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As central banks work to tame elevated inflation, the risk of a recession is increasing, CIBC Asset Management’s chief investment officer says. 

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With the war in Ukraine raising energy and food prices, labour shortages leading to elevated wage pressure, and China’s more stringent approach to Covid disrupting supply chains, central banks have started aggressively tightening monetary policy to bring inflation down “almost regardless of the economic impact,” CIBC’s Luc de la Durantaye said. 

As a result, though a global recession is not his base case scenario, he said the probability has increased. The silver lining, he said, is that “the sooner you can tame inflation, the less damage you do to the long-term economic activity.”

The most likely scenario is that central banks generate a “very meaningful economic slowdown” though rate hikes, which de la Durantaye said could help “re-anchor” inflation expectations. Inflation expectations have come back toward central banks’ targets, he said, which means they’ll still have to deliver their hikes, but they won’t necessarily need to do more than what has already been priced into the market. 

In that scenario, inflation peaks later this year and starts to come down in the first half of 2023. 

That said, the risk of a recession remains, though certain factors make it difficult to predict.

Labour demand is slowing, de la Durantaye said, but it remains tight. “You still have a two-to-one ratio in terms of job openings versus available workers,” he said.

There’s also the stalemate in Ukraine, putting pressure on food and energy prices. “What Russia is going to do in terms of its supply of oil and gas to Europe could determine whether Europe goes into a recession,” he said.

Ongoing lockdowns in China and the implications for supply chains also remain uncertain, de la Durantaye said.

“There are elements that continue to force the central banks to raise interest rates, create a meaningful slowdown to manage inflation, and that’s certainly going to be continuing to be priced in financial markets,” he said.

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