TD Economics forecast highlights US strength and concerns over China’s slowdown amid global inflation control
TD Economics reports that despite significant geopolitical events, the global economic outlook has remained steady.
However, the global forecast reveals substantial variability between countries. The slight upgrade to the 2024 outlook is largely attributed to the US, with smaller economies like the UK, Canada, and some emerging markets also showing improvements.
Conversely, China and Germany, once strong growth performers, are now lagging. Global central banks, with inflation coming under control, are now focusing on rate cuts.
Germany continues to recover from the 2022 energy shock, where both consumer and producer prices rose more than in the rest of the euro area.
Confidence among households and businesses remains weak. Germany’s economy contracted in the second quarter and risks further contraction in the third. The UK, however, has outperformed expectations in the first half of the year.
China's early-year economic momentum has slowed due to a shrinking real estate sector and weakened consumer demand. This has pushed the country towards deflation, and there is a significant risk that China will miss its growth targets.
So far, government stimulus measures have not been enough to revive consumer and business confidence. This slowdown has had a global impact, particularly in commodity markets, with oil prices dropping by US$10 per barrel in just over two weeks, despite OPEC+ delaying production increases.
As a result, TD Economics downgraded its near-term oil price forecast. However, oil prices are expected to average $77 per barrel next year, as falling interest rates boost demand and OPEC maintains control over global oil supply.
In the US, the economy has slowed but remains stable, with economic growth just above 2 percent. The labour market has returned to balance, as indicated by the cooling non-farm payrolls data, and inflation is steadily moving towards the Federal Reserve’s 2 percent target.
The Fed has gained confidence in lowering interest rates without overheating the economy. TD Economics expects US growth to reach 2.6 percent in 2024, slowing towards 2 percent by the year’s end.
Consumer spending remains resilient, though the central bank is monitoring risks, including the erosion of pandemic-era savings and rising delinquency rates. The labour market has cooled, and housing demand is expected to improve in 2024 due to better affordability conditions.
Business investment in the US exceeded expectations but could slow in the coming quarters. Aircraft orders boosted second-quarter results, though transportation investment remains below pre-pandemic levels.
As borrowing costs decline, the transportation segment still has room to recover, and while business investment may slow, the easing interest rate cycle should limit the downside.
In Canada, the Bank of Canada was one of the first central banks to cut interest rates in June. Inflation is on track to reach 2 percent by the end of the year. However, economic growth is subdued, with real GDP growth forecasted at 1.1 percent for 2024, below the trend pace of 1.8 percent.
Consumer spending remains weak, though slightly stronger than in previous forecasts, thanks to better-than-expected population growth. Despite government efforts to control immigration, population growth continues to outpace expectations, providing some support to consumer spending.
Business investment in Canada is weaker than initially forecast for 2024, but lower borrowing costs and stronger growth are expected to boost investment next year. Investment in renewable energy and infrastructure projects will likely play a key role.
Residential investment, which has struggled for over two years, is also forecast to see improvement in the third quarter of 2024.
Canada's labour market has cooled significantly, with unemployment rising from a post-pandemic low of 5 percent to 6.6 percent as of August. Youth unemployment has accounted for over 40 percent of this increase.
The Federal government has announced policy changes regarding non-permanent residents, but the timing and effectiveness of these policies remain uncertain. TD Economics forecasts that the unemployment rate will peak at 6.8 percent before returning to 6 percent by the end of 2025.
Inflation in Canada is expected to stabilize near 2 percent by the end of this year, but the Bank of Canada must avoid over-correcting with its monetary policy.
TD Economics estimates the “neutral” overnight rate in Canada to be 2.25 percent, meaning the current rate is highly restrictive. Further interest rate cuts are likely, including the possibility of a 50-basis point cut at any meeting.
