United States
The US economy performed strongly in 2023. Robust consumer spending and more significant than expected outlays from the Inflation Reduction Act supporting onshoring manufacturing capacity helped drive better-than-expected growth.
Real GDP grew by 4.9% in Q3 following 2.2% growth in H1. Preliminary Q4 growth was estimated at 3.3% annualized (well higher than expected) driven by healthy retail sales and consumer spending as the labor market remains strong.
Growth in 2024 is expected to slow to less than 2.0% as excess consumer savings bleed down, unemployment ticks up modestly, and the lagged effect of substantial interest rate increases are felt throughout the economy. However, the probability of a soft landing has increased markedly over the past few months.
Canada’s economy has remained sluggish over the past several months with slightly negative growth in Q3 2023 and flattish growth expected in Q4.
Canada
Canada’s economy was bolstered in 2023 by historically high population growth. On a per-capita basis, GDP declined for the past several quarters.
Higher household debt ratios will likely constrain consumer spending through H1 2024; 2.2mm households face mortgage renewals over the next two years.
On the flip side, with inflation rapidly falling, the Central bank is well poised to cut rates over the next few quarters.
Europe
Europe’s economy likely experienced a mild recession in H2 2023, but inflation is rapidly cooling which should set the stage for several rate cuts in 2024.
Manufacturing remains weak with PMI surveys near 44 (well below the 50-level which indicates neither growth or contraction). Manufacturing surveys have indicated contraction for 18 straight months but seem to have bottomed out. Worryingly, services PMIs have also breached 50, indicating that services may no longer buoy Europe’s economy.
On the positive side, unemployment levels remain near historic lows and European consumers have spent less of their excess savings accumulated during the pandemic (in contrast to US consumers).
China
China’s 2023 post-COVID recovery proved to be disappointing.
Real GDP grew at 5.2% in 2023 (against easy comparisons) and was below most economist forecasts.
The property market remains extremely weak despite various measures of government support.
China factories have suffered from deflation due to excess capacity and consumer spending remains restrained.
Most economists expect 2024 growth to be below the government’s 5% official target. The level of government fiscal and monetary stimulus remains a crucial wildcard.
Inflation
Inflation is declining quickly across most major economies and recent declines have been faster than expected.
The US Core PCE Index (Fed’s preferred measure) grew at 3.2% YOY and 0.1% MOM in November. While the YOY growth was still higher than the Fed’s 2% target, the index has averaged 1.9% annualized increases over the past six months.
Importantly, this growth rate is likely overstated as it includes shelter costs in its calculation (shelter cost inflation is artificially high due to the lagged nature of the calculation in inflation data).
The rapid fall in inflation has been driven by falling goods prices as supply chains have fully normalized while services inflation has remained stickier.
Core inflation in the Eurozone cooled to 3.4% YOY in December, the lowest annual rate since March 2022.
Additionally, government subsidies have also helped to lower energy and food costs through subsidies and other measures.
Interest Rates
The interest rate hiking cycle is clearly over for central banks (barring a surprise re-acceleration of inflation). The current debate centers around x and magnitudes for rate cuts.
The Fed or ECB is unlikely to cut rates during the first quarter. However, with inflation falling faster than expected, central banks may cut rates more than they have targeted to stave off potential economic declines.
While we acknowledge a wide range of possible outcomes, our current thinking is for Fed rate cuts of 75bps-100bps in 2024 and a decline in 10-year US Treasury yields to 3.50%-3.75% by YE 2024 from 4.1% today.
