Since the middle of last year, the dominant topic of discussion revolved around the possibility of a recession, be it a soft or hard one. This prevailing thinking stemmed from the belief that global economies would grind to a halt due to the aggressive measures taken by central banks to combat surging inflation.

Economists are now softening their stance on recession predictions. With easing inflation, a strong labor market, and resilient economic activity, Goldman Sachs cut the chance of recession from 25% to 20%.

The Canadian economy grew at an annualized rate of 3.1% in the first quarter of 2023, as per Statistics Canada, while the US reported the number to be at 2.0%. US GDP is on track to have increased by 2.3% in the second quarter of 2023, while S&P Global calls for a dip of 0.6% in the Canadian economic activity in the second quarter. For the year, however, S&P Global expects the real GDP to grow by 0.8% for Canada.

The remarkable unemployment rates in both countries are playing a key role in elevating consumer confidence and fostering a positive economic outlook.

Growth is only expected to decelerate slightly due to slower growth in disposable income. This can be due to high mortgage costs in Canada or student debt payments in the US.

The strength and resilience shown by the economies, the ongoing strength in the job market, and the continued growth in GDP suggest that the Canadian and US economies will continue to grow, albeit at a slower pace. The odds of a recession are sliding.

What could change?

This perspective is particularly susceptible to risks if inflation continues at elevated levels, pushing central banks towards a hawkish mode. Nevertheless, the recent CPI reading provides some comfort on that parameter as well.

Another potential outcome is the economic overcooling resulting from consumers experiencing significant financial strain due to two years of high inflation and the impact of elevated interest costs. Although there might be a time delay before these effects fully manifest, the most recent job reports do not currently indicate any immediate signs of an overcooled economy.

The market sentiment is shifting. Bank earnings are coming in strong; companies are beating street expectations and many investors are revising their recession forecasts.

As we always say, time in the market is more important than timing the market.

All the best!

Disclosure: The analyst(s) responsible for this report do not have a financial or other interest in the securities mentioned.