Recession risks are rising as trade tensions depress global manufacturing and the inverted U.S. Treasury yield curve signals warning. While we’re cautious for now, a combination of central bank easing, a trade-war truce and China stimulus could brighten the outlook.
For 2019, we expect the Canadian economy to grow near 2%, or roughly in line with trend based on central bank estimates, but several risks loom. Specifically, consumption, crude oil and competitiveness – the “three Cs” – will be critical in shaping the outlook for 2019 and beyond.
The U.S. Federal Reserve (the Fed) is settling into a quarterly tightening routine that could see the federal funds rate rise above 3%. Even so, the upside for the U.S. dollar looks limited given its expensive valuation and crowded long positions. We believe a pause in the dollar uptrend should bring respite to beleaguered emerging markets.
Tailwinds from global growth, strong earnings and fiscal easing currently outweigh headwinds from monetary tightening and inflation—but for how long?
Our central view is that equity markets can push higher before facing headwinds later in 2018 as markets factor in rising risks of a 2019 recession. Running with the bulls can be dangerous. It’s easy to get swept up in the elation of the crowd and underestimate the risks.