Global economy

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

Overall, global economic growth continues to evolve as expected. However, the composition of that growth has changed.

Growth of gross domestic product (GDP) in the United States is expected to be stronger than in the July Report, while growth in emerging‑market economies is projected to be weaker, particularly in China in the near term. Oil prices have declined, and inflation has eased in both the United States and the euro area (Chart 16).

Global GDP growth slowed to 2¾% in mid-2024 but is expected to strengthen modestly to 3% by the end of the year and maintain this pace over the projection (see Table 3 in the Projections section). Inflation is now close to central bank targets in many jurisdictions.

United States

US growth is strong, but the pace of activity is forecast to moderate. The labour market has cooled from overheated levels.

Inflation in the United States is easing mainly due to a decline in energy prices. However, core inflation remains higher than total inflation and is not anticipated to decline until early 2025.

Over the past year, improving supply conditions have helped production keep pace with strong demand. Labour productivity growth has averaged more than 2½%. Labour supply has been expanding, reflecting post-pandemic rebounds in labour force participation and immigration.

Economic growth will then moderate

In the projection, growth settles at a pace near 2¼% over 2025 and 2026. This is slightly slower than the outlook for growth in potential output and, because of this, the US economy should move gradually into better balance.

While growth continues to be underpinned by solid immigration and labour productivity, several factors are expected to contribute to a modest easing. These include:

• the fading impact of federal incentives for both business investment and infrastructure spending by state and local governments
• an assumed reduction in federal discretionary spending to meet legislated restrictions, which leads to slower growth in government spending
• the waning impact of past increases in financial wealth, which slows consumption growth and brings it more in line with income growth

However, pent-up demand and lower mortgage rates are projected to contribute to an increase in housing investment. Lower interest rates and solid labour productivity growth are anticipated to continue supporting consumption.

US inflation is easing

US personal consumption expenditure inflation fell from 2.6% in May to 2.2% in August (Chart 18), mostly due to the recent decline in oil prices. At the same time, core inflation remained close to 2¾%. Inflation in core goods was weak, while inflation in core services was elevated.

Inflation is expected to remain close to 2% over the projection horizon. Core inflation is forecast to slow as goods inflation remains weak while services inflation eases. Inflation in prices for core services excluding shelter is expected to fall below 3% in early 2025 as the effects of unusually high price increases (such as for motor vehicle insurance and health care) fade from the year-over-year rates of change.

Other major economies

Growth in the euro area remains modest, supported by activity in the services sector. Growth is expected to pick up somewhat over the projection horizon.

In China, weak growth in domestic demand is being partially offset by robust export growth. Recently announced policy stimulus is expected to support growth in coming quarters.

Euro area growth is modest

The euro area is growing at a modest pace of around 1%. This reflects a combination of factors:

• Cultural and sporting events boosted both foreign tourism and domestic demand in the second and third quarters.
• Exports of goods remain soft. The manufacturing sector has been held back by weak productivity growth and has also struggled to adjust to past energy shocks and strong competition in global goods markets.

GDP growth is expected to rise gradually over the projection horizon. An improvement in domestic demand for goods is expected in the near term. Growth in domestic demand is then projected to remain steady as the fading impacts of this year’s cultural and sporting events are offset by the supportive effect of lower interest rates.

Inflation has dropped to below 2%. This largely reflects the impact of recent decreases in energy prices. Core inflation is somewhat higher than total inflation. Inflation is expected to pick back up by the end of 2024 as the effects of last year’s declines in energy prices fall out of inflation statistics.

Inflation is then projected to return to the European Central Bank’s target in 2025 as core services price inflation moderates in response to a softening labour market and easing wage pressures.

Growth in domestic demand in China has been weak

Economic activity in China slowed sharply around the middle of 2024 due to weak domestic demand. This weakness largely reflects the ongoing impacts of the downturn in the property market. In particular, consumer and business confidence have been negatively affected by falling house prices.

These developments are having economic impacts that extend beyond China’s borders. The weakness in domestic demand has weighed on China’s oil consumption and global oil prices. In contrast, rising production capacity and falling prices for China’s manufactured goods have supported strong export growth.

Policy supports are expected to boost demand

China’s GDP growth is expected to strengthen from its mid-year pace of around 3¼% to around 4¼% in 2025, partly in response to recent policy actions and announcements. These include:

• lower bank capital requirements
• monetary policy easing
• political announcements pledging additional fiscal support
• proposed government funding to recapitalize China’s largest banks

These policy actions and announcements are expected to support consumer and business confidence, along with bank lending. Growth in domestic demand is projected to increase in 2025 before slowing in 2026 as the impacts of policy stimulus fade.

Export growth to slow

Export growth, however, is expected to moderate from its currently elevated pace to be more in line with growth in foreign demand. Rising trade tensions are also anticipated to limit demand for some exports.

Commodities

Oil prices have fallen since the July Report, largely reflecting weaker global demand and concerns of oversupply (see Changes to the projection in the Projections section).

Oil prices have been volatile in recent weeks (Chart 19). These price movements are due to three main developments:

• Markets were surprised by the weakness in China’s demand for oil, which has pushed down prices.
• Markets have assessed that oil supply may be stronger than previously expected, which has added to the downward pressure on prices. Oil production has been robust in countries outside the Organization of the Petroleum Exporting Countries (OPEC), and OPEC+ (OPEC plus some non-OPEC oil producers) may increase production to maintain market share.
• The broadening conflict in the Middle East—particularly concerns that the conflict could expand and impact Iran’s oil production—has put upward pressure on prices.

On balance, the price of Brent oil has averaged around US$77 since the July Report. Brent oil is assumed to average US$75 over the projection, $10 lower than in the July Report.

The Bank of Canada’s commodity price index excluding energy is largely unchanged.

Financial conditions

Global financial conditions have eased amid policy rate reductions by central banks and market expectations of more to come.

Since the July Report, central bank communications have led markets to expect further reductions in policy interest rates. This has caused global sovereign bond yields to decline—especially bonds with short-term maturities, which are the most sensitive to changes in near-term expectations for policy rate paths (Chart 20).

In Canada, with inflation continuing to decline, markets are expecting further cuts to policy rates. This has contributed to Canadian short-term yields falling relatively more than those of other countries. Canadian long-term yields have also decreased, although to a lesser degree. The decline in long-term yields is similar to that in other countries, reflecting the importance of global factors for these longer maturities.

The reduction in global sovereign bond yields has also contributed to a broader easing in financial conditions. Equity indexes in the United States and Canada have recently reached all-time highs. Corporate credit spreads are lower, and corporate debt issuance has been robust.

The Canadian dollar has averaged around 73 cents US, in line with its level at the time of the July Report.