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In our 2022 economic and market outlook, we outlined how we believed the removal of policy accommodation would shape the economic and financial market landscape. Policy has in fact driven conditions globally in 2022, one of the most rapidly evolving economic and financial market environments in history. But one fact has been made abundantly clear: As long as financial markets function as intended, policymakers are willing to accept asset price volatility and a deterioration in macroeconomic fundamentals as a consequence of fighting inflation.
The stabilization of global consumer behavior, cyclical acceleration in demographic and geopolitical trends, and rapid monetary tightening suggest a more challenging macroeconomic environment in 2023 that, in our view, will help bring down the rate of inflation in Canada and in the global economy. The cumulative impact of financial tightening on the Canadian growth is already evident and should release tension in labor and commodity markets.
Inflation has continued to trend higher across most economies, in many cases setting multidecade highs. The action taken, and likely to be taken in the months ahead, by central banks reflects a promising effort to combat elevated inflation that has proven more persistent and broad-based. Supply-demand imbalances linger in many sectors as global supply chains have yet to fully recover from the Covid-19 pandemic and as demand is supported by strong household and business balance sheets buoyed by pandemic era stimulus. The war in Ukraine continues, threatening another surge in energy and food commodities prices. Effective monetary policy requires good decision-making, good communication, and good luck. The current backdrop is missing the good-luck component, posing a challenge for policymakers whose fiscal and monetary tools are less effective combating supply shocks.
Global conditions today and those anticipated in the coming months are similar to those that have signaled global recessions in the past. Energy supply-and-demand concerns, diminishing capital flows, declining trade volumes, and falling output per person mean that, in all likelihood, the global economy will enter a recession in the coming year. Although central banks generally seek to avoid recessions, inflation dynamics mean that supply-side pressures must continue to ease and that policymakers must tighten financial conditions to lessen the inflationary push from elevated demand. That said, households, businesses, and financial institutions are in a much better position to handle an eventual downturn, to the extent that drawing recent historical parallels seems misplaced. Although all recessions are painful, this one is unlikely to be historic.
Our base case is a global recession in 2023 brought about by the efforts to reduce inflation. Whether history views it as mild or significant matters little for those affected by the downturn. But failing to act aggressively to combat inflation risks harming households and businesses through entrenched inflationary pressures that last longer than the pain associated with any one recession. We expect the Canadian economy to grow at 0.7% in 2023, in line with our expectations for slower global economy.
As the table below highlights, growth is likely to end 2023 flat or slightly negative in most major economies outside of China. Unemployment is likely to rise over the year but nowhere near as high as during the 2008 and 2020 downturns. Through job losses and slowing consumer demand, a downtrend in inflation is likely to persist through 2023. We don’t believe that central banks will achieve their targets of 2% inflation in 2023, but they will maintain those targets and look to achieve them through 2024 and into 2025—or reassess them when the time is right. That time isn’t now; reassessing inflation targets in a high-inflation environment could have deleterious effects on central bank credibility and inflation expectations.
IMPORTANT: The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from VCMM are derived from 10,000 simulations for each modeled asset class. Simulations as of September 30, 2022. Results from the model may vary with each use and over time. For more information, please see Notes and Disclaimer below.
Joseph H. Davis, PhD, is a Vanguard principal, global chief economist, and global head of The Vanguard Group, Inc.’s Investment Strategy Group, whose research and client-facing team develops asset allocation strategies and conducts research on the capital markets, the global economy, portfolio construction and related investment topics. As Vanguard’s global chief economist, Mr. Davis is also a key member of the senior portfolio management team for Vanguard Fixed Income Group. The Vanguard Global Economics Team contributed to this report. The detailed Vanguard economic outlook for 2023 can be viewed on the Vanguard website.
Notes and Disclaimer
Content © 2022 by Vanguard Group. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited. This article first appeared on the “Insights“ page of the Vanguard Group, Inc.’s website. Used with permission.
Publication date: November 2022
The information contained in this material may be subject to change without notice and may not represent the views and/or opinions of Vanguard Investments Canada Inc.
The information contained in this material may be subject to change without notice and may not represent the views and/or opinions of Vanguard Investments Canada Inc.
Certain statements contained in this material may be considered "forward-looking information" which may be material, involve risks, uncertainties or other assumptions and there is no guarantee that actual results will not differ significantly from those expressed in or implied by these statements. Factors include, but are not limited to, general global financial market conditions, interest and foreign exchange rates, economic and political factors, competition, legal or regulatory changes and catastrophic events. Any predictions, projections, estimates or forecasts should be construed as general investment or market information and no representation is being made that any investor will, or is likely to, achieve returns similar to those mentioned herein.
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