Stocks Enjoy Brief Rally But Canada Is Still Heading for a Recession

The year started out strong for the stock market. In January alone, the TSX and S&P 500 both rallied more than 6.5%. But over the past month, stocks have taken a hit, with the failure of Silicon Valley Bank injecting fear into growing concerns about additional bank runs.

That said, turmoil in the banking industry appears to be ebbing with the U.S. Federal Reserve saying the U.S. banking system is sound and President Biden looking to push new banking reforms.

The Bank of Canada has said it is ready to step in if a global meltdown spills over into Canada. But the central bank does not think it will need to do that since Canadian banks are some of the most respected financial institutions in the world and are in a different sphere than regional banks in the U.S.

How Are Canadian Stocks Doing?

Stocks are also getting a boost on encouraging U.S. economic data. The number of Americans who filed for unemployment benefits in the U.S. rose to 198,000; higher than the 196,000 projected by economists. This is good news because it means there is a softening in the labour market.

Falling Treasury yields are also helping juice the broader stock market. Lower yields and a weakening labour market suggests the market is expecting the Federal Reserve to either pause its rate hikes or raise them at a slower pace. The Federal Reserve will announce its next interest rate decision in May.

Will Canada Enter a Recession in 2023?

Investors are feeling a little more confident but that doesn’t mean there aren’t other issues at play and other challenges won’t emerge. We’re still faced with stubbornly high inflation and elevated interest rates. Higher interest rates makes borrowing more expensive for home and car loans and much steeper credit card interest rates. It also makes it more expensive for businesses to borrow too.

Elevated borrowing costs, an economic slowdown in the U.S., and decades high inflation could squeeze Canada’s economic growth in 2023. While many economists have said they expect Canada to enter a recession this year, the Royal Bank of Canada expects both the U.S. and Canadian economies to enter a mild recession in the second and third quarter of 2023.

According to analysts at The Royal Bank, every province and territory in Canada will take an economic hit, with the exception of Newfoundland and Labrador, which is benefitting from increased offshore oil production.

Other oil producing provinces like Alberta and Saskatchewan are expected to do better than the rest of the country. The outlook for Ontario, Quebec, and British Columbia is worse, where corrections in the real estate market and higher household debt are having a bigger economic impact.  

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