Jan 12, 2023

Three Economic Factors to Watch


Last year was yet another year marred by significant macroeconomic and financial market uncertainty. Throughout 2022, markets were volatile and the global economic backdrop was hazy. The combination of pandemic-era spending and lingering supply chain challenges resulting from the coronavirus pandemic drove consumer prices to 40-year highs. In addition, the economic impact of the Russian invasion of Ukraine also led to significant price pressures. Finally, as global central banks began to use their toolset to reduce aggregate demand and inflation by significantly increasing policy interest rates, market volatility rose markedly and both equities and rates markets nosedived last year, a rare occurrence.

As we dive into 2023, AIMCo’s economic experts are monitoring three key factors expected to impact markets worldwide — recession, rates and reopening.


The issue of sustained high inflation has affected markets negatively and is beginning to weigh on economic growth. Even though labour markets are healthy on the surface, the run-up in prices could push businesses to their limits causing a wave of cost cutting measures and unemployment to move higher, shoving the economy into recession. While a recession is plausible, our baseline view remains one of mild stagflation. In 2023, this would be a situation characterized by declining, yet stubborn inflation, higher unemployment, stagnant demand and, consequently, low growth for most of the year. Consumer stress is beginning to mount higher and is the direct result of higher food, service and energy prices as well as mortgage rates and housing costs. While these factors do not impact low, middle and high-income households to the same extent, in 2023 they will likely harm overall consumer confidence and could cut into consumer spending and housing, two of the most important economic growth drivers in North America.

In 2023, it is possible that prices will continue to rise further than central banks desire. The national inflation rate is likely to stay above inflation targets in many countries despite the consequences of any upcoming interest rate decisions given the protracted process for rate hikes to be felt throughout the economy. In Canada, it is likely that stubbornly high inflation could join forces with higher rates to weaken demand and cause the domestic economy to slow down materially. We anticipate that real gross domestic product (GDP), or economic growth will not necessarily land in negative territory for the year as a whole, but will feel frustratingly slow for businesses and Canadians.


To date, central banks around the world have done their best to control the significant run-up in prices. While Canada’s 2023 annual inflation rate will most likely be lower than last year, this year’s consumer price gains are likely to continue to grow faster than the Bank of Canada’s prefers, outside of their target of 1-3% annually. It is for this reason that there is at least one more rate increase expected in Canada, likely in the first half of the year. Abroad, the Fed and the European Central Bank have made it clear that they are not finished with rate increases yet. This could mean rate hikes continue even into the second half of 2023, albeit at a slower pace and magnitude. Central banks in most emerging countries, in contrast, may already be done raising policy interest rates. The number and extent of potential additional rate increases in developed countries is a threat to global growth and is something AIMCo continues to monitor closely.

Given the current stickiness of prices and the lag in transmitting the rate hikes’ impact, the main point to take away is that there is little to no scope for rate cuts in the year ahead, at home and away. In fact, it is more likely that central banks will maintain higher rates until the dilemma of high inflation is solved — a process that could take the majority of this year.


For nearly three years, a steadfast zero-COVID policy in China caused supply chain woes across the world. The result? High inflation. China’s policy wreaked havoc on supply chain and caused prices to skyrocket due to business and factory closures which affected cars, computers and even aluminium cans. Indeed, the policy significantly impacted China's own economic activity.

Now, China has decided to cancel its zero-COVID policy and is reopening. The impact is expected to ripple across the world and could play out in two ways.

First, fewer COVID-related production shutdowns might mean fewer supply chain bottlenecks. This could ease inflationary pressure as a result of shortage. However, loosening the policy has already had its negative consequences. There are reports of China’s hospitals in disarray and widespread infections appear to be posing civic and commercial challenges of their own. China’s reopening is bound to be uneven in its pace whilst primarily taking place over, at least, the first half of this year.

Second, as China's economy once again picks up speed after its slumber, operating at a higher speed (not full speed as its external sector might suffer from lower global growth and reduced exports) might put upward pressure on worldwide commodity prices as demand rebounds. Both effects could play a crucial role in determining the trajectory of global economic trade and growth as well as prices in the short and medium term.


The current tightness in many labour markets worldwide and elevated but gradually declining inflation, present continued monetary policy challenges. Various developed market central banks may have further to go in their respective rate hiking cycles before pausing to assess their slowing effects on demand and price trends. Key to this year’s global growth is the extent to which China will reopen its domestic economy. Moreover, in Canada and the U.S., while a recession is plausible, a continued mild stagflation in 2023, instead, is also a likely economic outcome.

Overall, the uncertainty related to the likelihood of a recession, interest rate decisions and China’s reopening are expected drive volatility in global markets. This, in turn, potentially sets the stage for attractive, select investments in the diversified client portfolio AIMCo manages.

This article contains forward-looking statements with respect to economic conditions. Such statements address future events and conditions, and therefore involve inherent risks and uncertainties. Although AIMCo believes that the expectations and assumptions on which the forward-looking statements are based are reasonable, AIMCo can give no assurance that such statements will prove to be correct. Accordingly, AIMCo disclaims any and all responsibility for the continued truth of such statements at any future date.

This article is of a general nature only and does not purport to take into account all considerations that may be relevant to any particular individual or organization. As such, this article is not intended to be, nor should it be construed to be, investment advice to any particular individual or organization.