Growth holds firm amid inflation drag

Oil prices may ease slightly but will remain higher than pre-war levels, and this will trim global growth modestly, says Eric Morin, global head of research at CIBC Global Asset Management.  

“We have a growth outlook for the global economy that is 3%,” he said in a May 6 interview. “This is close to trend or potential. Without the oil shock, we would be at about 3.3%.” 

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Global Asset Management. 

Inflation may lift slightly, with core CPI rising 0.3% to 0.4% in most countries over the next 12 months, he said. “This is something that is an impediment to risky assets, but it’s manageable pain, simply because the impact is limited.” 

And unlike in 2022, when strong consumer demand drove inflation, secondary effects are expected to be limited, Morin said. With inflation now rising alongside weaker demand, any increase should remain contained at around 0.5% to 1% in Canada and the U.S.  

Meanwhile, ongoing disinflation in Canada should allow the Bank of Canada to hold rates and look through the shock, he said.  

In Canada, job creation is at near zero, and weak demographics due to new immigration policies create a “lacklustre outlook,” Morin said. “We also have an outlook in which private investment will remain weak and where housing tailwinds will likely decline. As a result, we think the Bank of Canada will be willing and able to look through the shock and do nothing.” 

Looking ahead, Morin said the BoC will eventually have to hike its policy rate by about 25 basis points to bring it towards neutral. 

The ECB and Bank of Japan may need to hike sooner, given a larger inflation shock due to their reliance on liquefied natural gas, he said.  

“For the central bank, this means more upside risk on inflation due to second-round effects. The shock is bigger, but also monetary policy is accommodative in both cases. Growth will be at or slightly below potential looking at the next four quarters.” 

In the medium term, both economies may outperform, Morin added, due to tailwinds from military investments and technology.  

Opportunities 

Energy stocks still have upside as oil stays above pre-war levels, Morin said, creating free cash flow for producers. With Brent around $90 for the next four quarters, there’s continued wealth transfer from importers to exporters. And this will be positive for Canadian energy stocks.  

China is another market that may offer opportunities, he said, as it moves up the value chain with a strong trade surplus. This creates a favourable backdrop for emerging market stocks and bonds, as well as currencies over the next 12 months.  

Meanwhile, Morin said the U.S. dollar is overvalued and could depreciate amid increasing downside pressure due to trade and fiscal deficits.  

“That said, the magnitude of the downside pressure will be contained by the fact that the next 12 months, global growth will be close to its trend, and the U.S. dollar is a counter cyclical asset.” 

This article is part of the Advisor To Go program, sponsored by CIBC Global Asset Management. The article was written without input from the sponsor.