Economy dancing around edge of recession going into 2024

Soft landings are in view for the Canadian and U.S. economies, according to economic forecasts from the Bank of Nova Scotia and Bank of Montreal, though an exposed consumer makes Canada’s descent from high inflation a bit bumpier.

Both Canada and the U.S. can avoid a full-blown recession next year, Scotiabank chief economist Jean-François Perrault wrote in the bank’s global outlook report, with the damage limited to a first-half “economic stall.”

Scotiabank forecasts 0.5% economic growth for Canada next year compared to 1.3% growth in the U.S. Despite the U.S. economy’s greater resilience, Scotiabank expects the Federal Reserve to cut rates by 150 basis points in 2024 compared to 100 basis points for the Bank of Canada (BoC).

“The larger cuts in the United States are prompted by a much better productivity performance, which is allowing that economy’s substantial wage gains to be less inflationary than in Canada,” the report said.

In BMO’s global outlook, chief economist Douglas Porter forecasts 1.5% growth for the U.S. economy and 0.5% growth for Canada, “with the economy dancing around the edge of recession in the first half of the year.”

BMO is expecting the BoC to move first with rate cuts, beginning in June, with both central banks cutting rates by 100 basis points in 2024.

Canada’s economic growth of around 1% this year was boosted by immigration, Porter wrote, and won’t hold up at the same level. He pointed to the debt-service ratio, which hit a record high of 15.2% in the third quarter and will likely rise again before rate relief arrives.

Higher interest rates, while not likely, pose the greatest risk of recession, Scotiabank said, with Canada’s overnight rate, in particular, “near the breaking point for firms and households.”

Mortgage renewals will moderate household spending in Canada, but Scotia doesn’t see a dramatic pullback.

“We believe most households will have a high degree of control over the extent of the payment shock given price appreciation since mortgages were undertaken, allowing households to refinance and extend amortizations if they would like,” the report said.

BMO is forecasting economic growth similar to Canada’s for the eurozone countries and the U.K., with the European Central Bank cutting 100 basis points beginning mid-year. For China, BMO forecasts 4.5% growth.

Both BMO and Scotia are forecasting 2.6% growth for the global economy next year.

Despite the mostly positive outlooks, both banks warned about political risks. The most obvious is the U.S. election, which could see a rematch of President Joe Biden and former president Donald Trump.

The Scotia report warned about the consequences to global trade of a second Trump presidency. “While the former president has not articulated much of a vision yet, he seems to support the idea of imposing unilateral tariffs on all imports into the United States, regardless of the county of origin,” it said.

There are also elections scheduled in Mexico and Taiwan, while voters in the U.K. and even Canada may go to the polls.

On the latter point, Scotiabank noted that one upside risk to its growth forecast for Canada could come from increased fiscal spending, with governments undertaking expansionary or direct support measures in spring budgets.

“The interaction of depressed sentiment and the challenging financial situation of many firms and households, combined with poor polling for the federal Liberals and many provincial premiers, mean this risk of additional fiscal support should not be discounted,” the report said.

Scotiabank forecasts inflation in Canada to average 2.6% next year and 2.1% in 2025. For the U.S., it expects average inflation to come in at 2.8% in 2024 and 2.2% the following year.