• The outlook in Europe and China is deteriorating sharply owing to a particularly troublesome combination of droughts, pandemic control measures, consequences from the Ukraine war, and ongoing efforts to tame inflation.
  • The outlook is far better in Canada and the United States, even though growth is impacted by developments overseas and the fight against inflation. We continue to view recession as a risk, not a certainty.
  • Incoming data suggest inflation is on the cusp of slowing even as wage pressures accelerate. We are more confident about the future path of inflation owing to these developments but risks to inflation remain tilted to the upside.
  • The Federal Reserve and Bank of Canada (BoC) are nearing the end of their policy rate tightening cycles. We expect the BoC to stop tightening after its policy rate reaches 3.75% in October. We forecast that the Fed stops raising its target rate once it reaches 3.5% in November. In both cases, we anticipate that policy rates will remain unchanged throughout 2023.

A global recession is inevitable. COVID management measures in China, combined with the impact of inclement weather and weakness in the residential construction sector point to the weakest growth observed since 1980, excluding 2020. In Europe, the lagged impact of higher commodity prices, the war in Ukraine, the impact of heatwaves and rising interest rates are pushing major European economies into recession. With these major economic powers registering very weak economic performance, a global recession is assured.

The more pessimistic developments in these major economic players, along with continued concern about the extent and impact of rate increases in the United States, have led to sharp declines in commodity prices and equity markets in recent weeks. From a North American perspective, we consider that these developments are of greater macroeconomic consequence to the outlook in the US and Canada than the direct impacts of the deterioration in China and Europe.

We are marking down our forecast in Canada and the US to largely reflect the impact of lower commodity prices and equity values. We continue to believe that both countries will avoid a recession, though it is clear that growth is slowing, as needed. In the US, we now expect growth of 1.8% this year and 0.9% in 2023. In Canada, we continue to expect that economic growth will lead that of major industrialized countries by a large margin in 2022 with predicted growth of 3.1%. Growth is expected to slow sharply in 2023, to 1%. In the Canadian context, we expect household spending to slow, but remain reasonably resilient owing to re-opening effects, historically high pent-up demand, high liquidity and strong household balances. This view flies in the face of numerous surveys which point to concern about finances in light of rising inflation and interest rates. Yet, the hard data do not yet demonstrate a major impact on spending per the softer data.

Inflation will remain a challenge in both countries even though we expect a substantial deceleration in inflation over the course of the next 18 months. Given the most recent July prints of 8.5% in the US and 7.6% in Canada, even a substantial slowing in the pace of inflation would leave inflation well above targets through 2023. Our forecast expects inflation will average 4.4% in the US and 3.8% in Canada next year. There is plenty of evidence that points to a reversal of some of the factors that have pushed inflation up in recent quarters, so our confidence in a shift in inflation dynamics is rising. However, it is very clear that labour markets remain exceedingly tight and that wage pressures are rising. Going forward our focus on the inflation front is shifting away from global factors and towards developments in labour markets.

The inflation outlook warrants additional policy rate increases. In Canada we believe another 50 basis point move is required in October and that the BoC will end its tightening cycle at 3.75%, keeping policy settings at that level through next year. In the US, we anticipate another 100 basis points of tightening by the November meeting, with rates then remaining at 3.50% through 2023. In both countries, central banks are expected to stop raising rates well before inflation is at target. While policy rates will stabilize well before inflation returns to targets, we believe the amount of tightening engineered will be sufficient to lower inflation over the next couple of years, in line with the typical length of time it takes for policy to have its full impact on inflation. Risks are tilted to the upside for policy rates as they depend on imminent confirmation that inflation is indeed slowing. If that isn’t confirmed soon, we may need to reconsider our views on terminal policy rates in both countries.

Table 1: International: Real GDP, Consumer Prices
Table 2: North America: Real GDP 2019 to 2023 and Quarterly Forecasts
Table 3: Central Bank Rates, Currencies, Interest Rates 2020 to 2023
Table 4: The Provinces 2019 to 2023