S&P Global Ratings’ team of economists, led by Chief Economist Dr. Paul Gruenwald, is responsible for developing the macroeconomic forecasts and risk scenarios used by S&P Global Ratings' analysts during the ratings process, as well as leading key cross-sector and cross-divisional research projects.
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ON THIS PAGE Global U.S. Eurozone Asia-Pacific Emerging Markets Canada EMEA Emerging Markets Latin America
GDP growth: Headwinds against household consumption and an expected recession in the U.S., Canada's major trading partner, will likely hurt the Canadian economy next year. Geopolitical uncertainties, weakness in the U.S., and the ramifications of inflation and monetary policies at home will keep growth moderate into next year. We now expect growth to slow to 1.1% in 2023 (compared with the 1.9% we projected in our June forecast).
Labor force: The jobs market remains tight as more people return to the labor force. Nonetheless, there have been net job losses in three consecutive months, while job postings continue to decline. We expect the labor market to weaken modestly in response to tighter monetary policy.
Unemployment: The unemployment rate, at 5.4% in August (just below the pre-pandemic level), is expected to rise through early 2024. With economic pressures worsening as the central bank continues tightening the screws and U.S. economic activity weakens, business demand for labor shrinks. We now expect the unemployment rate to climb to 5.9%, on average, in 2023 from 5.3% in 2022.
The BoC: By the end of the year, the central bank will likely raise policy rates an additional cumulative 150 basis points to 3.75%. The bank will keep both monetary tools--rate hikes and quantitative tightening--for as long as excess demand and the tight labor market continue to push prices. We expect the bank to cut rates starting in second-quarter 2023 as inflation begins to moderate. Core inflation, excluding food and fuel, is expected to reach the BoC's target of 2.0% by fourth-quarter 2023.
Growth: Better-than-expected growth in several emerging market (EM) economies in the first half triggered a small upward revision to our 2022 GDP growth forecast for our sample of EMs, excluding China. However, we expect a weaker second half, and even slower growth in 2023 across most EMs.
Risks: Downside risks remain substantial, especially from the global fallout of the ongoing Russia-Ukraine conflict and the Fed-led tightening of financial conditions.
Inflation: We raised our median consumer price inflation forecast for our sample of 17 EM countries to 5.6% in 2023--1.5 percentage points higher than our June forecasts--emphasizing the sharper hit to consumers' purchasing power and subsequent lower real domestic demand.
Monetary policy: Keeping inflation expectations anchored and protecting capital flows will be top of mind for monetary policymakers. EM central banks have been ahead of their advanced country counterparts in hiking policy rates, and in Latin America are now near the end of their tightening cycles. Elsewhere, core inflation continues to rise, suggesting there is more work to do.
A sharp slowdown in eurozone growth is imminent. An unprecedented deterioration in the terms of trade has pushed inflation to record highs and confidence to record lows. As a result, the five consecutive quarters of solid GDP growth as of second-quarter 2022 will give way to two or three quarters of subdued or even lower activity. That's why we now expect the eurozone economy to stagnate next year (0.3% versus 1.9% previously). For this year we are revising upward our growth forecast to 3.1% from 2.6% and lowering our unemployment forecasts.
There are windbreakers, however. Supporting the economy are still accommodative monetary policy, increasing fiscal support in response to the energy crisis, easing supply chain bottlenecks with large remaining production backlogs, and a growing population. What's more, the labor market, with employment at an all-time high, is unusually strong. Risks to this outlook are predominantly on the downside.
Monetary policy will become slightly restrictive by next year. Given strong economic conditions and high inflation, the ECB has front-loaded interest rate hikes. A terminal deposit rate of 2% could be reached by the end of first-quarter 2023. Also important for monetary policy normalization are reductions to the ECB's balance sheet, which we believe will start by the end of 2024.
GDP growth: Our U.S. GDP growth forecast is 1.6% for 2022 and 0.2% for 2023, as the economy falls into a shallow recession in the first half of the year (compared with 1.8% and 1.6%, respectively, in our August economic update).
Labor force: The jobs market is still tight as workers quickly find jobs. The labor force participation rate for prime age female workers (25 to 54 years old) climbed in August to its highest rate since before the pandemic, as COVID-19 vaccines to young children and reopening of schools helped parents return to the workforce, to improve business needs.
Unemployment: We now expect the unemployment rate to reach 4.8% by the end of 2023 and peak at 5.7% by early 2025. It will hold above 5% through 2026.
Inflation: Inflation likely peaked in third-quarter 2022 but will remain high on continued supply-chain disruptions. Core prices, excluding food and fuel, is expected to remain above the Fed's 2.0% target until first-quarter 2024.
The Fed: The Fed is now likely to push rates from zero at the beginning of this year to 400-425 basis points (bps) by early 2023. The Fed will keep monetary policy tight until inflation begins to moderate in second-half 2023. We expect the Fed to cut rates in late 2023 as its soft landing turns into a hard one with prices softening on weak demand. Risk is for more rate hikes this year and the next.
Downside: While our baseline now includes a recession, we can't rule out chances of an even harder landing. As we write this, the Fed has indicated that it will tighten the screws more if needed. A more aggressive Fed would likely mean an even harder landing than in our baseline.
Upside: One upside could be that, as the economy tumbles, demand softens, lowering prices, allowing the Fed to change course to avoid an economic crash. The economic ship re-rights itself and manages to steer toward safer waters.
