The global economic growth backdrop has shown signs of improvement, but Canada\u2019s economy continues to underperform. Interest rate cuts are welcomed by highly indebted households, but won\u2019t spur growth until next year.<\/p>\n
Gross domestic product across the euro area and the U.K. picked up early in 2024 after contracting over the second half of 2023 and business surveys suggest that growth momentum carried over into Q2. The manufacturing sector globally has remained soft but has improved and the service sector continues to expand in most regions.<\/p>\n
The U.S. economy is showing signs of softening with GDP growth tracking below 2% over the first half of 2024 for the first time since 2022 and the unemployment rate has edged higher. Still, U.S. labour markets have remained resilient on balance and signs of a reacceleration in inflation earlier this year will keep policymakers cautious about easing monetary policy too quickly even with a downside<\/a> surprise in May price growth. We continue to expect the U.S. Federal Reserve won\u2019t be in a position to start cutting interest rates until late this year.<\/p>\n In Canada, per-capita GDP has continued to decline as the economy grows more slowly than the population. Per-capita output is running 3% below 2019 levels and is little changed from a decade ago. That represents a 10% underperformance<\/a> relative to a 7% increase in per-capita GDP in the United States, but the silver lining is that inflation pressures also slowed enough for the Bank of Canada to cut interest rates for the first time in four years in June.<\/p>\n The sharp underperformance of the Canadian economy argues<\/a> for further gradual interest rate cuts this year from the BoC, even with the Fed on hold. But that doesn\u2019t mean the adjustment of households and businesses to higher interest rates is over as past interest rate increases continue to filter through to higher debt payments.<\/p>\n Much of Canada\u2019s broader economic growth challenges are tied to decades-long economic underperformance that has more to do with an inefficient regulatory backdrop and other headwinds to business investment than the short-run stance of monetary policy. These challenges are discussed in more detail in our new Growth Project<\/a>.<\/p>\n The BoC\u2019s June interest rate cut followed reductions from Switzerland and Sweden\u2019s central banks, and the European Central Bank followed with a 25 basis point interest rate cut soon after.<\/p>\n The key Canadian overnight rate is still at 4.75%\u2014well above the 2.25% to 3.25% range that the BoC estimates would have a neutral (neither helping to accelerate or decelerate economic growth) impact on the economy. We assume another 75 basis points of BoC cuts this year, but that will still leave the level of interest rates above those neutral levels and subtract on net from economic growth, just by less than currently.<\/p>\n We look for Canada\u2019s economy to continue to soften on a per-person basis in the near term before ticking back to positive growth in 2025\u2014led by strengthening consumer spending into next year as interest rate headwinds ease. Business investment is on track to decline for a second straight year in 2024.<\/p>\n We estimate that about $200 billion in four and five-year fixed-rate mortgages in total are coming up for renewal this year (roughly a fifth of the outstanding balances of those mortgages), with another $275 billion in 2025. Almost all of those will be renewing at higher interest rates even with assumed BoC interest rate cuts.<\/p>\n The increase in mortgage payments looks manageable when measured against household incomes that have also grown substantially from pre-pandemic levels \u2013 and some variable rate and shorter-duration mortgage holders could start to see some relief. The expected payment shock this year will still be large for individual households impacted, but accounts for a relatively small 0.2% of total Canadian household incomes, according to our estimates. But they will keep debt payments rising in the near term even as interest rates begin to fall.<\/p>\n A long and impressive U.S. run of economic resilience has broadly continued but the spillover effects to Canada have been limited<\/a>. The U.S. manufacturing sector, where links to the Canadian economy are the closest, has been soft with declines in output for three straight quarters to Q1. U.S. economic growth has, instead, been driven by consumer consumption and government spending\u2014both of which don\u2019t have much of an impact on demand for Canadian exports.<\/p>\n The strength of the U.S. economy won\u2019t be sustained. Large government deficits will remain a big tailwind, but households have largely run out of savings accumulated during the pandemic. Delinquency rates are rising, and GDP growth has slowed to below 2% in the first half of 2024. The unemployment rate is still low, but is up 0.6% from post-pandemic lows. And firmer price growth in the U.S. earlier this year means the Fed will have to wait longer before cutting interest rates. We don\u2019t expect the first rate cut from the Fed until December.<\/p>\n Interest rate cuts will help improve housing affordability for new buyers in the near term, but a structural undersupply<\/a> of housing will keep a floor under home prices. Slower population growth after planned federal government caps<\/a> on non-permanent resident arrivals next year will slow both demand and supply in the economy. Overall, interest rate cuts in the near term will do little to help address Canada\u2019s long-running productivity<\/a> challenges.<\/p>\n We\u2019re keeping Ontario (0.5%) and B.C. (0.7%) at the back of our 2024 provincial growth ranking. Clearer signs of an economic slowdown are emerging for Canada\u2019s most indebted households as the lagged impact of high interest rates keeps spending activity muted. Quebec\u2019s economy (0.8%), on the other hand, seems to be turning a corner with record planned capital investments this year. Still, the modest recovery will be on the heels of a nearly flat year for economic growth\u2014keeping three of Canada\u2019s largest provincial economies growing slower than the rest.<\/p>\n A resurgence in fertilizer markets and completion of the Trans Mountain Pipeline expansion project should keep the Prairie economies growing middle of the pack with all three outpacing the national average of 1%.<\/p>\n In the eastern provinces, a resurgence in natural resource production is expected to pull economic growth in Newfoundland and Labrador (+2.0%) back into positive territory after two consecutive negative years for growth. Robust household spending and government investment are poised to boost growth in P.E.I. (+2.1%) and Nova Scotia (+1.6%) in 2024. Conversely, declining capital expenditures are expected to weigh on real GDP growth in New Brunswick (1.1%).<\/p>\n British Columbia\u2019s economy grew more than expected in 2023\u2014 up 1.6% from a year ago according to early estimates<\/a> from Statistics Canada. But that momentum is running out. We expect the sharp drop in capital spending intentions will be a major drag on growth this year. Lower interest rates will bring some relief to households and businesses, but this will do little to appease the intense prevailing affordability tensions in the province. We expect stretched affordability to keep highly indebted residents under pressure in the year ahead. Though some of the tailwinds from 2023 have prompted us to upwardly adjust our 2024 forecast\u2014from 0.3% to 0.7%, B.C. is still expected to remain near back of the pack in terms of growth this year.<\/p>\nCanada\u2019s economy continues to underperform<\/h2>\n
BoC cuts will still leave interest rates at elevated level<\/h2>\n
Household debt servicing costs will continue to rise<\/h2>\n
Surging U.S. economy has fewer than normal spillovers to Canada<\/h2>\n
Lower interest rates won\u2019t solve all problems<\/h2>\n
Provincial Outlook<\/h2>\n
BRITISH COLUMBIA \u2013 Consumer resilience is running out<\/h2>\n