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Economic and Financial Outlook

Major Economies Continue to Rebalance

January 18, 2024

Highlights

  • Most major advanced economies continue to see flat growth, with economic indicators rising or falling modestly. According to preliminary data, German real GDP contracted 0.1% in 2023 and posted a quarterly decline in Q4. Eurozone real GDP is also expected to come in lower for Q4, with further drops likely in the first half of 2024. In China, real GDP growth slowed in the last quarter of 2023, bringing the annual rate to 5.2% on the strength of the Q1 rebound. China’s economy will probably continue to cool in 2024.
  • Meanwhile the US economy continues to hold up, though real GDP growth likely slowed sharply in the fourth quarter from the 4.9% annualized pace recorded in Q3. We expect GDP to come in near 2% for Q4, with more weakness ahead in the first half of 2024 as consumer spending eases. Look for the labour market to show more signs of softening and inflation to continue coming down as well.
  • After a drop in Canadian real GDP in Q3 2023, the final quarter of the year is shaping up to eke out a modest advance. However, even if that occurs, we don’t think the reprieve from recession chatter will last for long. We continue to expect Canada’s economy to fall into a short and shallow recession in the first half of 2024. The weakness should be broad based, with declines in consumption and residential investment resulting from households feeling the sustained squeeze of higher interest rates. Net exports are also likely to suffer due to a milder slowdown in the US. As the pace of hiring falls consistently below still solid population growth, the unemployment rate in Canada should steadily rise as well. The slump in economic activity is likely to prompt the Bank of Canada to begin cutting interest rates next spring. While this should spur a recovery in the second half of this year, any recovery will be capped by ongoing mortgage renewals at higher rates.
  • Quebec’s real GDP fell an annualized 0.8% in the third quarter following a 1.5% decline in Q2. That means the province is in a technical recession, narrowly defined as two straight quarters of negative real GDP growth. But it’s hard to talk about a real recession when domestic demand continues to grow as it did in the third quarter. However, Quebec’s economic woes likely worsened in the fourth quarter amid strikes in the healthcare and education sectors. The economy should pick back up in the first quarter as things return to normal, but growth will probably remain anemic throughout the first half of the year. A more meaningful improvement is expected in the second half as interest rates gradually start to come down.

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