Short or shallow, any recession will push us into a bear market, it is coming: David Rosenberg
The Bank of Canada and the U.S. Federal Reserve have cautioned that future rate hikes are likely as the fight against inflation continues, but one economist says their persistence might cause a long-lasting recession.
Canada’s central bank surprised economists with a rate hike this month, bringing the country’s overnight lending rate to 4.75 per cent. The U.S. Fed held rates at its latest meeting, but Chairman Jerome Powell has warned that future hikes might be necessary to bring inflation to the central bank’s desired two per cent target rate.
These aggressive policy moves to tame inflation will undoubtedly push Canada and the U.S. into a recession that will take a while to come out of, David Rosenberg, president, chief economist and strategist at Rosenberg Research, told BNN Bloomberg in an interview on Wednesday.
“Once a recession starts, they (the central banks) are not going to be easing policy sufficiently to generate the next recovery, so this could be a long recession – not a deep one but a long one,” Rosenberg said. “As an investor that wouldn’t make me feel very good.”
He made the case that although a recession has not begun, it is foolish to think it won’t. He explained that the heightened interest rate environment hasn’t yet materialized into a recession because consumers are still holding on to the fiscal support they obtained during the pandemic.
“Once all the multiplier impacts from the fiscal stimulus fade into the rearview mirror, the lagged impact of everything that the Bank of Canada has done, and the Fed -- and we haven’t felt the full impact yet -- that’s going to the big story for the next 12 to 18 months,” he said.
Rosenberg also warned that even though North America may not experience a deep recession, it could still have a massive impact on the markets.
“You’re going to hear a lot of this hand-holding, don’t worry it’s going to be a mild recession, it’s going to be a shallow recession. That doesn’t matter – ultimately you’re paying for earnings not gross domestic product (GDP) anyways,” he explained.
Rosenberg pointed to the shallow 2001 recession which posted a 0.2 per cent decline in GDP, yet the Nasdaq still entered a bear market for three years.
“The compounding effect of even a mild recession on earnings, and what it does to the multiple, will still lead you into a fundamental bear market,” Rosenberg warned.