Europe avoided catastrophe and China got back on track. The fight against inflation is slowly starting to bear fruit, but the bankruptcy of Silicon Valley Bank increases the risks of a recession in the United States. The economic landscape has changed considerably since the start of the year, forcing economists to revise their forecasts.

Three of them set the record straight on Tuesday, at the invitation of the Cercle finance du Québec.

It was to be the most anticipated recession of all time, recalled Sébastien McMahon, chief economist of IA, who led the discussion with two guests, Matthieu Arseneau, of the National Bank, and Jimmy Jean, of Desjardins.

The bankruptcy of Silicon Valley Bank (SVB), which is a consequence of this rapid monetary tightening, is confusing the cards and making the task of the Federal Reserve (Fed) even more delicate, according to him.

Inflation slowed in February in the United States, from 6.4% to 6.0% on an annual basis, which is still too high for the American central bank, which has already announced its intention to raise its rate further energetic manager. Will the shock wave caused by the bankruptcy of SVB in the financial markets make the Fed back down?

It should not, says Jimmy Jean, chief economist of Desjardins.

This is also the opinion of Matthieu Arseneau, Deputy Chief Economist of the National Bank, who points out that the measures taken by the American government following the collapse of SVB have been “very robust and very credible”, and should be sufficient limit the damage to the economy as a whole.

The Federal Reserve could, however, play it safe and raise its rate by just 25 basis points, rather than 50 basis points as was discussed just a few days ago.

In Canada, signs of slowing inflation are more evident. According to Jimmy Jean, the inflation rate should be back within the Bank of Canada’s target range of 1% to 3% by the end of this year.

The cost of international shipping is steadily falling, which should affect the price of most goods. According to the Freightos Container Shipping Index, the cost of shipping between Asia and the US East Coast has fallen 88% over the past year.

“We’ve moved on,” he said, although it will be a few months before we see the impact at the grocery store.

The inflation rate is already below the Bank of Canada’s target, said Matthieu Arseneau. “Without food, energy and mortgage costs, inflation is 1.8%,” he observes.

The Canadian and Quebec economies are holding up so far, but perhaps not for long.

The National Bank’s economic scenario has been revised downwards and now forecasts a few negative quarters, and that of Desjardins, which already incorporated a slight recession, shifts it towards the end of 2023 and perhaps into 2024.

The Canadian economy is even more vulnerable to rising interest rates than the US economy, says Matthieu Arseneau.

The construction and real estate sector, very sensitive to interest rate increases, occupies a larger place in the economy as a whole and there are more variable rate and short-term mortgages than in the United States, where 30-year terms are common, also notes Jimmy Jean.

Even though the Canadian economy started the year off on the right foot, particularly in the job market, the drop in corporate profits and weak investment will eventually have an upward impact on the unemployment and the downturn in the economy.

So far, the number of overdue loans has remained stable, both for households and businesses, but that can change quickly, believe the two guest economists.

Neither, however, believes in the apocalyptic scenario put forward recently by renowned strategist François Trahan, who believes that the worst is yet to come in terms of inflation and the economic slowdown. “I don’t see how inflation can start accelerating again in a moribund global economy,” said Matthieu Arseneau.