Long-Term Forecast

United States

• After a better-than-expected year for economic growth in 2023, the U.S. economy is forecast to slow to a below-trend pace in 2024 as the impact of higher interest rates weighs on demand. By 2025, growth is expected to be on the upswing again as rates normalize, with the economy settling back to trend growth (~2.0%) over the medium term. 
• The unemployment rate is expected back to edge up to its long-run average of 4% by year-end. 
• Inflation has slowed from its multi-decade highs and is expected to continue to drift lower over the next few years. Core PCE inflation (the Fed’s preferred measure of inflation) isn’t expected to reach the FOMC’s 2% inflation target until late-2025. 
• We project the fed funds rate to remain in the 5.25% to 5.50% range until the end of 2024. 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 (3.0%) rate. 

Canada

• Following an economic slowdown in 2023 and 2024, Canadian output is expected to rebound in 2025 and 2026. Thereafter, real GDP growth is expected to decelerate to its long-run average of around 1.8% annually. Population growth is expected to decelerate in the coming years after its recent boom, boosting labour productivity growth. 
• Consumer spending will undergo a period of below-trend growth through 2026, as Canadian households save more in the face of high mortgage debt. 
• Business investment is expected to grow above trend over the forecast horizon. The need to build more homes will boost residential investment, and the opportunity to fast track the clean energy transition will cause a lift to investment in structures, machinery, and equipment. 
• After a period of high inflation, we expect headline and core consumer price inflation to decelerate back to the 2% target over the medium term.
• With inflationary pressures easing over the medium term, the Bank of Canada will be able to cut its policy rate back to the neutral rate of 2.25% by 2026. We expect the loonie to return to the 75 U.S. cent level once Canadian economic growth is able to catch-up to that of the U.S.