The global economic growth backdrop has continued to slow as the lagged impact of aggressive central bank interest rate hikes build continue to build alongside a continued squeeze on household purchasing power from the earlier rise in food and energy prices. Commodity prices are still high but have have edged progressively lower.<\/p>\n
The U.S. economy remains an outlier with strong GDP growth through Q3 2023. But households are running out of savings and ‘excess’ labour demand has evaporated with further declines in job openings expected to begin to push unemployment more significantly higher. We continue to expect the U.S. economy to soften in early 2024. GDP edged lower in Europe and was essentially unchanged in the UK over the summer.<\/p>\n
Canada\u2019s economy continues to soften as debt payments rise<\/h2>\n
Canada’s economy passed a tipping point some time ago. A surge in population propped up measures of total economic activity earlier in 2023 – each new arrival boosts both the productive capacity of the economy and consumer demand. But GDP fell 1.1% (annualized) in Q3 despite those tailwinds, and per-person output has now declined for five straight quarters. After-inflation, consumer expenditures per-capita fell to 1% below pre-pandemic levels in Q3.<\/p>\n
Rising debt payments and higher fuel and grocery bills have left household purchasing power diminished. And labour markets are softening with employment no longer rising fast enough to absorb a rapidly growing available workforce. The unemployment rate has risen by 0.8 percentage points since April \u2013 a magnitude of increase that historically usually only comes in the early stages of an economic downturn. Job openings continue to retrench, down 30% year-over-year as of September.<\/p>\n
Household savings are still very high, and that can act as a backstop in times of economic stress. But the cash stockpile is not evenly distributed across income cohorts and is increasingly unlikely to be spent in the near-term. Households typically save more (and spend less) when the outlook is uncertain and consumer confidence fell below the lows of the 2008\/09 recession in November. And household savings may be higher in part to accumulate funds among households that will still see significant increases in mortgage payments, including a mortgage refinancing wave coming in 2025. The household saving rate rose to 5.1% in Q3 (still well-above the 2.1% pre-pandemic rate in 2019.)<\/p>\n
Slowdown in domestic demand expected to ease as the BoC cuts rates<\/h2>\n
Consumer spending is expected to remain under pressure in the near-term as rising debt payments and higher food and energy prices continue to soak up purchasing power. Businesses have also been pulling back. Business investment on machinery and equipment fell 14.4% in Q3. For the first time since the pandemic, businesses tracked by the Canadian Federation of Independent Business ranked concerns about demand for their products as a larger factor limiting production\/sales than labour shortages. Housing markets have looked wobbly with headwinds from higher interest rates being countered by high rates of population growth and limited supply of homes available.<\/p>\n
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Central banks have done their job: additional hikes likely off the table<\/h2>\n
While the near-term economic outlook is not exactly rosy, the good news is that higher interest rates and slower growth are working to ease inflation pressures. The full impact of rate hikes to-date has yet to be felt, and downside remain if the slowdown in labour markets accelerates. Economic data to-date is still tracking consistent with a ‘mild’ downturn by historical standards.<\/p>\n
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