Perspectives: For the 12-month period beginning July 1, 2023

In September 2022, we identified an increased probability the global economy would experience a recession over the following 12 months. This became our baseline and most likely scenario. Since then, the recession has not materialized. Equity markets took this as a sign a soft landing was underway, and they rebounded strongly from late-2022 lows.

Has a global recession been avoided, or has it just been delayed? Our baseline scenario still calls for a global recession. Although inflation is slowing, it’s still uncomfortably high. For any credible inflation-fighting central bank, this means policy tightening campaigns are not over. It also means the monetary policy stance will have to stay in restrictive territory for a while longer to completely wash out inflationary imbalances.

Asset class highlights

Equity

Although some specific segments of the market might be stretched, this is not necessarily the case for the overall market. Europe is now in a technical recession. Canada’s valuation is more attractive, but it’s a cyclical market dependent on the U.S. economy. In addition, some regions appear more attractive than others, such as emerging markets outside China.

Fixed Income

Global bonds are likely to offer positive returns over the next 12 months. The yield of 10-year treasuries should trade in a range of 3.00% to 4.25%, around a pivot of 3.50%.

Currencies

We’re in the late stages of the global tightening cycle. In this stage, the risk of a financial system shock is relatively higher than normal. Foreign currency volatility is expected to increase considerably over the second half of the year.

China

Although underlying economic growth in China is expected to remain weak, additional policy stimulus is likely to limit downside risks. We expect GDP growth to average approximately 5% in the next four quarters. This projection is in line with the consensus but also embeds total policy support of about 1% to 1.5% of GDP.

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