SILVER LININGS FROM GLOOMY ECONOMIC SIGNALS
Friday Oct 07th, 2022
Pundits continue to point to economic signals that indicate a recession is on the horizon. The “good news” side of a bleak outlook - if there is a recession led by this inflationary cycle, it will likely not be as long or deep as the credit-driven recessions experienced in 2001 (dotcom bust) and 2008 (financial crisis).
While it may be a "rose-coloured glasses" perspective, based on our current path toward a possible recession, there are possibilities of:
• A shallower economic downturn that’s less damaging to corporate earnings than in 2001 and 2008.
• Housing activity and prices have come down from record highs and are now trending at historical growth averages. Inventories are tight and could fall even further with higher interest rates. The combination of low housing inventory and fewer buyers is expected to maintain a balance in the market and will likely keep home prices resilient.
• The unemployment rate is expected to go up next year. However, with the current record-high ratio of new job openings vs. potential applicants, forecaster see companies first reducing job postings rather than laying off employees.
• Borrowing and anything to do with credit will continue to get more expensive. The flip side - higher interest rates for savings vehicles like GICs. Good for retirees looking for low-risk investment options.
• Corporate and financial institution balance sheets are in good shape and corporate spending should remain strong, even if it does pull back a bit.
• As supply chains clear, order backlogs could keep the manufacturing sector active, even if there’s a recession-induced reduction in demand.
• Consumer spending, driven by solid employment looks to remain resilient, however focusing away from durable goods - shifting toward dining, travel, and shared experiences in a post-pandemic environment.
Yes, there looks to be short-term pain to get inflation down. The bright side - Inflation looks to have peaked. The direction of Benchmark Bond Yields, with an Inverted Yield Curve, hints that we will experience a recession and if the Bank of Canada follows the historical path associated with an economic downturn, interest rates and the cost of borrowing will come down as well.
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