With economic growth in Canada and the U.S. outpacing expectations, Scotiabank has upgraded its 2024 growth forecast for both countries and warned that interest rates might not come down until the third quarter.

In a report released Tuesday, Scotiabank nearly doubled its forecast for GDP growth in Canada to 0.9% from an earlier prediction of 0.5%. In the U.S., 2024 growth is predicted to reach 2.3%, up from a previous forecast of 1.3%.

“The resilience narrative continues to play out, as households on both sides of the border continue to spend at a higher pace than expected. The impact of elevated policy rates remains less negative than feared,” Scotiabank said.

U.S. GDP growth has been “nothing short of spectacular,” the report said. It was at 5% and 3.3% for the third and fourth quarters of 2023, respectively, and the Atlanta Federal Reserve suggested 4% growth for the first quarter of this year. Employment growth in the U.S. was strong, as were wage gains, with rapid productivity growth that helped slow inflation.

Canadian growth is stronger than expected but to a lesser extent than in the U.S. Scotiabank said that inflationary pressures remain a concern in Canada with underlying inflation close to 4% at the end of 2023 and robust wage gains.

“Upward revisions to growth that are not accompanied by stronger productivity will cut the amount of excess supply and reduce disinflationary pressure,” the report said.

The increased growth comes at an inflationary cost with Scotiabank predicting that the Bank of Canada and the U.S. Federal Reserve will delay rate cuts until the third quarter of this year.

The report forecasts that the Bank of Canada will adjust its rate down from 5% to 4.75% at the end of Q3 before reaching 4.25% by year’s end. Meanwhile, the U.S. policy rate is expected to drop from 5.5% to 5.25% in the third quarter before going down another 75 basis points by the end of the year. Both countries are expected to lower interest rates to 3% at the end of 2025.

However, the BoC is also sensitive to pent-up demand for housing in Canada. Residential real estate sales have accelerated as families expect declining long-term mortgage costs, the report said. This could put upward pressure on economic activity, possibly leading the BoC to delay rate cuts even further.