- \n
- Global central banks are reiterating that more progress is still needed on inflation before they can commit to cutting interest rates.<\/li>\n
- We continue to expect the U.S. Federal Reserve to make its first cut to rates in its June meeting, and the Bank of Canada and European Central Bank in the week prior to the Fed (also in June), and a much more hawkish sounding Bank of England to follow suit later in August.<\/li>\n
- Resurfacing inflation pressures in the U.S. over early 2024 means a more cautious Fed after the start of rate cuts. We expect them to go by a slower pace (once every other meeting) for the rest of 2024.<\/li>\n
- The economic growth backdrop hasn\u2019t significantly changed. The Canadian economy remains the worst of the bunch (on a per person basis). The U.K. and countries in the euro area meantime are already seeing early signs of a pickup in activity while the U.S. continues to show resilience. <\/li>\n
- Topic in focus:<\/u><\/strong> Business insolvencies have surged in Canada in early 2024. Granted, the increase is from exceptionally low levels during the pandemic, and the January deadline for federal CEBA pandemic support loans is likely playing a role. But the trend looks concerning nonetheless and serves as a reminder that downside economic growth risks remain, and further deterioration in labour market conditions and household incomes are not entirely off the radar.<\/li>\n<\/ul>\n
U.S. resilience stretching on but inflation risks also resurfacing<\/h2>\n
The outperformance of the U.S. economy persisted for another month. Personal spending on services was still running hot in January, and February\u2019s payroll report extended the streak of solid employment gains. A strong macro backdrop won\u2019t be problematic as long as inflation stays low. However, CPI data over early 2024 also showed price pressures reaccelerating. That\u2019s likely to set the Federal Reserve back a step in its assessment of the sustainability of low inflation over the second half of last year. Markets have pared back pricing for rate cuts this year, moving towards a June starting point that is consistent with our forecast. Beyond then, we expect fewer cuts this year at a pace of every other meeting for the rest of 2024 (we had expected the Fed to cut in every meeting previously), leaving the Fed Funds range 50 bps higher than we previously expected, at 4.5% – 4.75% by the end of this year.<\/p>\n
Economic conditions in Canada, euro area and the U.K. remain much softer. Gross domestic product growth in Canada trudged along in Q4 2023 with a surge in exports masking a large contraction in business investment. GDP growth in Q4 also came in weak in the euro area (barely changed from Q3) and the U.K. (a larger than expected -0.3% non-annualized decline.) Monthly PMI surveys did show a rebound in activities in both regions over the early months of 2024, primarily driven by stronger demand for services as the sub-indices are now within the expansion zone for both. The same cannot be said about Canada, where insolvencies are still rising and labour market conditions continue to soften.<\/p>\n
<\/div>\nDespite the divergence in economic growth backdrops, the messaging from global central banks has remained largely uniform\u2014more progress is needed on inflation before they can commit to cutting interest rates. The BoC and ECB both reiterated that message last month while delivering widely expected holds on interest rates. U.S. economic outperformance has raised concerns that the Fed will need to be more cautious about easing than previously expected. But comments from policymakers, including chair Jerome Powell, have largely reinforced the central bank\u2019s preference, which is to begin cutting interest rates this year. We continue to look for the BoC, Fed and the ECB to start to move rates lower in June, followed by BoE in August and the Reserve Bank of Australia later in December. <\/p>\n
Central bank bias<\/h3>\n
<\/p>\n
\n<\/p>\n
\n\nCentral Bank<\/p>\n<\/div>\n
\nCurrent Policy Rate
\n(Latest Move)<\/p>\n<\/div>\n\nNext move<\/p>\n<\/div>\n<\/div>\n
\n<\/p>\n
\n![\"\"](\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/4\/2025\/03\/Central-bank-bias_Canada-Flag.png\")
BoC<\/p>\n<\/div>\n\n5.00%
\n+0 bps in Mar-24<\/span><\/p>\n<\/div>\n\n0 bps
\nin Apr-24<\/span><\/p>\n<\/div>\nThe BoC left rates unchanged for a fifth meeting in March, highlighting softening in the economy as evidence that monetary policy is working to restrict activity. The catch is still elevated core inflation readings, which the BoC expects to gradually fall in the second half. We continue to expect price pressures to keep easing, driving a first rate cut around mid-year.<\/div>\n<\/div>\n<\/div>\n<\/p>\n
\n\n![\"\"](\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/4\/2025\/03\/Central-bank-bias_US-Flag.png\")
Fed<\/p>\n<\/div>\n\n5.25-5.50%
\n+0 bps in Jan-24<\/span><\/p>\n<\/div>\n\n0 bps
