Good morning,

The surprisingly robust performance of the economy despite punishing interest rate hikes has doused recession fears and raised hopes that we can escape this inflation battle with a so-called soft landing.

Just this past week the International Monetary Fund raised its outlook for the global economy, speculating that risks had receded.

The IMF now predicts global gross domestic product will rise by three per cent in 2023, slower than the 3.5 per cent growth last year, but up from the fund’s April forecast of 2.8 per cent.

At the United States Federal Reserve’s meeting last week chair Jerome Powell said the central bank is no longer forecasting a recession.

But CIBC chief economist Avery Shenfeld cautions against popping the champagne just yet.

“It’s worth noting that a soft landing is still only a mixed blessing for investors, workers and those seeking re-election in North America,” Shenfeld said in CIBC Capital Markets’ weekly note.

Among his “hard truths about soft landings,” Shenfeld said we can say good-bye to the strong job numbers Canada and the U.S. have seen over the past few years.

Central bank rate increases aim to push the job vacancy rate down and unemployment rate up and a final hike in September has not been ruled out.

“If not an outright recession, we could still see a three-quarter period of negligible economic gains, and a half point or so climb in the jobless rate on both sides of the border,” Shenfeld wrote.

Corporate earnings have held up better than expected because the long-expected recession has failed to show up, he said. But the slump in economic growth CIBC expects and the erosion of pricing power in the consumer sector should eventually take some toll.

Equities that are sensitive to interest rates and the bond market will have a tougher time because without a recession interest rates are likely to stay higher for longer.

“While bond yields will rally on the prospect for lower policy rates in 2024 and beyond, that rally will be much more muted than in a ‘hard landing’ scenario,” said Shenfeld.

A soft landing involves much less economic slack, forcing central banks to be more cautious about stimulating the economy by cutting rates.

“If economic slack is modest, we will likely only see overnight rates in the mid-2 per cent territory by 2025, and that could leave 10-year rates struggling to sustain levels much below 3 per cent,” he said.

According to overnight indexed swap data, cited by mortgage analyst Robert McLister, markets are predicting no Bank of Canada cuts for the next year, and only 175 basis points in cuts after two to three years.

Still, Shenfeld says compared to the last two serious inflation threats in the 1980s and 1990s, “Canadians and Americans don’t appear to be facing anywhere near the pain experienced back then to get inflation under control.”

The risk remains, however, that central bankers will overshoot on rate hikes or leave them high too long, pushing the economy into a more serious downturn.

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Canada’s economy eked out a small gain in May, data showed Friday, but not for long, according to Statistics Canada. Gross domestic product grew 0.3 per cent in May, matching economists’ estimates, but preliminary data suggest it shrank by 0.2 per cent in June, the first contraction this year.

If you take into account Canada’s record population growth the picture gets even bleaker, as shown in today’s chart from National Bank of Canada Financial Markets.

National economists Matthieu Arseneau and Alexandra Ducharme say real GDP per capita has been on a downward spiral since the Bank of Canada began hiking interest rates back in early 2022.

They expect “economic lethargy” over the next year as Canadians undergo “interest payment shock,” with growth stumbling to 1.4 per cent this year and 0 per cent next.

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The second half of the year is often more expensive than the first, but there are some ways to minimize the wallop to your wallet. Credit counsellor Sandra Fry has some tips on how to afford some summer fun when money is tight.

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Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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