Global economy

The global economy is forecast to grow at around 3% over the projection horizon, in line with its current pace. Inflation remains above central bank targets.

US economic growth has slowed materially, while the euro area is recovering from a period of weakness (see Table 3 in the Projections section)

Inflation is above central bank targets in both the United States and the euro area due to continued strong growth in services prices. As labour markets move into better balance, inflation should ease gradually.

The Bank monitors progress in the global economy to understand how developments outside our borders are impacting the Canadian economy and inflation.

United States

US economic growth has decelerated this year. Inflation is above target due to still-strong growth in services prices, although it should ease gradually as labour markets move into better balance.

US economy has slowed significantly

US growth is expected to average 1½% over the first half of 2024, down from about 4% in the second half of 2023.

Moderating growth in consumption and government spending has contributed to the slower pace of economic expansion. Consumption growth eased from an average of more than 3% in the second half of 2023 to about 1½% in the first half of 2024. This largely reflects the effects of past increases in interest rates, which raised borrowing costs. Consumer credit growth has slowed, and credit card delinquencies and loans in arrears are rising.

Government spending growth also eased in the first half of 2024. This mainly reflects a smaller impact from US federal government incentives on infrastructure spending as well as legislative constraints that held back growth in federal discretionary spending.

Growth in gross domestic product (GDP) is expected to gradually increase in the second half of 2024 to around 2% as growth in exports and consumption picks up. However, some uncertainty surrounds the strength of this increase.

In the projection, growth settles at a pace just over 2% in 2025 and 2026. This is broadly in line with the outlook for growth in potential output. Growth in consumption spending should pick up in 2026 in response to lower interest rates. This is partially offset by the projected slowdown in business investment growth, which is occurring due to the fading boost from various government incentives. Government spending growth is expected to continue to moderate in the second half of 2024 and remain weak thereafter.

US inflation remains above target

US inflation has eased (Chart 12) but remains above the Federal Reserve’s 2% target. Strong growth in services prices is keeping US inflation above target even though inflation in goods prices has returned to close to zero percent—near its historical average (see In focus: Drivers of inflation in core goods and services).

Chart 12: Inflation is still above central bank targets

Year-over-year percentage change, monthly data

The strength in services price inflation reflects two factors:

• inflation components that use long-term price contracts—such as rental housing and motor vehicle insurance—are adjusting slowly and their prices continue to rise in response to past inflationary pressures
• increases in the prices of some volatile components of the services sector, such as financial services, were relatively strong during the first half of the year

US inflation is projected to ease gradually in the coming quarters as inflation in services prices moderates. The ongoing easing in the labour market should help reduce cost pressures. Shelter price inflation continues to moderate. This mostly reflects slower growth in the prices of new rental contracts that are gradually feeding into official inflation measures.

Overall, with demand now broadly balanced with supply and the economy growing at a more measured pace, conditions are consistent with inflation gradually returning to the Federal Reserve’s 2% target.

Other major economies

The euro area is recovering from a period of weakness, while growth in China has been modest in recent quarters.

Euro area economies returned to growth

Economic activity in the euro area is expected to have grown at an annualized pace of just above 1% over the first half of 2024, after having stalled in the second half of 2023. A services-led recovery is now underway, while past energy shocks and disruptions continue to weigh on the manufacturing sector.

Over the projection, growth is forecast to slowly rise to around 1½% in 2026, supported by a resilient labour market, rising real income and a gradual decline in interest rates.

Inflation in the euro area has been around 2½% recently. Remaining inflationary pressures are mostly in services. Much of this upward pressure is from components related to tourism, such as hotel accommodation and restaurant services.

Inflation is expected to remain at close to its current pace over coming quarters. This partly reflects ongoing strength in wage growth and strong demand for services. In addition, the temporary impact on prices stemming from strong demand related to some cultural and sporting events, such as the Paris Olympics, is expected to help keep inflation elevated.

Inflation should gradually abate starting in 2025 as these one-off factors fade. Inflation then continues to ease toward the European Central Bank’s target because real interest rates remain restrictive. This maintains a modest degree of excess supply, which will help reduce pressures from labour costs.

China’s export-led growth has slowed

Growth in China has been modest in recent quarters, led by broad-based growth in exports. The prices of China’s exports have dropped, which has fuelled foreign demand. In contrast, growth in domestic demand has been weak. Deleveraging in the property sector has restrained investment, while falling prices for housing have weighed on consumer confidence.

In the projection, China’s growth is expected to slow as export growth moderates. This slowdown in exports is partially offset by policy support for infrastructure spending.

Elsewhere in emerging Asia, growth is supported by an ongoing recovery in tourism and exports. Growth in emerging-market economies (EMEs) is projected to continue at or close to its current pace until the end of 2026.

Commodities

The price of Brent oil has fluctuated around US$85—the level assumed in both the April Report and the current projection (Chart 13 and Key inputs to the projection in the Projections section).

In response to weaker-than-expected demand, members of the Organization of the Petroleum Exporting Countries (OPEC) and some non-OPEC oil producers have extended production cuts until at least the end of the summer.

In Canada, the start-up of the Trans Mountain Expansion pipeline has helped narrow the spread between West Texas Intermediate and Western Canadian Select oil prices from its 2022–23 average of close to US$20 to near US$15.

Relative to the April Report, the Bank’s non-energy commodity price index is modestly lower. Lumber prices have been weaker due to the recent slowing in US residential construction. Base metals and agricultural prices are somewhat weaker.

Financial conditions

Global financial conditions have eased since the April Report.

US equity prices have continued to rise, particularly in the technology sector. US bond yields have moved down due to softer economic data and expectations that the Federal Reserve will soon cut interest rates. Corporate credit spreads are at historically narrow levels and corporate debt issuance has been robust.

Canadian bond yields have also fallen since the April Report. The decline in these yields reflects two main factors:

• Canadian economic data were softer than markets had expected
• policy rates implied by the overnight index swap markets shifted down after the Bank’s policy rate cut in June

The yield on a Canadian two-year government bond is now close to 80 basis points lower than its US counterpart (Chart 14).

The value of the Canadian dollar is roughly unchanged against the US dollar at about 73 cents US.

Chart 14: Since the April Report, global financial conditions have eased, while the Canadian dollar has remained stable

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