Despite the steady drumbeat of negative market action and worrying headlines, DBRS Morningstar expects the Canadian and U.S. economies to enjoy a relatively soft landing.
In its latest forecast, the rating agency acknowledged that the risk of recession has increased significantly over the past six months, amid intensifying downside risks.
“However, we think a soft landing is still the most likely scenario due to tight labour markets, strong consumer spending, and a relatively positive outlook for business investment, particularly in Canada where high commodity prices are boosting profitability,” it said.
Economic momentum looks set to slow over the next 12–18 months, the report said, as monetary policy tightens to combat high inflation, which was initially sparked by external factors, such as high global commodity prices and supply chain disruptions, but is increasingly being driven by excess demand.
“These inflation dynamics highlight that even as year-over-year inflation may start to decline within the next several months, the path back to 2% will likely be gradual,” it said.
While both the U.S. Federal Reserve and the Bank of Canada appear to be tackling inflation more aggressively, DBRS said it’s not clear whether their actions will be enough to tamp down that excess demand.
“Slower global growth, tighter macroeconomic policies, and less favourable financial conditions will likely slow growth over the next four to six quarters,” the report said.
“The extent of the slowdown will largely depend on whether nominal wage growth persists and consumers continue to draw down savings,” it noted.
While a recession can’t be definitively ruled out at this point, “Absent further shocks, strong underlying demand in the U.S. and Canada suggest that if there is a recession in the next 12 months, it would likely be shallow and short-lived,” it concluded.