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Macroeconomic Conditions

The US economy is holding up well with strong consumer spending but weak manufacturing data. A mild recession is predicted for 2024, while Canada's growth may slow due to rising household debt costs, and Europe's growth has stagnated with negative GDP growth in some quarters

Thus far, US economic growth has held up much better than expected with support driven by strong consumer spending.   However, manufacturing data continues to be weak.  It also remains to be seen whether there will be any significant slowdown in regional bank lending.

Q1 Real GDP annualized growth was upwardly revised to 2.0% with consumer spending accelerating to a higher than expected 4.2%.   Q2 data also appears strong with GDP growth of 2.4% forecasted by the Atlanta FedNow models.   

Core US retail sales growth surged to 0.6% MOM In June as consumers continue to spend down excess pandemic savings (estimated now at $500bln vs. $2 trillion at peak) and increase credit card borrowings.


However, credit card and auto loan delinquency is steadily increasing especially for lower-income consumers.

Manufacturing remains weak with the ISM Manufacturing index continuing to show contracting activity (the index had been below 50 for the past 8 months).  The June reading of 46 was the slowest yet with new orders continuing to decline.   

The regional banking situation seems to have stabilized over the past few months.   

For many banks, deposits are either stabilizing or have increased sequentially (as the banks have raised deposit rates) and lending does not seem to have significantly slowed.  However, this is clearly a fluid situation to be monitored over the next several months.

The much-predicted recession in the US has yet to occur.   Analysts are now pushing back the timetable and view a mild recession occurring in 2024 as the likely base case.  

Additionally, a series of rolling recessions that affect different sectors at different times seems more likely than a broad-based recession.  For instance, semiconductors, goods manufacturers, and enterprise spending have already experienced pullbacks in demand (exacerbated by normalization of supply).   

These sectors may recover as inventories need to be rebuilt even if end demand were to slow.  The housing market appears to be recovering from trough levels as mortgage rates have stabilized.   On the other hand, consumer end markets may pull back in 2024 if consumers retrench their spending levels.

Canada experienced strong GDP growth in H1 but is likely to experience slowing in H2.

Consumption has remained very strong and has been helped by a surge in immigration.   

However, rising household debt service costs are likely to diminish consumer spending over the next several quarters.

Europe’s growth has stagnated with flat to slightly negative GDP growth in Q4 2022 and Q1 2023.  Leading indicators are turning more negative, but headline inflation is rapidly falling.

Manufacturing PMIs continue to deteriorate and the June reading of 43.4 is the lowest over the past year.  Offsetting this, services PMIs continue to remain strong.

The fading recovery in China has presented a challenge for European exports (that may reverse if China enacts meaningful stimulus measures in H2 2023).

Bank lending growth has slowed sharply YTD and is forecast at 2.0% for the full year, a sharp decline vs. the 5.0% growth experienced in 2022.   

China’s nascent post-COVID recovery is beginning to stall.  Additional stimulus measures are necessary to reignite growth to meet official targets.

China’s GDP increased sequentially by a lower-than-expected 0.8% in Q2 following a better-than-expected 2.2% sequential increase in Q1.  

Exports fell 12.4% YOY in June (the largest decline in three years) following May’s 7.5% YOY decline.   The decline was driven by a weakening global economy and a widespread paring of inventories.

Retail sales growth grew 3.1% YOY in June following a 12.7% jump in May.   Consumers are wary of large-ticket purchases as the embattled housing market and property development sectors remain stressed.  

Government stimulus is expected to increase in H2 2023 which should help reinvigorate growth.  However, the stimulus is likely to be well smaller than deployed immediately post-GFC and during 2016, given current concerns around China’s high debt levels. 

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