North American outlook: A mixed bag of economic activity

Across North America, the horizon looks brighter than it has for some time. Inflation is down and continues to fall, although with some bumps along the way, and an economic downturn that seemed to be looming hasn’t materialized. Businesses are still hiring, and wages have risen.

In North America, we aren’t impervious to events beyond our hemisphere. What happens geopolitically usually washes up on our shores. War in Ukraine and the Israeli-Hamas conflict are far away, but we’re seeing their impact through higher prices. If these conflicts intensify, they’ll likely worsen inflation and hit real wages and the purchasing power of North American households.

In addition to the global geopolitics, the United States goes to the polls Nov. 5, with hard-to-predict results that will shape the economic outlook for North America.

Despite this, the international picture is trending towards the positive. Global inflation is receding from recent highs and several major central banks—including in Canada and the European Union—have already cut interest rates. The hope is that the U.S. may follow suit with cuts.

In our summer Global Economic Outlook, EDC Economics expects the easing of U.S. rates to begin in December 2024. As the cost of borrowing starts to fall, it will gradually support demand for North American goods and services.

Jorge Rave, EDC’s regional vice-president for Latin America and the Caribbean, agrees.

“The main negative trends are related to the potential political changes that could derail the existing economic activity and global interdependence of the past 30 years,” Rave explains.

“This could be driven by the result of the upcoming U.S. election, which could be a catalyst for future political changes in the region. The political behaviour of voters is likely to be influenced by some of the socio-political challenges we have observed in the region in the past decade, including irregular migration, insecurity and economic inequality,” he says.

Some problems are common across North America, like housing prices, which have skyrocketed, putting homeownership out of the reach for many and high rent prices eating up consumer budgets. Aggravating this, the high interest rates have suppressed new home construction while an uptick in immigration has increased overall demand—putting upward pressure on housing prices. Until the supply gap is plugged, this will continue to eat into household budgets and crowd out discretionary spending.

But there are signs of improvement: All North American governments are trying to improve the housing situation. Mexico’s Institute of National Housing Fund for Workers is providing financing for low-income households, while the U.S. government is leveraging existing federal programs, as well as working with municipalities. In Canada, where lack of affordability is more acute, the federal government has announced billions of funding to boost the housing supply and provincial governments have started to address some regulatory restrictions.

Rave sees similar positive trends. “For three decades, North America’s economies have shown they can act as a powerful, interdependent economic and trade body. This is expected to remain the case, especially with North America acting increasingly as a regional investment and trade bloc. We also think that the nearshoring phenomenon will continue to be a driving force behind increased economic activity and much-needed prosperity in the region.”

That’s the general picture. When we look at North America’s three nations more closely, we can see it emerging with more clarity:

As summer advances, the economic optimism in the United States from the spring continues. Forecasts of a recession dominated news throughout the winter, but hasn’t materialized and inflation failed to stun economic momentum. This positive start to the year has led to an upward forecast revision that’ll see U.S. growth outpacing other developed markets.

In our forecast, we expect that this pace of expansion will slow. But it still leaves the U.S. in a class of its own among advanced economies: In our Global Economic Outlook, gross domestic product (GDP) is forecast to advance by 2.3% in 2024 and 1.8% in 2025.

This is partly due to the Biden administration’s industrial program, carried out through the Inflation Reduction Act, the CHIPS and Science Act and the Bipartisan Infrastructure Law. This hugely ambitious triad of policies is attempting to revive the United States’ productivity growth and alter the long-term trajectory of its economy.
 

While the inflationary pressure is ebbing, the Federal Reserve’s (Fed) policy goal of 2% is proving slow to achieve. Certain consumer needs such as vehicle maintenance and shelter remain costly, making overall inflation sticky. That stickiness, when coupled with the strong labour market—which will likely persist while job vacancies remain plentiful, and employers avoid laying off workers—probably means that the Fed will continue its restrictive monetary policies for longer than was expected by markets coming into 2024.

EDC Economics believes the Fed will begin reducing the policy rate no earlier than December. This will give the central bank time to assess how well they’re progressing toward the goal of 2% inflation, and if and when they can ease rates. This process will likely begin as the United States moves into 2025. But the U.S. economy won’t feel the full benefit for a while, especially since consumers who are carrying high debt loads won’t be inclined to splurge—they’re likely to be more focused on repairing their household finances after two years of dipping into savings. 

