Global Quarterly Economic Forecast

Steady As She Goes

Date Published: March 19, 2024


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  • Advanced economy central banks are now holding steady: they have acknowledged interest rates are at a peak, but not tipping their hand on when they expect to cut rates. 
  • However, the U.S. economy’s resilience has once again defied expectations. This means the Fed can afford to be patient with rate cuts and ride out the recent flare up in inflation. Slower growth and inflation are still expected, which should lead to the first Fed rate cut in July.  
  • In contrast, the Bank of Canada is white knuckling it a bit, holding tight to their inflation target while the economy continues to sputter. We expect that inflation will have cooled enough by July for them to loosen up with a first interest rate cut.

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U.S. Forecast

Global Forecast

 Chart 1, titled 'U.S. Still Leader of the Pack in 2024' and shows growth in real GDP for 2023 and TD Economics' forecast for 2024, on a fourth quarter over fourth quarter basis for the U.S., Canada, the UK and the Euro Area. It shows the U.S. being a growth leader in both years, despite a slowdown in growth from 2023 to 2024.

At 30,000 feet, the global economic outlook has evolved broadly in line with our expectations from last quarter. One exception is the U.S., which stands out as the biggest upgrade in the forecast. Advanced economy central banks are holding steady as she goes for now, placing the burden of proof on the data to provide reassurance that a reduction in interest rates won’t accelerate inflation after a hard-fought battle. 

The European Central Bank (ECB) and the Bank of Canada (BoC) should be among the first to lower rates, likely mid-year. The economy has materially downshifted in both regions, but earlier in Europe due to the fallout of Russia’s war in Ukraine. Europe has also experienced a more decisive cooling in inflation than Canada. Once interest rates head lower, economic momentum would gain a step as the year comes to an end, but still trail the impressive pace of the United States (Chart 1). 

China’s economy is still on track to slow from 2023, reflecting the ripple effects from the overhang in the housing market (see details). The government has set a 5% target for real GDP growth in 2024. Previously announced stimulus measures should help growth this year, but absent structural reforms, this will only be a band aid fix. China’s economy will continue to struggle with its long-term growth prospects. In the meantime, excess capacity in China’s good-producing sectors is lending a hand to cooling global inflation, offering a timely offset to the rise in shipping costs from conflict in the Red Sea.

U.S. economic juggernaut to gear down this year

The U.S. economy continues to defy expectations in the face of high interest rates. At the risk of sounding like the boy who cried wolf, we still expect growth to gear down this year, but to a lesser extent than we forecasted one quarter ago. The annual average growth forecast of 2.3% for 2024 is flattered by a strong hand off from last year, masking a slowdown to 1.6% by the end of this year on a Q4/Q4 basis. 

Consumer spending is tracking a solid 2.6% pace in the first quarter, but households will really have to dig into savings and wealth to maintain this pace going forward, and we’re betting against that dynamic. First, spending growth is already outpacing income by a wide margin, leaving households increasingly reliant on credit. Second, excess savings are depleted for all but the highest income households. Third, delinquency rates on credit cards and autos have risen beyond pre-pandemic levels. This is one of the clearest signals that strain is seeping into households, who will likely economize to a greater extent as time rolls forward. In all, consumer spending is forecast to slow from a 2.7% pace (on a Q4/Q4 basis) at the end of 2023 to 1.8% by the end of this year.  However, relative to other countries, this would still mark a stellar performance.

Business investment is performing as we expected and has not undergone any significant forecast revisions. It has already cooled from a heartier pace in the first half of last year on a collision of factors. Businesses are responding to lower levels of profits relative to the earlier phases of the recovery, while also absorbing higher financing costs and judging their sales outlook against talk of economic slowdown. 

Chart 2 titled 'Progress on U.S. Inflation Uneven' shows core inflation in the U.S. on a six-month annualized basis for both the core consumer price index and the core personal consumption deflator, which is the Fed's preferred inflation metric.  It shows core inflation coming down from a peak of around 6% in 2022 to close to 2% this year. However, it highlights that in the most recent two months inflation has ticked up a bit.

Their response is also evident in their hiring patterns. Private sector hiring slowed through last year, and only recently showed a little more oomph to start 2024. Any downshift in economic momentum should correspond with lower hiring intentions that would push the unemployment rate a bit higher to 4.2% by the end of this year. We have not penciled in outright or continuous job losses because the job vacancy rate remains elevated relative to past historical cycles, even as it continues to trend down. It’s still a long ways off from signaling economy-wide layoffs. 

By extension, the resilient domestic demand and labor market have stymied a previously favorable downtrend trend in inflation (Chart 2). This is starting to dash hopes that the U.S. can achieve its 2% target without some degree of growth-sacrifice in the economy. It also shows that the Federal Reserve was wise to be cautious in signaling that interest rate cuts were imminent. 

We have maintained an out-of-consensus view on the timing of interest rate cuts since last year, with an expectation that July is likely the better timing rather than market pricing that went from a March expectation all the way to being repriced for June. This is the right directional shift but may not yet have gone far enough. In fact, we place the risks around our outlook on a possible further delay if inflation fails to make material progress in the next two-to-three months.

Canada’s economic outlook is “meh”

For its part, Canada’s economy is muddling along. Economic growth in the fourth quarter of last year was better than expected, but looking under the hood, every component of demand in the domestic economy was weaker than we had forecast. Growth in 2024 reflects a small upgrade, but at roughly 1% is nothing to write home about (see table). 

Chart 3 titled 'Feels Like a Recession for Canadian Consumers' shows the peak to trough decline in real per capita consumer spending in the early 1990s recession (-5%) and 2008-09 recession (-2.5%) and in the current environment since the Bank of Canada started raising interest rates in 2022 through the middle of 2025 (TD Economics' current forecast), where it is expected to decline by 3.5%.

It’s true that consumer spending growth is looking a little better in the first quarter, boosted by auto sales. But considering that the population is expected to grow at a +3% pace in 2024 Q1, consumer spending is still projected to underperform on a per capita basis. This will extend the downtrend, which has been ongoing since the Bank of Canada started raising interest rates in 2022. That is akin to the weakness seen in past recessions and is likely why Canadians feel little consolation when hearing about a “soft landing” (Chart 3). 

Unlike the U.S., the Canadian job market is expected to tip into net losses in the second half of this year. Alongside healthy labour force growth, this would push the unemployment rate up further, to 6.7% by the end of this year. That said, this is not a large swing relative to history. A more balanced job market should help take more steam out of wage growth and assist in cooling inflation. 

Inflation has made progress in cooling across most categories, except shelter. CPI inflation excluding shelter was only 1.6% in January, but the BoC’s preferred core measures are still running in the 3-3.5% range. As we outlined in our recent report, the BoC has a shelter problem, which it will likely need to look past when it cuts interest rates for the first time mid-year. 

Financial markets have been anticipating interest rate cuts, and bond yields have been trending down since the fall, taking mortgage rates lower. This has reignited Canada’s housing market, and we expect residential investment will post a decent performance this year, as it rebounds off last year’s lows. Business investment is also looking a little brighter in 2024, as Statistics Canada’s capital expenditure survey showed stronger-than-expected investment planned for the year ahead, led by significant new investments in support of the clean energy transition. This should help Canada’s growth pick back up to its trend pace by the end of 2025.       

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