The Globe and Mail

October 3, 2022

The global economics team at Credit Suisse slashed their world growth estimates for 2022 and 2023 this week while also providing a less than encouraging outlook for the Canadian economy. Investors should be very careful with cyclical, growth-sensitive stocks for the foreseeable future.

Economist Ray Farris used the disquieting title “The worst is yet to come” for Credit Suisse’s quarterly outlook. Mr. Farris cited persistent inflation pressure as the core reason for his pessimism and predicted “a deteriorating economic environment for risk assets” for the next six to nine months.

Credit Suisse dropped its 2022 global GDP forecast to 2.6 per cent from 2.9 per cent. An even deeper cut to 2023 expectations sees the growth estimate fall to 2.1 per cent from 2.6 per cent.

Wenzhe Zhao is Credit Suisse’s economist covering Canada. His forecast currently features reasonable 3.4 per cent GDP growth for 2022 but a far weaker 1 per cent growth rate in 2023 – with a mild recession during the course of the year.

The economist wrote that “the risk of a real interest rate shock to the Canadian economy is rising.” He expects the Bank of Canada to push its overnight rate to 4.5 per cent, up from the current 3.25 per cent, to combat inflation pressure. This level will eventually depress spending for consumers still carrying near-record levels of debt.

Credit Suisse believes that the higher borrowing costs will push the housing market into an even sharper contraction. The domestic economy has become extremely dependent on real estate markets with residential construction climbing to 40 per cent of total investment for the entire economy. A reversal in this trend would help push the economy into contraction.

The economist expects that an expanding working age population – growing at the fastest rate since 1996 – will help mitigate wage inflation. Immigration has accelerated. CIBC economist Avery Shenfeld noted Thursday that the 285,000 jump in Canada’s population in the second quarter of 2022 was the largest nominal increase since Newfoundland joined Confederation.

Weaker commodity prices are already reflecting these concerns about global growth. The S&P GSCI Industrial Metals Spot Index is down 19.1 per cent year to date, and the West Texas Intermediate crude price is set to end September with a monthly loss of more than 10 per cent.

A significant recovery in the commodity space is unlikely until the economic outlook improves. Other cyclical sectors including consumer discretionary and industrials should also remain under pressure.

-- Scott Barlow, Globe and Mail market strategist

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