Canada won't escape pain of a global recession
Two months ago, the Institute of International Finance changed its forecast to predict a recession in the eurozone. Now, it's changing it again. Since then, new risks have emerged for a world already disrupted by the war in Ukraine and the lingering threat of COVID-19, says the association for the global financial industry.
The confluence of the Omicron wave in China which has proved more disruptive than expected and the “disorderly” reaction to tightening by the U.S. Federal Reserve threaten global recession, warned the IIF.
The group has downgraded its outlook for global growth “significantly” and now predicts world GDP will essentially flatline in 2022.
“That leaves little room to avoid an outright GDP contraction. Recession risk is elevated,” it said.
Dismal data out of China this morning appeared to support their view. Retail and factory activity in the world's second largest economy fell sharply in April as COVID-19 lockdowns kept workers and consumers at home and disrupted supply chains.
Analysts now warn that this downturn may be harder to recover from than when the pandemic began in early 2020, Reuters reports.
And make no mistake, a downturn in China would be felt around the world. In April China processed 11 per cent less crude oil, the lowest daily throughput since March 2020.
“The Omicron wave in China is more disruptive than we anticipated and — in our estimation — will take a substantial toll on growth,” said the IIF.
Meanwhile, a “disorderly tightening in U.S. financial conditions is playing out, which compares to the 2013 taper tantrum, it said.
The IIF are not alone in its fear that rapid tightening by the Fed could derail global growth.
On Sunday Goldman Sachs' Lloyd Blankfein warned that there was a “very, very high risk” of a U.S. recession and warned businesses and consumers to prepare for it.
A top investment banker at the Bloomberg Canada Capital Markets Forum last week also warned that rising interest rates could put the global economy in recession.
While he hopes for a soft landing, Dan Barclay, chief executive officer of capital markets at the Bank of Montreal, said: “My fear story is that they raise rates really, really hard, they can't fix demand, because it's a supply problem and not demand, and we will have a very deep recession.”
Broad-based recession talk was the main market mover Monday morning, wrote Ipek Ozkardeskaya, senior analyst at Swissquote Bank in her note.
Stocks surged on Friday, but the Dow Jones still posted its seventh consecutive weekly loss, the worst losing streak since 2001, she said.
“Datatrek estimates that the S&P500 would need to fall to 3,525 level to ‘discount the 50/50' odds of recession. And odds of recession are mounting.”
And futures this morning, a sea of red, suggest Friday's rebound was nothing more than a dead cat bounce, she said.
Canada will not escape the pain of slowing global growth and stock market turbulence.
While Oxford Economics expects Canadian GDP to rise 4.1 per cent this year, it predicts growth to slow to almost half that in 2023.
Besides higher rates, soaring inflation and the fallout from the deteriorating global picture, Oxford expects a 24 per cent correction in Canada's housing market.