates are rising fast as central banks fight inflation, bond yields rise and mitigate valuation risks, equities face a deep slide and earnings prospects are vulnerable amid slowing global growth.
