What should we expect of the economy in 2024?
Chiefly that last year’s rise in the cost of living will be greatly slowed and perhaps halted altogether in 2024.
And that the economic recovery in 2024 will set the stage for a return to pre-pandemic normality as early as 2025.
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This is the year that mortgages rates start falling, along with high rates of interest on credit cards and other types of credit.
In fact, borrowing costs will drop by at least 20 per cent in 2024.
The Bank of Canada (BoC) is poised to cut its policy rate to four per cent by year-end from a current decades-high five per cent.
The BoC, vilified by some for the role of interest-rate hikes in raising the cost of living, is not heartless.
“With the cost of living still increasing too quickly, and with growth subdued, the next two quarters will be difficult for many,” Tiff Macklem, governor of the Bank of Canada (BoC), acknowledged in a December speech.
Macklem also said that victory over inflation is at hand.
“The excess demand that drove prices higher over the past two years is now gone,” he declared, a rare, unambiguous statement from a central banker.
That being the case, interest-rate relief is in order. And the double-whammy of high inflation and rising interest rates that Canadians endured last year will be a thing of the past by the end of this year.
Inflation is already down to 3.1 per cent from its 2022 peak of 8.1 per cent. And it will fall further this year, to within the BoC’s target range of 1.5 per cent to three per cent.
Which makes possible the BoC’s rate cuts, expected to commence by summer.
Those cuts will be the start of a gradual but sustained decline in borrowing costs. Mortgage rates, which have already begun to slip, will fall to an average of about 3.5 per cent by 2026.
And they will drop from the current six to eight per cent long before that.
Meanwhile, the weakness in consumer spending that has helped drive down inflation without pushing the economy into a severe recession is forcing merchants to cut their prices.
The year ahead will be one of price discounts, already evident in 2023’s decline in food inflation and price-cutting in the airline and auto sectors.
That price relief will spark renewed strength in consumer spending by the second half of 2024 that should lift the entire economy, given the outsized role of retail sales in GDP growth.
Optimism about 2024 derives in part from a widely forecast 2023 recession that didn’t happen.
Goldman Sachs was one of few forecasters that got it right early last year in forecasting a 2023 economic slowdown but not a deep recession.
In its latest forecast, the New York securities firm again sees “only limited recession risk” in 2024.
Instead, Goldman predicts a further increase in real household income this year, a higher rate of economic growth as interest rates decline, and a recovery in manufacturing activity.
A Canadian jobless rate that was expected to spike in 2023 instead nudged up to a current 5.8 per cent, well below its 6.9 per cent average in the decade prior to the pandemic.
Last year also marked historic wage gains that eclipsed a falling inflation rate. That marks a permanent net increase in household buying power as inflation drops still further this year.
High interest rates tend to divert money from the stock market to risk-free cash-equivalents that offer respectable returns.
But investors have kept faith in equities.
While the stock market is not synonymous with the economy, it’s good at signalling the economy’s underlying strengths and weaknesses.
So, it matters that the Dow Jones and Nasdaq ended 2023 at record highs, and that the broader S&P/TSX and S&P 500 came close to doing so.
Canadian housing starts have also remained strong despite higher borrowing costs.
Risk factors in 2024 include a BoC that waits too long to start cutting rates, a widening in the Ukraine-Russia and Israel-Hamas conflicts, and another oil-price shock.
Nothing does more damage to an economy more quickly than an oil-price shock. But production increases by the Alberta oilpatch and U.S. frackers have kept oil prices from hitting a widely predicted $100 (U.S.) per barrel. (The current world price is $73.)
To be sure, economic growth will remain sluggish in the first half of 2024. And stock markets, riding high on expectations of rate cuts, are overvalued until GDP growth and stronger corporate profits catch up with current valuations.
In the meantime, the Canadian economy has taken severe blows from historically high interest rates without cratering. Far from it.
There’s even less reason for economic uncertainty in 2024, which is shaping up as a year of modest but meaningful recovery.
Happy New Year.
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