Long-Term Forecast

United States

• After the strongest annual average growth in nearly 40 years (5.7%) in 2021, US economic growth is set to slow to a 1.9% pace in 2022. Looking into 2023, economic growth is expected to decelerate further, as monetary policy moves well into restrictive territory, pushing growth to a sub-trend pace through 2024. Growth is expected to average 0.9% in both 2023 and 2024, respectively. 
• The labor market has continued to perform better than expected. Labor demand remains just off historic highs, while the pool of available workers continues to shrink as the participation rate has shown no improvement through 2022. This combined with a weaker pace of  economic growth should give way to a slower pace of hiring – putting upward pressure on the unemployment rate. We now expect the unemployment rate to rise by 1.5%-pts between Q3-2022 and Q2-2024, reaching a peak of 5.1%, before gradually moving back to its long-run average of 4%. 
• Inflation has slowed from its multidecade highs and we expect to see a meaningful deceleration through 2023. However, the core PCE deflator (the Fed’s preferred measure of inflation ) isn’t expected to reach the FOMC’s average 2% inflation target until the end of 2024. 
• Monetary policy is expected to become far more restrictive than previously thought. We now project the Fed funds rate to reach 5% in early 2023 and remain at that level through the third quarter of 2023. As higher rates cool demand-side pressures and inflation moves meaningfully back towards 2%, we expect the Fed to cut interest rates back to a level more consistent with its neutral (2.25%) rate. 

Canada

• The narrative for Canada is similar to the economic backdrop to the south. Near-term spending is likely to grow at a modest rate amid resilient job market conditions. However, high inflation and rising interest rates will increasingly take their toll on spending and hiring in 2023 and through 2024.
• The unemployment rate outlook reflects a peak of 6.5% that corresponds to 110 thousand job losses. There is a risk that Canadian employers may go further. Although the job market reflects tightness based on high vacancy and low unemployment rates, the degree of tightness is not as pronounced as its U.S. counterpart. 
• Inflation has likely peaked in Canada and we expect further easing in price pressures in 2023 and 2024. This, in combination with higher interest rate sensitivity should provide a lower stopping level for the Bank of Canada on its rate hike cycle. 
• We deem the peak overnight rate to be 4.5% in the first quarter of 2023. Both short-term and long-term bond yields are likely to decline over 2023 as the weak economic backdrop causes increasing expectation for policy rate cuts. We assume the rate is reduced back towards its neutral level starting at the end of 2023, with the rate reaching 2% by 2025.