Here at home, there does continue to be support for a weakening economic backdrop for Canada.  Like the U.S., Canadian headline CPI rose in December to 3.4% from November’s 3.1%.  (RBC Economics).    Energy prices, primarily gasoline, were partly to blame for the lift.  Even though prices at the pump came down in December, they did not decline to the same degree as was seen in December of 2022.  Food CPI has also held steady with no change on a YoY basis, keeping its current rate from November at 5%.  Of greater concern, food inflation appears to have accelerated in the last quarter of 2023 after experiencing a steady deceleration from the previous 6 months.    When food and energy are excluded from the data, CPI is shown to have decreased by 0.1% MoM – down to 3.4% from November’s 3.5%. 

 

This result parlayed well into the Bank of Canada’s decision this week to hold rates steady.  (RBC Economics)  In their press release on Wednesday, they did outline their continued focus on bringing inflation down, however they have now ceased to state that they remain “prepared to raise the policy rate further if needed,” which is a welcome development.  With a softening economic backdrop, the path forward for the Bank of Canada is very likely to begin rate cuts by mid-year provided CPI continues its downward trend.  The Bank’s own Business Outlook Survey for Q4 2023 highlighted the fact that most Canadian businesses have an overall negative sentiment on growth opportunity going into 2024 – primarily driven by demand side pressures. (RBC Economics)    While inflation is certainly cooling consumer spending, the Bank of Canada also noted that price inflation has also come down close to “normal” historical levels from those we saw during the pandemic. So, there may be some relief in sight for the consumer as we enter the next economic cycle later this year. 

 

Aside from the media circus that has been the U.S. primary races,  the U.S. economy itself continues to make headlines as GDP data for Q4 once again surprised to the upside with Q4 U.S. GDP growth coming in at an annualized 3.3%. (RBC Economics)  This resulted in the growth rate for 2023 in the U.S. coming in at 2.5%, well above 2022’s 1.9% and a far cry from the result most analysts were expecting at the beginning of last year when recession concerns were elevated.  The main contributor to this growth continued to be a robust U.S. consumer that appears to remain unphased by still above target inflation.  Business investment also remains strong in the U.S.   The only downside from this week’s GDP results is that the savings rate in the U.S. continues to be in decline, as household spending is now increasing at a greater rate than wage growth.    In addition, there has been a notable decrease in the number of new job openings in the labour market in the U.S., supporting the potential for an economic slowdown in the first half of this year.   Our outlook remains that the first half of 2024 will see the U.S. economy slow down and unemployment tick higher, however the prospects of a long and difficult recession remain quite low.

 

In China, there continues to be concerns regarding their equity market.  Since 2021, they have experienced a substantial sell off in onshore stock markets that has resulted in nearly $6 Trillion USD being wiped out.   In a bid to salvage investor confidence and put the Chinese stock market on the path to recovery, policymakers are putting together a $2 trillion-yuan (US$278 billion) package to buy shares onshore through the Hong Kong exchange.   The hope is that this relieves some of the downward pressure on stocks in the country and reinvigorates investor confidence.  (BNN Bloomberg)  Meanwhile, China continues to manage a real estate crisis, as their economic growth though positive continues to show signs of slowing.  GDP growth for China in 2023 came in at a soft, but near target, 5.2%.  (Al Jazeera) 

 

Over in Europe, like the Bank of Canada the ECB kept their overnight lending rate this week.   With recession slowing down economic growth in some of the region, the likelihood of an increase in rates remains near zero – especially as inflation has come down considerably since the beginning of 2023 with December headline inflation coming in at 2.9%. (BNN Bloomberg)   At present, it would appear policy makers are waiting to see if wage growth slows in the early part of 2024 as well as ensuring inflation continues its downward trajectory, before making any significant changes to their monetary policy.  Despite the recessionary concerns in mainland Europe, equity markets in the region have started 2024 off on a positive note.  For example, the EURO STOXX 60 is up 2.52% YTD – not far off from the S&P 500’s current YTD performance of 2.59%.