Page 15 - ISQ Outlook 2023

INVESTMENT STRATEGY QUARTERLY

“ Once inflation is under control, the Fed will start relaxing

monetary policy and the normal catalysts for growth will, once

again, take over to deliver stronger economic growth. ”

prices slowing down, the sooner the Fed is going to start pivoting.
The second important indicator is inflation expectations. So far, KEY TAKEAWAYS:
the Fed has been successful in keeping long-term inflation expec- • 2022 started on a positive note but was derailed
tations contained. To win the battle against inflation, the Fed by the Russian invasion of Ukraine which severely
needs to keep long-term inflation expectations in check. impacted food and energy prices globally.

WHAT DOES THE U.S. ECONOMY NEED TO START • Still-strained supply chains, the large accumula-
GROWING AGAIN? tion of savings during the pandemic, and a strong
The current economic cycle is very different from previous eco- labour market made it impossible for inflation to
nomic cycles in that the service sector is expected to continue to come back down, triggering a very strong response
expand while goods sectors struggle. That is, big-ticket item pur- from the Fed.
chases such as automobiles and homes, are going to continue to • The Fed is expected to continue increasing the fed
struggle until interest rates start to come down. Before that hap- funds rate until March of 2023, taking the terminal
pens, high interest rates are going to continue to push the price of federal funds rate for this cycle to 4.75% to 5.00%.
these items down, bringing these sectors into a better equilib- • We expect inflation to be below 3% by the end of
rium. Both automobile prices and home prices are expected to 2023. This will require the Fed to stay put for the
decline in 2023, and this should help ease pressures on inflation whole of 2023 as inflation will not go down to the
as well as on affordability. 2% target until well into 2024.
The health of the service sector will also be impacted by employ- • We are forecasting a mild recession in 2023, during
ment growth as well as real income growth. We expect employment which we expect the economy to remain flat, and
to deteriorate during the year as we expect a mild recession, weak- to start growing again at a rate of only 0.8% during
ening real incomes further. Thus, we expect some weakening of the 2024.
service side of the economy. However, if inflation continues to
come down, the effect on real incomes is going to start taking over
and this will help keep the economy from weakening further. The
bottom line is that once inflation is under control, the Fed will start
relaxing monetary policy and the normal catalysts for growth will,
once again, take over to deliver stronger economic growth. That is,
the housing market will start to grow again, and this will push resi-
dential investment higher as well as produce an increase in
employment in the sector. The biggest risk for this year and into the
next will be the labour market. The current labour scarcity is not
expected to improve that much over the next couple of years,
although weaker economic growth this year and next will help
reduce the pressures coming from a tight labour market.

15