- “Inflation is sticky, growth is slowing—and that’s a dangerous mix for companies without pricing power.” — Alpha Ba, CIO, Pillow Investment
- Rising Labour Costs: Unit labour costs are climbing across developed economies, putting pressure on corporate margins—especially for companies without pricing power
- Slower Growth Ahead: The IMF forecasts sub-2 per cent GDP growth for both the U.S. and Canada in 2025, with inflation remaining above 2 per cent, raising stagflation concerns
- U.S. equities remain pricey, while European and Chinese markets are delivering stronger returns at lower valuations
Expert Exchange with Alpha Ba, Chief Investment Officer, Pillow Investment
This article is a journalistic opinion piece which has been written based on independent research. It is intended to inform investors and should not be taken as a recommendation or financial advice.
The global economy is entering a new phase—marked by sticky inflation, sluggish growth, and rising costs. As the International Monetary Fund (IMF) outlined in its April World Economic Outlook, both the U.S. and Canadian economies are facing a slower road ahead, with risks emerging not just locally, but across global markets.
We sat down with Alpha Ba, CIO at Pillow Investment, for the latest edition of Expert Exchange, to get his macro view on where things are headed, what investors should watch, and which companies are best positioned to weather the storm.
Stagflation Fears Take Center Stage
According to Alpha, the IMF’s latest forecasts suggest below-trend GDP growth and elevated inflation through 2025—conditions that resemble early signs of stagflation, a scenario where growth stalls but prices remain high.
- U.S. GDP is expected to slow to 1.7% in 2025 (from 1.8% in 2024).
- Canada’s GDP is forecast to edge up slightly to 1.6 per cent in 2025 (from 1.4%).
- Inflation in both countries is projected to hover between 2–2.5%, remaining above central bank targets.
“This mix of low growth and high inflation is particularly dangerous for companies,” Ba noted, “especially those without pricing power.”
Rising Unit Labour Costs Squeeze Margins
Pillow Investment’s proprietary analysis on unit labour costs adds another layer of concern. Labour costs—an important component of business profitability—have risen significantly in developed markets:
- Canada: From 2.9 % in 2019 to nearly 4 % in 2024
- U.S.: From 2% to 3.1%
- Germany: From 3% to 5%
“These increases act as a headwind to margins,” says Ba. “Unless companies can pass those costs onto customers, they’ll see declining earnings and stock performance.”
Alpha BA, CIO Pillow Investment
Winners and Losers: Who Has Pricing Power?
In this environment, pricing power becomes a key investment filter.
- Winners: Companies like Dollarama and Constellation Software, which can pass on rising costs to consumers without losing demand, are seen as well-positioned.
- Losers: Commodity businesses or companies in highly competitive sectors may struggle to protect margins and could face downward pressure on earnings and stock prices.
Global Valuation Outlook: Canada Lags, U.S. Overpriced
Valuation disparities are also becoming more pronounced:
- Canada: Lowest projected EPS growth at 8.4 per cent, with stocks trading at 16x earnings
- U.S.: Projected growth between 12–14 per cent, but at a steep 22x earnings
- Germany and China: Similar growth rates at significantly lower multiples, offering more attractive risk/reward profiles
Notably, EU and Chinese markets have outperformed year-to-date, while the U.S. has lagged after a decade of dominance.
The U.S. Shift: From Global Anchor to Risk Factor
Alpha pointed to a critical geopolitical shift: “The U.S. used to be a stabilizing force in global economic policy. Now, with higher tariffs and unpredictable fiscal strategy, it’s become a destabilizing one.”
He highlighted how recent tariff threats by the U.S. administration rattled bond markets and forced political backtracking—an indication that capital markets still hold sway. “As long as debt levels are high, the bond market will limit how far policy can stray,” he said.
Canada’s Response: Smart Policy in a Challenging Climate
On Canada’s side, Ba praised the federal government’s three-pronged approach under Prime Minister Mark Carney:
- Freeing up interprovincial trade—removing internal barriers that act like a 7% tariff on Canadian goods
- Investing in infrastructure—improving long-term productivity
- Diversifying trade relationships—turning focus to growing markets in Asia and Europe
“This is a forward-thinking strategy,” Ba said. “While Canada may face slow growth, these policies lay the groundwork for more resilience and competitiveness over time.”
Energy vs. Tech: The Power Trade-Off
Alpha also warned about the unintended consequences of U.S. tariffs on industrial sectors like aluminum and steel. Smelters require 300–900 megawatts of power, compared to 10–100 megawatts for data centres. Redirecting investment away from high-tech industries into energy-hungry, low-yield sectors could reduce long-term economic efficiency.
The Bottom Line
Investors face a more complex and regionally fragmented world than in previous years. While the U.S. economy remains dynamic, its rising risk profile and high valuations may cause capital to flow elsewhere. Canada, while slow-growing, is pursuing strategic policies that could pay off in the long run. And across Europe and Asia, lower valuations and stronger relative performance are opening new opportunities.
For more Expert Exchange interviews and insights, check out Ba’s Stock Picks from Latin America to Canada. Previously, Ba also gave a global market update in the the trade war disruption,
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