Global Quarterly Economic Forecast

Landing the Plane 

Date Published: December 14, 2023


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  • After the global economy defied expectations in 2023, we expect economic growth to reach its low point in the first half of next year. The speed of the recovery thereafter depends on how motivated central banks are to normalize monetary policy.  
  • In the fight to outstrip expectations this year, the U.S. economy won by a wide margin. But, the tailwinds that drove above trend growth will die down next year. That, combined with 2% inflation within the Federal Reserve’s sights, should produce rate cuts in the second half of the year as the central bank tries to pull off the elusive soft landing.  
  • With Canada’s economy already sputtering, the Bank of Canada will be out in front in cutting rates, likely in the spring. Recession risks are higher north of the border, with a bumpier landing in store.

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Canadian Forecast

U.S. Forecast

Chart 1 titled Core inflation shows signs of improvement shows recent core inflation trends for Canada, the U.S. and the Euro Area from January 2022 to October 2023. It shows that core inflation in the U.S. and Euro area  has been trending steadily downward, which the Euro Area falling below 2% in October. However, Canada, which saw inflation decelerate earlier has plateaued around 3.5%

‘Tis the season when forecasters reflect on the past year: what we got right and where we missed the mark. The big miss has been stronger global economic growth, but this is mostly attributed to the U.S. economy. Canada stepped more in line with our expectations, but not for those who called for a recession due to its defiant job market. With each passing quarter, the soft landing narrative went from being a long shot to the more likely outcome, particularly when it came to the American economy. The Federal Reserve and Bank of Canada were also caught off guard, evidenced by serial upgrades to forecasts for the economy, inflation, and the path for interest rates. 

Europe and China showed evidence of slipping below expectations, prompting Chinese authorities to respond with an increase in deficit-funded infrastructure spending. Although inflation globally is cooling and central banks are likely done tightening monetary policy, the lagged effects from past interest rate hikes are still snaking through business and consumer behaviours (Chart 1). And, the landscape has now become more difficult to navigate under the weight of another war. The first half of next year is expected to be the low point for global growth in this cycle. It should also mark a pivot point in when central banks either begin to gingerly cut rates or entertain rhetoric to that effect. However, the speed of the economic recovery within the second half of the year will be determined by the confidence of central banks to fully normalize interest rates. This action, we don’t expect to be completed until 2025. Either way, whether the landing turns out to be hard, soft, or more likely, bumpy, the runway is within sight. 

U.S.’s Immaculate Dis-inflation 

Fed Chair Jay Powell likely had a much better performance review this year having presided over an impressive feat: inflation has moved very close to the Fed’s target with little economic cost. The labour market has stayed close to full employment. Strong productivity growth has helped cool growth in unit labour costs in recent quarters, dampening the inflationary impulse. The U.S. economy is on track to beat last year’s growth of 1.9% with a 2.4% pace, despite a forecast to slow to 1.5% in 2024 as many of the tailwinds that lifted the economy in 2023 fizzle out (see details here).  

Chart 2 titled U.S. Consumer Set to Drive a Cooler 2024 shows annual GDP growth for the U.S. of 1.9% in 2022 and 2.4% 2023 and 1.5% in 2024. It breaks GDP growth into the contribution from the consumer, government, business investment and residential investment, and shows that consumer spending is set to decline as a contribution to growth next year.

The biggest tailwind is the continued impact of past fiscal policy, which has played a key role in keeping the U.S. economy humming in the face of high inflation and interest rate increases. Generous pandemic stimulus payments to households have buoyed consumer spending. While government incentives for investment in clean tech and semiconductors has helped to keep business investment solid despite higher financing costs. And thanks in part to past fiscal transfers from Washington, state and local government spending has contributed nearly a full percentage point to growth over the past four quarters – a reversal from 2021-22 when the unwinding of peak Covid-era stimulus was a drag on the economy.  

Looking ahead to next year, weaker consumer spending will be a key ingredient in slower U.S growth (Chart 2), with excess savings set to be drawn down by mid-year. We are already seeing consumers look a bit more cautious in the fourth quarter, and delinquency rates for credit cards and auto loans have risen above pre-pandemic levels despite a very low unemployment rate. This suggests many households are increasingly feeling the pinch from high inflation and rate increases and are likely to become more cautious in their spending. 

With Washington in a stalemate and likely to remain funded under continuing resolutions until the election, the fiscal impulse is likely to peter out, weighing on government’s contribution to growth. The one area of the economy which is likely to see its fortunes improve is housing, where lower borrowing costs are expected to bolster activity in the second half of the year.    

Slower growth next year should create better balance in the labour market. Cooler wage growth is needed to get inflation all the way back to 2%, and the next stage of the disinflation process is expected to be a bit slower. 

Canada’s Economy Read the Textbook 

Chart 3 titled Canadian Inflation has some stubborn spots shows the year-on-year change in core inflation in October 2023 for Canada and the U.S. It shows CPI core inflation is slightly lower in Canada than the U.S. at 3.4%, and services inflation is also slightly lower than the U.S. However, core goods inflation in Canada is 1.7% which is much higher than the near-zero pace in the U.S.

In contrast, Canada’s economy has slowed in textbook fashion in response to higher interest rates. So much so, that a discussion of whether the country was already in a recession heated up until the second quarter’s performance benefited from a revision that swung the data into the black following an initially reported contraction. Canada may have skirted a recession, but the economy is running at a very anemic pace. 

The tone is set by the consumer. Canadians have been reining in spending on discretionary items since the Bank of Canada started raising interest rates last year. After essentially no growth in real consumer spending through the middle of the year, we expect a modest 0.6% pace in the fourth quarter. That will continue the weak trend, with spending likely to slow below 1% in real terms in the first half of the year as income growth slows and consumer penny-pinching reaches a peak. This belt tightening will extend to housing too where the BoC’s summer rate hikes have weakened the market further than we expected a quarter ago. 

Businesses are already following suit, with investment spending in retreat in the third quarter after a strong start to the year, and we expect it to remain sub-par through the coming quarters in line with the dour sentiment captured in the Bank of Canada’s Business Outlook Survey. Government spending is expected to contribute to growth as most levels of government seem to be a bit loath to tighten their belts. All in, Canada is on track to slow from 3.8% in 2022 to 1.1% this year, and trough next year at 0.5%. This leaves a very narrow margin for error and recession risks are elevated.  

Despite the weakness seen so far, Canada’s inflation metrics have shown fewer signs of cooling recently than other advanced economies. Relative to the U.S., core goods prices are a standout (Chart 3). This may reflect a weaker Canadian dollar, which has kept imported goods inflation higher than south of the border, in addition to a less competitive retail environment. It may take a bit more time for price pressures to ease in Canada, and this is expected to keep the Bank of Canada vigilant despite obvious signs of a cooling economy. That said, we think the BoC will see enough progress in inflation by the spring to start cutting interest rates, which should help growth pick up in the latter part of next year and improve real GDP growth to 1.5% in 2025.       

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Contributing Authors

  • Beata Caranci, Chief Economist | 416-982-8067

  • Derek Burleton, Deputy Chief Economist | 416-982-2514

  • Leslie Preston, Managing Director | 416-983-7053

  • Thomas Feltmate, Director | 416-944-5730

  • James Orlando, CFA, Director | 416-413-3180

  • Andrew Hencic, Senior Economist | 416-944-5307