With the global economic engine kicking into a preemptive higher gear, summer 2023 began on a cautiously optimistic tone with mostly positive news from first-quarter economic data for countries, like the United States, China, and Canada.
As a result, EDC Economics revised our forecast for the global economy this year from 2.4% to 2.9%, with similar growth of 3% in 2024. The global economic recovery remains in a precarious state due to the lingering impacts from Russia’s invasion of Ukraine and high inflation in many developing markets. But spiking interest rates are creating headwinds for momentum in the second half of the year.
With interest rates exceeding inflation in some advanced markets, investment flows will be more targeted, marking the end of the “easy money” era. A stronger U.S. dollar and increasing debt borrowing costs will put further strain on developing markets contending with increased fiscal constraints.
Despite higher interest rates, consumers—the growth engine of any economy—have continued to dip into their pandemic savings account. In North America, for example, households in the U.S. and Canada are using surplus savings to cover the higher cost of living. Any remaining savings are concentrated in the higher income brackets and have a lower tendency to spend that money in times of higher uncertainty.
Fortunately for Canada, we’re in a good place. Inflation, which has been persistently high over the past year, is showing noticeable signs of improvement, and will enter the target range of 1% and 3% before the end of the year. The labour market also remains resilient, with unemployment at historically low levels in the face of central bank’s fastest and most aggressive interest rate hikes in a quarter of a century.
Here are three things to watch, as highlighted in the recent summer edition of our Global Economic Outlook.
1. Inflation is easing in most advanced countries, but core measures are more persistent.
Inflation in many advanced economies is coming down as economic activity slows, due to higher interest rates and volatile components, like energy, dropping off. But, some categories are keeping core inflation well-above normal levels of growth. As consumers shift spending to services, inflation has stayed persistent. The European context is still impacted by the Russia-Ukraine war, keeping food price inflation in double-digits.
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2. The labour market is slowing, but remains healthy.
Tumbling job vacancy rates are an early indication of loosening labour markets in North America, where conditions never seemed to translate into a wage-price spiral. In the Euro Area, job vacancy rates have stalled, and labour costs have begun to stoke inflation pressures, highlighting the unique economic challenge for the region. Unemployment in many advanced markets is still low, although risks to reversing the downward trend are mounting.
3. Central banks are committed to taming inflationary pressures, even if it means keeping rates higher for longer.
While most central banks remain in their tightening cycle, the pace of interest rate increases has slowed. Yet, high interest rates have led to more expensive credit, as banks have swiftly increased lending rates. Tighter lending standards, in particular, have restricted access to credit for consumers and businesses. EDC Economics expects the Federal Reserve, Bank of Canada, and European Central Bank will soon end their tightening cycle.
The global economy is entering rough waters with a higher risk that monetary policy will further slow economic activity. But despite this, Canadian exporters expressed a renewed sense of optimism. In EDC’s mid-year 2023 Trade Confidence Index, exporter confidence rose after three consecutive declines, but remains below the historical average, with global economic conditions a key concern.
Be sure to check out our latest Global Economic Outlook to help you make sense of the global economic environment. In this release, EDC Economics launched our new country profiles—each of the nine countries in our base case forecast—to bring in the regional perspective on key export markets for Canadian companies. You’ll be able to read each analyst’s prediction on the short-term outlook for each country.