Wage growth is running well above inflation, so real earnings of workers are positive and on par with the 10-year, pre-COVID-19 growth. This positive trend is likely to persist due to rising productivity gains. Despite the relief afforded by the labour market, U.S. households are feeling worn down by high interest rates and inflationary pressures. Many have spent the savings they accrued during the pandemic, and they have since racked up credit card and “buy now, pay later” debts. This is probably the root of the glum consumer sentiments—feelings that have been oddly out of tune with the generally good performance of the economy.

Housing remains another pain point for consumers, with persistently high borrowing costs and prices reflected in their reluctance to purchase in the near term. Once interest rates begin to ease next year, the pentup demand will be released and both home building and buying should increase. That, in turn, will support other housing-related spending.

On the business side, surveys indicate that financing conditions are generally positive for companies. While business spending is expected to be only middling this summer, non-residential investment is highly unlikely to collapse and business spending should improve next year as the Fed begins to cut borrowing costs. Incentive packages made available through recent legislation should support business investment over the next year as companies invest in their aging capital assets.

Internationally, as the Fed lags on interest rate cuts, the U.S. dollar’s strength will likely increase for the rest of the year. This will help slow U.S. exports. But export growth should pick up in 2025 when the Fed’s expected policy easing weakens the strength of the dollar.

The steady stream of warnings about a looming recession has made many worry about the bottom dropping out of the economy, especially when consumers are heavily loaded with debt. High interest rates haven’t helped—since they started rising in spring 2022, home purchases have slumped while rental costs have skyrocketed. Households have less room for discretionary spending and big-ticket items, leading to a sharply weakened domestic demand for goods and services.

While households are making decent wages, most are focused on interest rate payments and building their saving buffers. Aggravating this uneasy situation is a likely decline in Canada’s short-term economic performance. Growth wasn’t great in 2023, at 1.2%, and we forecast it to hit only 1.1% in 2024 and 1.9% in 2025. Also, government spending, which has been a key support for the economy since the pandemic, has wound down and this will remove some growth momentum. Taken together, there are some good reasons for Canadians’ economic edginess.

That said, there are trends currently at work that may ensure Canada’s economy makes a soft landing:

1. The slowdown in domestic demand, mentioned above, has led to a corresponding slowdown in hiring. Job vacancies are now back to pre-pandemic levels and the jobless rate has gone to 6.2% in May 2024 from 4.8% in June 2022. This is partly a result of an increased labour supply, boosted by a flood of non-permanent residents (such as temporary foreign workers) into Canada, and this rise in worker numbers has helped control wage pressures faced by employers.

2. The average hourly wage gains have stabilized to around 5% year-over-year since summer 2022. With inflation now hovering around 2.6%, that provides a decent real-wage boost for workers.

3. As the labour market has cooled, the Bank of Canada has begun easing its target overnight policy rate. It was cut in June to 4.75% and more cuts are expected before the year ends.

4. Inflation continues to edge downward. Weaker domestic demand is helping to ease pricing pressures, which could drive inflation down to the Bank of Canada’s 2% goal by the end of 2024 and allow them to announce additional interest rate cuts.

5. Canadians are understandably fretful about housing costs—just like American consumers. But with the Bank of Canada starting to cut the policy rate and government measures introduced to improve the housing market, residential construction activities should pick up next year.

On the business side, the outlook isn’t very positive for capital investment, and optimism among purchasing managers is low. On balance, most businesses expect that future sales, investments, and hiring will be subdued this year while lending conditions remain tight. But with economic conditions expected to improve in 2025, business investment is likely to bounce back next year.
 

In the interim, though, weak Canadian growth and a wider interest rate spread between Canada and the United States means that investors will be drawn south of the border. This will likely keep the Canadian dollar to an average of US$0.72 this year, continuing the downward trend of the last two years. But the loonie is expected to rise to US$0.75 in 2025 once the economy rebounds.

Finally, on the exports front, the Canadian economy will get a lift from a weaker loonie and a strengthening U.S. economy. While auto production is expected to slow as companies re-tool plans and production lines to produce electric vehicles, Canada’s exports of crude oil, machinery, agri-food and consumer goods will likely perform well in the U.S. market.

