For over a year, the global economy has avoided recession. Beneath the surface however, imbalances can be seen in the latest upturn. Much of the gain experienced globally owes to a reopening surge in China. Regional imbalances outside of China as well as sectoral imbalances have emerged as the goods-producing sector stalled last quarter after tumbling in the fourth quarter of 2022. Rates are currently on hold for most central banks outside the U.S. and Western Europe. Lags incorporated in models suggest that the drag from tightening in global policy rates (ex. China) will continue to build. Policy stances are now seen as sufficiently restrictive to maintain central bank credibility and ensure that inflation gradually returns to acceptable levels.

In the U.S., the failure to raise the U.S. debt ceiling is an immediate concern. As it is delayed, credit conditions are likely to tighten further. Our baseline remains that these forces combine to tip the U.S. into recession by year-end. In May, we maintained our twelve-month forward outlook for the U.S. economy of six months of Stagnation, followed by three months of Recession and then three months of Stagnation.

The Chinese economy advanced 4.5% year over year in Q1 of 2023, accelerating from a 2.9% growth in Q4, amid efforts from Beijing to spur the post-pandemic recovery.1 China’s annual inflation rate fell to 0.1% in April.2 China’s surveyed urban unemployment rate declined to a 16-month low of 5.2% in April.3 China’s trade surplus surged in April including the trade surplus with the United States.4

The Eurozone’s quarterly economic growth was confirmed at a modest 0.1% during the first quarter of 2023, following a stagnant fourth quarter. The European Central Bank’s aggressive tightening of monetary policy has added to the economic strain. Germany registered no growth in the first quarter, while the Netherlands experienced a contraction. The economies of France, Italy, and Spain did see some expansion during the same period.5 The Eurozone posted a trade surplus in March. Exports climbed 7.5% and imports fell 10%.6 The consumer price inflation rate in the Euro Area slightly increased to 7.0% in April 2023.7  

The U.S. economy grew by an annualized 1.3% in Q1 2023, slightly higher than 1.1% in the advance estimate but the weakest since Q2 2022. Consumer spending growth accelerated to 3.8% despite stubbornly high inflation.8 The U.S. trade gap narrowed to a four-month low in March. Exports were up 2.1% while imports edged 0.3% lower.9 The annual inflation rate in the U.S. fell to 4.9% in April. Food prices grew at a slower rate (7.7% vs 8.5% in March) while energy costs fell further (-5.1% vs -6.4%).10 The unemployment rate in the United States edged down to 3.4% in April.11 

Canada’s GDP grew by 0.6% in the first quarter of 2023, 2.5% at an annualized rate.12 The annual inflation rate in Canada rose to 4.4% in April.13 The unemployment rate in Canada was at 5% for a fifth consecutive month in April.14 Canada posted a trade surplus of CAD 0.97 billion in March. Total imports slumped 2.9% over while total exports fell at a slower 0.7%.15

Lingering concerns around inflation, coupled with recession jitters stemming from continued turmoil within the banking space led to uncertainty over the Fed’s future rate hike trajectory. Despite the ambiguity, better than expected Big Tech corporate earnings managed to sustain the U.S. market in April. The S&P 500 posted a gain of 1.6%, outpacing smaller caps, with the S&P Mid Cap 400 down -.8% and the S&P SmallCap 600 down -2.8%. Canadian equities finished the month with the S&P/TSX Composite up 2.9%. S&P Europe 350 extended its year-to-date gains in April, with the pan – European bellwether ending 2.7% higher for the month. The U.K. market was the brightest spot, contributing +0.9%, followed by Switzerland and France, with 0.7% each. The S&P Pan Asia BMI dropped 0.6% in April. 

In May, we maintained our asset allocation from March, including the presence of gold and the twenty percent cash position across all models. We continue to maintain short duration exposure to fixed income and a greater exposure to Canadian equities over U.S. equities as we anticipate a continuing weaker underlying economy through the remainder of 2023.

The support from declining energy prices and pandemic recovery is beginning to fade. With central banks unlikely to ease policy rates due to persistent inflation, the adjustment of private sector balance sheets to higher rates will bite. We are positioned for a recession in the U.S. in the third quarter. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

Deborah Frame, President and CIO

1 Trading Economics. China GDP. April 18, 2023.

2 Trading Economics. China Inflation. May 11, 2023.

3 Trading Economics. China Unemployment. May 16, 2023.

4 Trading Economics. China Trade. May 9, 2023.

5 Trading Economics. EU GDP. May 1, 2023.

6 Trading Economics. EU Trade. May 16, 2023.

7 Trading Economics. EU Inflation. May 2, 2023.

8 Trading Economics. U.S. GDP. May 25, 2023.

9 Trading Economics. U.S. Trade. May 4, 2023.

10 Trading Economics. U.S. Inflation. May 10, 2023.

11 Trading Economics. U.S. Unemployment. May 5, 2023.

12 Trading Economics. Canada GDP. April 28, 2023.

13 Trading Economics. Canada Inflation. May 6, 2023.

14 Trading Economics. Canada Unemployment. May 5, 2023.

15 Trading Economics. Canada Trade. May 4, 2023.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. April 30, 2023. Index performance is based on total returns and expressed in the local currency of the index.