More and more banks and economists are leaning towards a hard landing in 2023 as high interest rates start to bite. But a recession is not a done deal yet, even though the U.S. economy is on thin ice going into next year.
After a rapid interest rate hiking cycle by the Federal Reserve, macroeconomic data is finally showing signs of cooling, with the biggest hit to the economy yet to come.
Fed Chair Jerome Powell has reiterated a few times already that the full effects of this year’s total 425-basis-point rate increase are yet to be worked through the economy.
On the possibility of a soft landing, Powell also noted that the longer the Fed needs to keep rates higher, the narrower the runway becomes. “I don’t think anyone knows whether we’re going to have a recession or not. And if we do, whether it’s going to be a deep one or not, it’s just not knowable,” he said in December.
Despite the Fed Chair not being able to forecast a recession, the Fed is looking for real GDP to come in at 0.5% in 2023, the PCE inflation to slow to 3.1%, and the federal funds rate to peak at 5.1%.
What the big banks are saying
The big banks have weighed in on what to expect next year, and some see a soft landing as their base case scenario.
Goldman Sachs stated that the U.S. economy could avoid a recession. “There are strong reasons to expect positive growth in coming quarters,” Goldman Sachs’ chief economist Jan Hatzius said in the 2023 outlook.
Goldman sees core inflation slowing to 3%, the unemployment rate rising 0.5 percentage points, and the U.S. economy growing 1% next year.
However, the bank noted a “distinct risk” of a downturn, with a chance of a recession at 35% next year.
“We expect the FOMC to slow the pace of rate hikes as it shifts to fine-tuning the funds rate to keep growth below potential, but to ultimately deliver a bit more than is priced … with three 25bp hikes next year raising the fund’s rate to a peak of 5-5.25%,” Hatzius said. “Our recession odds are below consensus even though our Fed forecast is slightly more hawkish than consensus because we expect demand to prove more resilient than expected next year.”
Morgan Stanley projects that “the U.S. economy just skirts recession in 2023, but the landing doesn’t feel so soft as job growth slows meaningfully and the unemployment rate continues to rise.”
Nevertheless, risks remain “skewed to the downside” because of high interest rates, noted Morgan Stanley’s chief U.S. economist Ellen Zentner.
Morgan Stanley estimates that rates will remain elevated for almost the whole year.
Credit Suisse believes the U.S. can avoid an economic downturn next year as inflation slows and the Fed pauses rate hikes. In 2023, the bank sees the U.S. economy growing 0.8%.
On a more bearish side, JPMorgan has warned that a recession is very likely next year. “Our view is that market and economic weakness may occur in 2023 as a result of central bank overtightening, with Europe first and the U.S. to follow later next year,” JPMorgan’s chief global markets strategist Marko Kolanovic said in his 2023 outlook. “While there is significant uncertainty on the timing and severity of this downturn, we think that financial markets may react sooner and more violently than the economy itself.”
Bank of America forecasts a recession in the first quarter of 2023, with the GDP falling 0.4% next year. The bank forecasts the unemployment rate to rise to 5.5% and inflation to fall to 3.2% by 2024.
UBS is also calling for a recession in 2023, citing high interest rates and projecting near-zero growth for the U.S. next year and in 2024. “We think the U.S. expansion is headed for a hard landing,” UBS’ chief U.S. economist Jonathan Pingle said in the 2023 outlook.
Wells Fargo is pricing in a recession in the third quarter of next year as the dramatic rise in rates hurts demand.
“We expect the Fed to continue tightening policy through the first quarter of next year, with the fed funds rate peaking at 5.25% this cycle … That said, we do not expect the Fed to cut rates immediately at the first sign of weakness. Specifically, we expect the Committee to stay on hold for the rest of 2023, and we look for the first rate cut in Q1-2024,” the bank said.
Capital Economics is looking for the U.S. to enter into a mild recession next year, with the Fed forced to cut rates before the end of 2023. The GDP is expected to rise 0.2% over the next year, and core inflation to slow to 3.2%.
“We expect the lagged impact of higher interest rates to push the U.S. economy into a mild recession next year. Although that downturn will be accompanied by only a modest rebound in the unemployment rate, we expect both headline and core inflation to fall rapidly, eventually convincing the Fed to begin cutting rates before the end of 2023,” Capital Economics said in its outlook.
Can the Fed reach 5% next year?
Billionaire “Bond King” Jeffrey Gundlach sees the Fed moving another 50 basis points in February, with rates potentially peaking at 5% next year.
But what’s more important is that the Fed won’t be able to keep rates at that level for more than one meeting and will be forced to cut, DoubleLine Capital CEO Gundlach said during a December webcast.
“You get to 5%, you repeat it, and then the market thinks it will start falling,” he said. “The bond market is pricing in that the fed funds rate one year [later] will be the same as the fed funds rate at the December meeting. This leads me to wonder why even bother with these hikes? Dig a hole just to fill it back in.”
Gundlach even warned that the Fed might not even make it to 5% as the data is “weakening too rapidly.”
The Fed moving rates up so quickly is not usually good for stable policy, said Gainesville Coins precious metals expert Everett Millman. “The U.S. economy will fluctuate widely from that … I think there will be a pause on rate hikes sooner than projected. Next year, the damage will be clearer,” Millman said.
The Fed is always working with backward-looking data, which makes its job much harder. “It’s difficult for them to see problems in the economy until it is too late. They could follow through and push rates near 5% because they want to appear to be handling inflation,” Millman added.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