Mexico’s recent election will reverberate throughout the country’s economy for some time. It was a landslide for the country’s first female president, Claudia Sheinbaum, and awarded her coalition a clear mandate to govern. However, the scope of this victory was unsettling for markets and investors as the stock market lost 6% in the days following the election and the peso dropped 4% against the U.S. dollar.

Investors now expect the winning coalition to pass President Andrés Manuel López Obrador’s constitutional reforms—including ones that reduce judicial independence—resulting in further losses since the election. The peso took a beating from the markets, and forecasts suggest that it’ll fall even farther by 2025. These reactions stem from investors’ unease about the deterioration of governance and policy that could be precipitated by the electoral outcome, and they’re being cautious when considering their investment choices.

Mexico also started the year on a weaker economic footing than expected, with retail sales and business investments declining. Election spending boosted government expenditure, but with the election now over and the purse strings tightened, the government has limited fiscal space to operate. Large commitments to pension entitlements, for example, are estimated to cost the government 1.3% of GDP in 2025 and 2% of GDP by 2035. This will constrict the government’s ability to improve infrastructure and other social programs that would make the country attractive to international businesses looking for nearshoring opportunities.

Despite the challenges, there are several notable positives.

• Jorge Rave says we can expect a level of policy continuity for the next six-year presidential term. “Public policy that prioritizes social programs and poverty reduction should continue to drive Sheinbaum’s short- to medium-term efforts. Her administration will also provide new resources for clean technologies and green energy to drive the fight against climate change, which will strengthen Mexico’s energy matrix to support nearshoring. This ambition will likely become a critical aspect of the country’s aspiration to be a credible and reliable North American manufacturer.”
  
  
• While consumption moderated in early 2024, the Mexican consumer still has enough firepower to move the economy along. The unemployment rate was down to 2.6% in April this year, while real minimum wages went up by nearly 15% this year. That follows a similar jump a year ago as the current government boosts workers’ purchasing power.
  
  
• Given our outlook for the U.S. economy, the flow of remittances from Mexicans in the United States to families at home are expected to continue. This is an important economic factor, as Mexicans abroad sent US$63 billion back to Mexico last year to support their families. Together with wage increases, this should help support domestic consumption in the face of high interest rates and high inflation.
  
  
• While business investment is likely to soften this year, Mexican exporters are likely to benefit from the strong U.S. economy. Mexico has now overtaken China as the largest exporter to the United States and the weakening peso will make Mexican goods even more attractive for U.S. importers. Mexico is also benefiting from an inflow of tourists and film production due to cheap labour and a lower peso.
  
  
• On the inflation front, the Central Bank of Mexico left its policy rate unchanged during its meeting in May. This is only a temporary pause, since additional policy easing is expected before the year ends. The speed of the easing will be adjusted to ensure that inflation reaches the bank’s policy target.
  
  
• Finally, EDC Economics has revised Mexico’s outlook downward for the medium term. Real GDP is forecast to advance by 1.9% in 2024 and 2% next year. This is a 0.5-point and 0.2-point reduction, respectively, from our 2024 spring forecast. But the most important point here is that the overall forecast for Mexico remains positive—and indeed, is stronger than that of most G7 economies.

Export Development Canada (EDC) offers several solutions, including market intelligence and business connections, to support Canadian companies in their global expansion. Our sector-focused teams have a range of knowledge and expertise.

“We have local knowledge of how to do business in different markets, but we also have the right people who have the connections, and we can leverage that benefit to Canadian exporters,” says Rave.

“We have a significant and strong Team Canada, including the Trade Commissioner Service, as well as our guides on local culture and doing business as a Canadian exporter.”

• Accessing the U.S. market should start with learning how to navigate and leverage the Canada-United States-Mexico-Agreement (CUSMA) and understand how the U.S. Buy America policy can impact business.
• EDC’s Export Help Hub covers the globe and can connect you with EDC trade advisors who can answer your questions, help you understand your challenges and help you find solutions for them. They specialize in markets and strategies and customs and regulation requirements.
• EDC offers the Business Connections Program, which promotes Canadian export capabilities to international buyers.

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