\nin Mar-24<\/span><\/p>\n<\/div>\nRecent CPI data showed a rebound in underlying price pressures in the U.S. in early 2024. That coupled with the backdrop of a booming economy means the Fed will likely be extra cautious around their assessment of where inflation is heading (our expectation is still down), and when rates should be moving lower. We continue to expect a first cut in June after inflation follows rent growth lower.<\/div>\n<\/div>\n<\/p>\n
\n\n![\"\"](\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/4\/2025\/03\/Central-bank-bias_British-Flag.png\")
BoE<\/p>\n<\/div>\n\n5.25%
\n+0 bps in Feb-24<\/span><\/p>\n<\/div>\n\n0 bps
\nin Mar-24<\/span><\/p>\n<\/div>\nImpact on monetary policy in the U.K. from the recently announced budget is expected to be minimal. The boost to aggregated demand from measures announced is expected to be offset by added labour supply and is not expected to add to inflation. The BoE expressed the need to see persistent signs of CPI returning to target before cutting rates. We expect the first move to come in August.<\/div>\n<\/div>\n<\/p>\n
\n\n![\"\"](\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/4\/2025\/03\/Central-bank-bias_EU-flag.png\")
ECB<\/p>\n<\/div>\n\n4.00%
\n+0 bps in Mar-24<\/span><\/p>\n<\/div>\n\n0 bps
\nin Apr-24<\/span><\/p>\n<\/div>\nThe ECB left the deposit rate unchanged in its March meeting with the updated staff forecast showing downgrades to the near and medium-term inflation forecast. February\u2019s early euro area inflation data showed a lack of progress especially in the services components, but still tracks closely to ECB\u2019s forecast on a quarter basis. President Christine Lagarde endorsed a first rate cut in June in line with our view.<\/div>\n<\/div>\n<\/p>\n
\n\n![\"\"](\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/4\/2025\/03\/Central-bank-bias_Australia-flag.png\")
RBA<\/p>\n<\/div>\n\n4.35%
\n+0 bps in Feb-24<\/span><\/p>\n<\/div>\n\n0 bps
\nin Mar-24<\/span><\/p>\n<\/div>\nQ4 GDP data was on consensus to confirm softening in the Australian economy, especially in interest rate sensitive sectors. Labour market conditions have weakened, although not to a degree that would warrant immediate easing from the RBA. Our base case remains for rate cuts to begin in Q4 (50bps total in the quarter), followed by two more cuts in the first half of 2025 taking the cash rate to 3.35%.<\/div>\n<\/div>\n<\/p>\n
Corporate bankruptcies are rising in Canada<\/h2>\n
Business insolvencies surged in Canada in early 2024 to levels not seen since the great financial crisis. What\u2019s concerning is that most of the insolvencies were driven by actual bankruptcies that have more than doubled since last fall, instead of proposals for businesses to settle debt with creditors under conditions outside of the existing terms. Part of the increase may have been tied to the end of some government pandemic support programs. The repayment deadline for federal CEBA loans was in January. The rise also follows a period of exceptionally low business insolvencies during the pandemic.<\/p>\n
Data from the Business Investment Survey also showed a large pickup in the Canadian non-financial corporate sector\u2019s debt servicing ratio. Several factors likely contributed, including a more indebted non-financial corporate sector as a whole (debt-to-GDP ratio was the second highest among G7 just after France), and differences in term structures for business non-mortgage borrowing.<\/p>\n
<\/div>\nConsumer facing sectors harder hit<\/h2>\n
Many Canadian companies that survived the pandemic with the help of government support are now facing a triple whammy of slowing consumer demand, rising borrowing costs and deteriorating productivity. The conditions look worse for businesses in consumer-facing sectors such as retail, housing and accommodation, food, and recreation, which have seen the largest increase in insolvencies and the worst deterioration in credit access. Lenders have tightened standards in part due to anticipating softer demand in these areas, according to the Q4 2023 Bank of Canada Business Outlook Survey.<\/p>\n
A high concentration of small businesses in these sectors also likely explains part of the underperformance, as small businesses tend to have less diverse financing sources. The deadline for small businesses to pay back CEBA loans without forgoing the forgivable portion likely further exacerbated the situation. We already saw an unusual increase in chartered banks\u2019 business loans advanced towards the end of last year, likely driven by higher demand among small businesses to refinance debt to meet the CEBA January deadline.<\/p>\n
<\/div>\nSurging insolvencies pose risks to household income<\/h2>\n
It remains to be seen whether this recent rise in business insolvencies will be \u201ctransitory\u201d (remember the last time that word was used to describe inflation?), or if it\u2019s reflective of persistent underlying weakness in businesses operating conditions. Regardless, it will have a negative impact on the labour market.<\/p>\n