U.S. Quarterly Economic Forecast

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. 

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.