Recession or resilience in 2023?

Experts on Canada Life Investment Management's 2023 market outlook call say answer is more nuanced

Recession or resilience in 2023?

This article was produced in partnership with Canada Life Investment Management.

We’re likely to see one of the most well-telegraphed slowdowns in history for many economies, but will central banks achieve a so-called “soft landing”? The experts on Canada Life Investment Management’s 2023 market outlook call said the answer is more nuanced.

A midyear slump?

“The starting point for capital markets and economies in 2023 is quite distinct from a year ago,” said Susan Spence, Vice-President and Portfolio Manager at Portfolio Solutions Group (PSG), a division of Canada Life Investment Management. Speaking on Canada Life Investment Management’s 2023 market outlook call on January 12, she said that PSG has muted expectations for growth this year across developed economies. The team projects that the U.S. will eke out 0.3% growth and Canada will perform slightly better with 0.5% growth, with both economies picking up towards 2024.

These figures are in line with those being forecasted by leading economists. Todd Mattina, former Senior Vice-President, Chief Economist and Co-Lead of the Multi-Asset Strategies Team at Mackenzie Investments (Mackenzie) said economists are forecasting that growth in the U.S. will slow to about 0.25% to 0.5% for the year. Much of that impact is the cumulative effect of restrictive interest rate hikes by the U.S. Federal Reserve (Fed).

Speaking about predictions of a so-called “soft landing,” Mattina cautioned that the International Monetary Fund expects that about a third of the world will be in a recession this year. “So, in my mind, that’s going to be a sharper economic contraction than a mid-cycle slowdown or as some people call it a ‘soft landing.’ I think that we’re likely to see slightly more headwinds for the global economy,” he said. Spence said that PSG believes developed economies will continue to soften in 2023 and experience a recession, although the depth and severity will vary across regions.

It’s impossible to predict when a recession will occur, but Mattina expects a slowdown earlier in the year in Canada. This is likely to be a “short and shallow” recession that fits the technical definition of back-to-back quarters of contraction. Mattina pointed to the importance of housing construction activity for the Canadian economy, as well as its sensitivity to interest rates in residential and business investment. Lower energy and commodity prices, which are coming off last year’s highs, are also likely to weigh on Canada’s top exports.

Global headwinds

Developed economies outside North America will have more of an uphill climb this year. Spence and Mattina both mentioned the Eurozone and the U.K. as markets where recession will be perhaps even less avoidable. “In the near term, the impact of food and energy on inflation will continue to be the focus,” said Spence.   

That focus is clear as Europe continues to grapple with the effects of Russia’s war on Ukraine. It’s had a profound human impact, worsened inflation and highlighted some major concerns with European energy policy. Commodities are off their peak levels, but with no clear resolution in sight the ongoing nature of the war raises further questions and uncertainties. As for what markets have priced in, Spence highlighted that PSG believes there could be more downside than upside and risk does remain elevated. New developments in the war – or other geopolitical events – could quickly reprice markets.

Higher for longer

We’re finally starting to see inflation roll over in North America. The latest consumer price index reading for the U.S. was released January 12, with headline inflation at 6.5% year-over-year, down from 7.1% in November. Month-over-month inflation ticked down 1%, the first decline in two-and-a-half years.

These positive signs, against the recession outlook, have many wondering just how long central banks will hold rates at a high level. Spence said that PSG expects central banks across most developed markets to pause rate hikes at some point during the year as they try to strike a balance between cooling inflation and freezing markets altogether. This could take some time, too. “It may take well into 2024 and beyond to get back to the 2% target that central banks are ultimately focused on,” she said.

Mattina agreed that the Fed’s December meeting showed they might need to sustain rates for longer than markets expect. The price of goods may be falling overall, but the parts of the consumer price index (CPI) basket that are dependent on wages and services are rising at rates that don’t line up with what investors are expecting. The markets are less optimistic on the Eurozone, which faces more persistent inflationary forces and is likely to face hikes throughout the year.

Defending portfolios and finding value

With this complex backdrop, Spence was quick to remind that diversification remains a core tenet of investing for good reason. “Diversification is an opportunity in and of itself in these types of markets,” she said. And with bonds providing higher yields, PSG expects fixed income to act as more of a stabilizer in portfolios this year. They’re neutrally positioned and see risk/reward opportunities balanced between fixed income and equities.

“Diversification is an opportunity in and of itself in these types of markets.”
Susan Spence, Vice-President and Portfolio Manager, Portfolio Solutions Group

Equity markets are likely to respond more positively later in the year as fourth-quarter corporate earnings come into focus and they look beyond some of the immediate uncertainty. Both Mackenzie and PSG offered a slightly bearish outlook on U.S. equities. PSG, currently underweight U.S. equities in its portfolios, is paying close attention to valuations against growth prospects there. Mackenzie sees a case for long-term value, but is watching for risks with U.S. companies that have a larger market capitalization. Looking at opportunities in equities abroad, both Spence and Mattina agreed that emerging markets have the biggest upside, with growth expectations outpacing most developed nations.

We’re invested

Canada Life Investment Management is proud to bring you wealth solutions to address the challenges and opportunities ahead. Reach out to your Canada Life wealth wholesaling team for support and to read our 2023 Market Outlook for more perspectives from investment managers on the Canada Life™ shelf.


The views expressed in this commentary are those of these investment managers as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice.

Canada Life and design, Canada Life Investment Management and design, and other marks followed by the TM symbol at first time of use are trademarks of The Canada Life Assurance Company (“Canada Life”). Other marks displayed in this piece are trademarks of a third party, and used with permission or under license. Canada Life Investment Management Ltd. is a wholly owned subsidiary of Canada Life. Portfolio Solutions Group is a division of Canada Life Investment Management Ltd.