January 10, 2023

Q4 2022 market update: A rebound even as economies weakened

Inflation slowed, but remained high enough to prompt expectations of a recession. Economic growth began to stall in the fourth quarter of 2022. Read on for our view of the global economy and financial markets.


  • Market concerns pivoted from runaway inflation to a possible recession
    • An extended period of rising interest rates cooled the real estate market
    • Consumers and businesses spent cautiously as financial conditions weakened
  • Many central banks slowed the rate of interest rate increases
    • Inflationary pressures began to ease as costs for goods and services rose less sharply
    • To contain inflation, rates might continue to remain high
  • Global markets fared better than the previous quarter
    • Stocks rallied somewhat amid hopes that inflationary pressures had peaked
    • Bond prices also gained as the economy weakened and yields lowered

A turning economic tide

Markets and economists focused on inflation for much of 2022. Most central banks continued raising interest rates aggressively to slow the economy. Notable outliers that held steady interest rates were the Bank of Japan and the People’s Bank of China.

Central bank high-interest-rate policies helped control rising inflation by dampening demand. Inflation may remain high for some time relative to historical levels.

The overall pace of inflation eased. However, it was (and continues to be) above the usually preferred target of 2%. This prompted central bankers to signal that interest rates could stay high for a while.

Attention shifted in late 2022 from controlling inflation to preparing for a recession. The real estate market cooled, signaling slower economic growth. Consumers and businesses spent less because of high rates.

How are major economies doing?

  • The U.S. economy expanded by 3.2%
  • China’s economy grew by 3.9%
  • Europe’s economy slowed but still expanded by 0.3%
  • Japan’s economy contracted by 0.8%

A welcome rally by global financial markets

Global equities across many developed and emerging markets rose in the fourth quarter of 2022.

  • Inflation worries continued. High interest rates used to suppress economic growth may trigger a recession.
  • Rallying might indicate that markets accept the process. Markets also expect brighter days once the recession (whether mild or severe) passes. Economic indicators signalled that the worst of this inflationary period could be behind us.
  • Ten-year government bond yields were generally unchanged. Fears of a recession suggested interest rate increases may slow and eventually reverse course. The yield curve in Canada and the U.S. remained inverted. This indicates shorter-term yields rose more rapidly than longer-term yields.
  • Gold prices rose over the quarter. Many investors turned to this precious metal as a “safe haven” in times of significant political and economic uncertainty.
  • Major oil producers announced they would reduce production. Oil prices finished largely flat in the fourth quarter. Expected weaker demand for oil offset any potential price boost that production cuts typically create.
  • Equities made gains over the period.
  • Uncertainty continued as the lengthy Russia-Ukraine conflict intensified.
  • Lockdown restrictions in China eased but continued and negatively impacted supply chains and the global economy.

How did the Canadian economy do?

Overall it was a decent quarter for the Canadian economy and markets.

  • The Bank of Canada (BoC) raised interest rates twice in the quarter by 50 basis points both times. The key rate ended the quarter at a 14-year high of 4.25%. The BoC expects inflation to remain elevated and for economic conditions in Canada to weaken further.
  • The BoC also noted its resolve to keep interest rates high enough to combat inflation. Canada’s inflation rate was 6.9% year-over-year in October. This figure matched September as the lowest y-o-y inflation rate since April. Canada’s inflation eased in response to a slowing rise in gasoline and food prices.
  • The labour market remained strong despite signs of weakening economic growth. Canada’s unemployment rate shrunk to 5.1% in November. That’s the lowest it has been since July, as the economy added jobs. The labour market stayed strong and with notable upward pressure on wages.
  • Canadian equities gained value over the period as the information technology and real estate sectors were strong.
  • Canadian bond prices advanced as yields ended largely unchanged. The yield on the 10-year Government of Canada bond edged higher.
  • It was a mixed picture for Canada’s economy. Ongoing inflationary pressures clashed with growing concerns about a recession.
  • Annualized gross domestic product in Canada grew 2.9% in the third quarter.
  • Businesses invested in inventories, providing an economic boost. In contrast, consumers spent less and the housing market declined

What can investors expect in the future?

Factor Outlook

Central banks are studying how steady interest rate increases may impact global economic growth. Central banks will likely raise rates in the first quarter of 2023, to tame inflation.

The BoC wants to see Canada’s inflation rate at its 2% target level. Inflation has subsided somewhat but remains too high for the BoC.

U.S. interest rates  The U.S. Federal Reserve Board (Fed) should slow its rate of interest rate increases in the first quarter. The Fed expects rates to reach 5.1% in 2023. This figure is higher than its earlier projections.
World economy Tighter financial conditions and ongoing geopolitical tensions may cause global economic growth to slow. Such a scenario could push some economies into a recession in 2023.
Canadian economy The Canadian economy may come under pressure as consumers contend with high inflation and rising interest rates. Businesses would likewise be impacted by higher rates and fading consumer spending. These challenges might disrupt Canada’s labour market.
Real estate The Canadian real estate market may cool further. Higher mortgage rates and rising debt burdens weigh on many Canadians. 

This commentary contains information in summary form for your convenience. Although this commentary has been prepared from sources believed to be reliable, Sun Life can’t guarantee its accuracy or completeness. Plus, this commentary is intended to provide general information and should not be seen as providing specific individual financial, investment, tax, or legal advice. The views expressed are those of the author and not necessarily the opinions of Sun Life. Please note, any future or forward-looking statements contained in this commentary are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated.

Sign up for FREE personalized tips, tools and offers.

I understand I can unsubscribe at any time and acknowledge that this email address belongs to me. Learn more about privacy and how we collect data to provide you with more relevant content.

Tools & calculators

Budget calculator

Where does your money go? Use this monthly budget calculator to help you manage your spending and understand if you're falling short, breaking even or coming out ahead.

Life insurance calculator

Calculate how much life insurance you might need to help protect the people you love if you die.

Net worth calculator

Use this calculator to find out how your net worth – the difference between what you own (your assets) and  what you owe (your liabilities) compares to other Canadians.

Need financial advice?

Make well-informed decisions with helpful advice. Talk to your advisor or find one near you - there is no cost to talk to an advisor.

Get a quote

You can buy some of our insurance products online.