The surge in inflation and the rise in interest rates did not cause the apocalypse that some had predicted nor the recession predicted for almost two years. Not yet, but the worst is to come, according to a panel brought together by the Montreal Council on International Relations to debate the global economic situation.

The economic cycle is longer than in the past, but it is following the same path as usual, estimates Martin Lefebvre, strategist and chief investment officer at National Bank Investments. “Interest rate increases are always followed by an economic slowdown or recession,” he stressed. There was never such a thing as a soft landing. »

The performance of the American economy is better than expected, he notes, but that is explained by excess savings which stimulated consumption, and it is coming to an end.

“There is a slowdown in growth coming and it’s major because it represents 60% of the [American] economy.”

Significant government spending, which has remained at a high level since the end of the pandemic, also continues to support the economy, notes Vincent Delisle, first vice-president and head of liquid markets at the Caisse de dépôt et placement du Québec. .

“Governments are spending like crazy,” he says, giving the example of the United States’ Inflation Reduction Act. This explains why the economy takes time to slow down. »

In Canada, monetary policy is working and the economy has started to plunge. In the United States, the worst is yet to come, believes Martin Lefebvre, in particular because households have mortgages with longer maturities (up to 30 years) and they have not yet suffered from increases in interest rate.

If persistent inflation and high interest rates end up overcoming the resilience of the economy and the labor market, we should not expect a rapid decline in interest rates, due in particular to the generalized increase in debt.

We often talk about high debt in emerging countries, but it is also a problem in industrialized countries, underlines Jimmy Jean, chief economist and strategist of Mouvement Desjardins, who already sees “the wall of debt” of governments, of businesses and individuals who will need to be financed or refinanced.

He gives the example of the United States, where debt service has almost doubled in a short period of time. “And we’re still expanding; what will happen if there is a recession? “, he asked.

Another factor that will contribute to fueling inflation and keeping interest rates high is deglobalization, also called reshoring, that is to say the tendency to repatriate production to countries where the costs of labor are higher. The United States is making major reindustrialization efforts, particularly in the semiconductor sector and the electrification of transportation.

Globalization, which for a long time helped to contain inflation, is “a tailwind that we have lost,” notes Vincent Delisle.

For the moment, however, no figures indicate that deglobalization is underway, said Marie-France Paquet, chief economist of Global Affairs Canada.

There are clues, “but in the numbers we don’t see much, neither in Canada nor in the United States,” she said.

Foreign investment in China is not declining, she clarified, and if trade in goods is slowing its growth, trade in services is booming.