2023 Economic Year in Review | U.S. and Canada
As 2023 comes to an end, it’s a good time to look back at the performance of both the U.S. and Canadian economies this year. Much has happened in both countries, and we might be able to glean some insight into the coming year based on what we’ve seen in the last 12 months. Let’s take a look at the state of the economy in both countries and look forward to 2024.
The U.S. Economy Today
Despite strong forecasts early in the year that the U.S. was headed for an almost-certain recession, that prediction now appears to have been skirted, replaced by optimism for a “soft landing”… at least for the immediate future. Real GDP and consumer spending have continued to grow and stocks have rallied throughout the year. With the Federal Reserve likely done bumping interest rates, inflation will continue to ease. The strong labor market resilience has also contributed to a more optimistic outlook.
However, the effect of many pandemic-related factors such as federal financial assistance, low borrowing rates, increased salaries and pent-up demand will eventually begin to erode. Plus, high government spending is helping the economy now, but the longer-term effect of the sharp increase in the federal deficit remains to be seen. In the end, the economy likely will not be resilient forever meaning the predicted recession may simply have been delayed rather than averted.
What We Could See in 2024
2024 will be a U.S. Presidential election year, so a lot may be up in the air. The Chair of the U.S. Federal Reserve expects inflation to continue to reduce based on the current positive direction it is currently taking, potentially dropping below 2.5 percent by the end of the year. However, the economy as a whole may see some slowing, particularly in the first half of the year, due to the Fed’s tight monetary policy measures. Overall, the Fed projects U.S. GDP growth of 1.5 percent in 2024, although some economist predictions are a bit more conservative.
The Canadian Economy Today
The economy in Canada, much like in the U.S., is seeing inflation cooling and unemployment lowering. However, the Canadian economy has remained flat – some have even suggested that the significant population growth in Canada is the only thing that has prevented economic decline – while the U.S. economy is growing. CBC cites two likely culprits as to why: higher interest rates are hitting Canadians harder than they are hitting Americans, and Canadians aren’t spending at the same rate as Americans. Canadian mortgage terms are set up at only five years compared to America’s typical 30 which causes higher interest rates to hit Canadians faster and harder. This has also led to Canadians saving, rather than spending, their disposal income in anticipation of higher mortgage rates nearer in the future.
The philosophies of the two countries regarding federal spending are also at odds which contributes to the economic disparity. The U.S. government has invested billions of dollars in each of several new programs targeting infrastructure, semiconductor technology and clean energy which have helped to boost the U.S. economy. However, the cautionary flip side to these investments is that, as of the end of October, Canada’s deficit shrank slightly in 2023 while the U.S. deficit jumped around 23 percent from the prior year.
What We Could See in 2024
Last month, the Bank of Canada suggested in its 2024 forecast that the Canadian economy will continue to shrink with real GDP growing by only 0.9 percent; however, inflation is expected to begin recovering from its reversal in Fall 2023 with a drop to around 3 percent by the end of 2023 and possibly reaching 2 percent by the end of 2024. This could bode well for a potential “soft landing” in Canada rather than a recession. However, consumer spending is expected to remain low given high household debt due to mortgage terms coupled with high interest rates which, along with increased geopolitical risks, could drive the Canadian economy into full recession.
For a more geographically-specific forecast, see this breakdown of how Canada’s provinces might fair next year when it comes to both economic and housing performance.
The only thing truly clear at this point is that no one has a crystal ball to predict the future of the North American economies. For now, it seems the U.S. can stop holding its collective breath since recession no longer appears to be imminent although it would be wise to plan for a slow-down in 2024. Meanwhile, Canadians should brace for a longer stretch before any relief is expected, likely at least until the second half of the year when interest rates may finally start returning to more manageable levels.