The year 2022 was punctuated by multiple economic shocks: high inflation, the war in Ukraine, the sharp rises in interest rates, the stock market rout, the marked fall in the bond market, the collapse of cryptocurrencies, the surge gasoline, the escalation of the residential real estate market...

After having dramatically raised their respective key rates in an effort to counter inflation, the US Federal Reserve (Fed), the European Central Bank and the Bank of Canada now risk plunging us into recession.

While the Bank of Canada seems to want to give us a break by keeping its key rate at 4.25%, the Fed monks have hinted that they will continue to tighten American monetary policy. Their next tightening could push the policy rate to 5%.

Whether the global, American, Canadian or Quebec economies fall into recession in 2023, there is no doubt that the odds are very high.

The challenge for central banks? It is to slow down their respective economies enough to bring inflation down to 2-3%, while not causing a serious economic crisis. Easy to say, but not easy to do!

The ideal

Ideally, under the circumstances, it would be a soft landing for the economy.

According to economists at National Bank Financial, this scenario could be envisaged, as domestic demand has cooled, as well as the labor market and the housing market.

“Consumers are simultaneously suffering from a loss of purchasing power, an interest payment shock and an unprecedented negative wealth effect. In our view, it will not be necessary to keep interest rates at such high levels for long to calm inflation and we therefore expect the central bank to lower them in the second quarter of next year. »

Given the monetary tightening, they expect the economy to stagnate in the next three quarters. This would translate into anemic growth of 0.7% in 2023.

Desjardins Group economists, for their part, forecast a short and moderate recession. But a recession that could, they say, stretch into the third quarter.

“Risks to our outlook remain tilted to the downside as households increasingly face the reality of higher mortgage debt costs. »

The situation in Quebec

The Quebec Ministry of Finance is relatively optimistic, predicting real GDP growth of 0.7% and export growth in real terms of 1.6% in 2023. And inflation is expected to rise by 3.7%, 5 percentage points less than this year.

With such weak economic growth, job creation should have a modest year. The Department of Finance anticipates adding just 31,000 jobs in the new year. This is 3.3 times less than in 2022 when job creation was expected to reach 103,400.

As for the unemployment rate, it is expected to hover around 5%, up half a percentage point for 2022 as a whole.

Wage growth will slow from 10.5% this year to a meager 3.5% in 2023.

Disposable income per capita is expected to stay flat or close to $35,537.

real estate

The sharp rise in interest rates has significantly cooled the residential real estate market.

Many potential new buyers will now wait for mortgage rates to start falling again before buying a property.

As a result, the average price of properties should come under downward pressure in several regions of Quebec. Like 5 to 15% from the all-time high of last April.

Construction of new homes will inevitably slow down.

The obligations

After a really pocket-sized year in 2022, the bond market for negotiable bonds and the market for other fixed-income securities should possibly return to its upward trend in 2023. Or in the worst case: stop losing feathers.

You should know that the market value of marketable bonds goes down when interest rates go up, and vice versa, it goes up when rates go down.

Barring an incredible surprise, interest rates will soon stop rising. And after several months of stability, they could start falling again in the last quarter of the new year. The decline would continue in 2024.

The Stock Exchange

Despite the looming global recession, 2023 is expected to prove more "rewarding" for investors than 2022, a truly disastrous year for major equity indices like the Nasdaq and the world's most popular index, them

Note that the profitability forecasts are still very modest.

Rather than end up with heavy losses, as is the case this year, investors should---at the very least see their portfolios stabilize in 2023 in order to reposition themselves when the bull market returns.

And with a bit of luck, investors might even reap modest gains.

Happy New Year 2023!