The prospects of a recession are receding. Instead, it’s increasingly likely that the U.S. and Canadian economies will manage a soft landing, according to a report from Morningstar DBRS.
The rating agency said economic growth and labour markets appear to be cooling gradually on both sides of the border.
Growth in Canada rebounded in the first quarter, following two quarters of little growth in the second half of 2023.
Overall, “the underlying trends point to an economy that is growing below potential,” the report said, noting that GDP growth lagged population growth in six of the last seven quarters. Morningstar DBRS said such a situation indicates slack is building in the economy.
Preliminary data suggests the economy will register moderate growth in the second quarter, Morningstar DBRS added.
“We expect the U.S. and Canadian economies to grow slightly below-trend through the remainder of the year,” the report said. “In Canada, population growth should underpin moderate growth rates over the next few quarters even as the negative output gap continues to widen.”
The U.S. economy appears to be returning to normal rather than facing a more severe downturn, Morningstar DBRS said.
Meanwhile, the inflation outlook is improving in both Canada and the U.S., and labour markets are cooling too. “The U.S. labour market is loosening on the margin but remains in good shape,” the report said. “While demand for labour is waning, there are few signs of stress in the market.”
In Canada, the job market is adjusting to the rapid population growth.
“While layoffs remain relatively low, small businesses are increasingly concerned about insufficient demand and there is a rising number of involuntary part-time workers. In this environment, we think the pace of job gains will likely slow and unemployment will continue to edge upward,” DBRS Morningstar said.
At their latest policy meetings, the Bank of Canada trimmed rates while the U.S. Federal Reserve Board kept rates unchanged. DBRS expects monetary policy from both central banks to be largely driven by the incoming economic data in the months ahead.
“We think the [Bank of Canada] could take a gradual approach, at least early in the easing cycle, as it remains concerned about strong wage growth amid weak productivity gains and it will want to avoid stoking a rebound in the housing market,” the report said.
For Canada, markets are forecasting two to three more 25-basis point rate cuts this year.
In the U.S., markets are expecting rate cuts to start this year, but there’s a good deal of uncertainty about how far and how fast the Fed will move.