Waiting for the US Election—Forecasts Largely On Hold: Scotiabank’s Forecast Tables

• Somewhat stronger growth expected in the US and Canada this year and next as incoming data suggest a bit more momentum.

• Inflation in Canada is moderating, giving the Bank of Canada scope to continue cutting rates as there are early signs that the rate-sensitive sectors of the economy are improving.

• With inflation accelerating in the US (temporarily, we hope) and stronger growth, the Federal Reserve should cut rates, but we see no case for jumbo cuts going forward.

• The results of the US election could alter these forecasts significantly, and we will reflect upon the outcomes post-election. There is simply too much uncertainty about who may win and what the winner will do at this point to have a firm view on the impact of the election.

The results of the US election have the potential to heavily impact forecasts. With polling continuing to suggest a toss-up in the November 5^th vote, there is simply too much uncertainty to be confident on the way forward for the US, Canadian and global economies. As a result, this month’s update is just a quick update to account for the most recent economic data. We usually push out our forecast horizon by a year in our October forecasts but we will delay this until our November, post-election, outlook.

There are nevertheless some meaningful developments to reflect upon. In the United States, it is clear the economy is stronger than what the Federal Reserve seemed to think when they began the rate cutting cycle with a 50 bps move. The job market is stronger, wage growth remains solid, retail sales are accelerating sharply, inflation is (hopefully temporarily) re-accelerating, and historical revisions to GDP show more activity than previously estimated. Owing to these developments, we have raised our forecast for US growth this year and next, from 2.5% and 1.6% in 2024 and 2025 to 2.6% and 1.8%. Taken together these data suggest the Fed may have erred with a first jumbo cut. We continue to believe the Fed will cut rates gradually, with 25 bps cuts in coming meetings, but our confidence on this is waning. We may well need to revise the number of expected cuts if the economic and inflation data continue to confound expectations with their resilience.

The slightly stronger growth in the US is a positive for Canada, but here too we are seeing signs of a pickup in the interest rate-sensitive segments of the economy (chart 1). Existing home sales have picked up significantly in August and September. Auto sales have generally been trending up in the last several months (with some exceptions). Retail sales in July and August tracking were very strong. Moreover, the Canadian economy cranked out 47k jobs in September, all of which were full-time and private sector. Offsetting these data to some extent have been lower oil prices, but on balance we are raising our forecast for growth to 1.2% and 2.1% this year and next from 1.1% and 1.9%.

Inflation in Canada is decelerating a bit more rapidly than expected. While we think the growth outlook and the early response to lower interest rates suggest the Bank of Canada should continue to cut its policy rate in a gradual manner, we believe the decline in inflation will prompt the Bank of Canada to cut its policy rate by 50 bps at the October 23^rd meeting. Following that, we expect a return to a pattern of 25 bps cuts through the middle of the year, with the policy rate sitting at 3.0% then. As argued previously, we continue to believe there are meaningful upside risks to consumption and housing market activity that should make the Bank of Canada more cautious in cutting interest rates even though the economy remains in excess supply. More growth would of course be welcome as it would help close the output gap more rapidly, but a potentially sharp rebound in these areas could pose risks for inflation control. This risk is amplified by the political side in Canada, with a Federal election set to take place within the next year. It will likely see some pre-election goodies rolled out, which could be stimulative. And we can’t discount the impact of provincial policies, as Ontario’s Premier is reportedly getting ready to send $200 cheques to Ontarians early next year. Any ramping up of fiscal spending will further cloud the outlook for interest rate cuts.

These views risk being altered significantly by the results of the US election. Both candidate platforms are generally inflationary, but the tariffs proposed by former president Trump could dramatically alter the inflation path going forward, and if so the outlook for growth and interest rates. At a minimum a Trump win would increase uncertainty, which in and of itself is damaging to growth, but the tax cuts he proposes could provide a boost to the economy in the early days of his mandate. Unless VP Harris manages to also control Congress, her platform is less likely to be implemented than Trump’s. Neither candidate is fiscally responsible, though the Trump platform points to a much larger increase in debt than Harris’.