United States, Canada, Mexico

Our economic and market outlook for 2024

December 12, 2023

A resilient U.S. economy may finally find itself susceptible to the effects of restrictive monetary policy in 2024. Canada already finds itself in such a position and may lead developed markets into a rate-cutting cycle. Mexico’s economy will likely take its cue from the U.S.

Roger Aliaga-Diaz, Vanguard Americas Chief Economist

“Even after policy rates recede from their cyclical peaks in the Americas region, rates will settle at a higher level than in the previous decade. We’re entering a new regime of positive real interest rates; we call it ‘sound money.’ In 2024, economic growth, central bank policy decisions, and capital markets expectations will continue adjusting to this new reality.” 

– Roger Aliaga-Díaz, Vanguard Americas Chief Economist

United States

Our outlook for year-end 2024

0.5%

Economic growth,
year-over-year

We expect the impact of more than 5 percentage points of interest rate hikes since March 2022 to take firm hold in 2024. The effect of restrictive real rates will overcome recent offsets to monetary policy including resilient consumption and fiscal spending. We foresee the economy slowing sufficiently to put inflation on a sustainable last mile toward the Federal Reserve’s 2% target.

2.3%

Core inflation, year-over-year

Downward trends in goods and shelter inflation put the focus squarely on services inflation, which is tied to the strength of the labor market. We expect the labor market and wage growth to soften through 2024, helping drive core inflation below 3% but not quite to the Fed’s 2% target.

3.5%–4%

Monetary policy rate

We believe that the Fed is at or near the end of its rate-hiking cycle, though we don’t expect it will cut interest rates until the second half of 2024. Thereafter we expect several cuts as economic growth stalls and the labor market softens.

4.8%

Unemployment rate

We expect the output gap—the difference between actual and potential economic activity—to widen, which would lead to a loosening in the labor market. We believe that disinflation will come at the cost of higher unemployment. The so-called “soft landing” scenario, one of sufficiently slowing inflation without material corresponding job losses, is unlikely. 

What I’m watching


Real interest rates finally becoming restrictive

“Real, or after-inflation, interest rates have only recently turned positive and by historical standards haven’t approached levels where they would weaken the economy sufficiently to consider the inflation fight over. We expect real rates to climb in 2024 as the pace of inflation slows and eventually become restrictive enough to push inflation the last mile to the Fed’s 2% target.”


Josh Hirt

Josh Hirt,
Vanguard Senior Economist

Notes: Light bars represent the average real interest rate over each hiking cycle; median average rate represents the median of the light bars. Real rate defined as the fed funds rate minus the average of 1-year-ahead inflation expectations and realized core Personal Consumption Expenditures Index year-over-year percentage change. Pre-1978 uses only realized core PCE inflation due to data availability. Dark bars represent the peak real interest rate achieved during each hiking cycle; median peak rate represents the median of the dark bars. We exclude the 2015 rate-hiking cycle from this analysis as an outlier because of the extraordinary effects of the COVID-19 recession in 2020. However, through the second quarter of 2019, before the Federal Open Market Committee began easing, the average and peak real rates were – 0.8% and 0.4% respectively over the hiking cycle.

Sources: Vanguard calculations, based on data from Refinitiv, as of October 31, 2023.

What I’m watching


The path of sticky services inflation

“The share of inflation-basket components running at more than 4% on an annualized basis is well above its prepandemic average, driven primarily by services inflation. We anticipate that rising unemployment and slowing wage growth should help normalize the pace of services inflation in 2024, which will be crucial for the Fed to reach its 2% inflation target.” 


Asawari Sathe

Asawari Sathe,
Vanguard Senior Economist

Notes: The shaded regions represent the three-month moving average of the proportion of inflation components by weight in the Personal Consumption Expenditures Index above 4% on a three-month seasonally adjusted annual basis

Sources: Vanguard calculations, based on data from Refinitiv and Moody's, as of November 30, 2023.

What I’m watching


A potential turning point for the U.S. labor market

“The labor market is typically a lagging indicator; it follows rather than leads the business cycle. Yet a few indicators foretell a potential turning point. Recent movement in indicators including private-sector job growth, part-time employment, and long-term unemployment suggest that in the first six months of 2024, the U.S. unemployment rate could jump by half a percentage point.”


Adam Schickling

Adam Schickling,
Vanguard Senior Economist

Notes: Probability of a rise of half a percentage point in the unemployment rate over the next six months is calculated using a probit model with the following leading indicators of the labor market as independent variables: long-term unemployed, part-time for economic reasons, discouraged job seekers, and temporary help employment. 

Sources: Vanguard calculations, based on data from the Federal Reserve Bank of St. Louis FRED database, as of October 31, 2023.

Canada

Our outlook for year-end 2024

~1%

Economic growth,
year-over-year

We expect the period of weak growth seen in late 2023 to extend into mild recession in early 2024. Though we anticipate a recovery in late 2024 in response to expected Bank of Canada (BOC) rate cuts as inflation moderates, highly leveraged households pose a risk of a greater slowdown. 

2%–2.5%

Core inflation, year-over-year

We expect inflation to continue decelerating toward the BOC’s target range of 1%–3%. Housing-related inflation, a key driver of overall inflation, should soften as house prices moderate in response to declining affordability. A loosening in the labor market and the resulting easing of wage pressures should additionally slow price increases for services unrelated to shelter. 

2.5%–3%

Monetary policy rate

Rapid interest rate increases in 2022 and 2023 have curbed demand such that the BOC led developed markets central banks in pausing its hiking cycle. The BOC could well lead a rate-cutting cycle, too. We foresee a reduction in the overnight rate by up to half from its current 5% by the end of 2024.

6%–6.5%

Unemployment rate

We expect inflation to slow further in 2024, but at the cost of a weaker labor market. The unemployment rate has increased by more than half a percentage point from 5% since the start of 2023. We expect further rises as the economy slows in response to rate hikes and as immigration helps ease labor shortages.

What I’m watching


The prospect of slowing homeownership-related inflation

“Prices related to homeownership, also known as owned accommodation, have been a key driver of overall inflation, with a weight of nearly 20% in Canada’s Consumer Price Index. Rapid Bank of Canada rate hikes have driven mortgage interest costs to multidecade highs. However, we expect declining affordability to weigh on house prices, helping to offset some of the impact of higher rates on mortgage interest costs. This in turn should help reduce the broader pace of inflation.”


Rhea Thomas

Rhea Thomas,
Vanguard Economist

An area chart showing the progression of owned accommodation prices’ annual contribution to the Consumer Price Index (CPI), with four components broken out: property taxes and other expenses, insurance and maintenance, replacement cost, and mortgage-interest cost.   Owned accommodation prices’ contribution to CPI remains in a range from around 0.2% to 0.5% from 2015 through the first quarter of 2021, then shoots sharply higher, to as high as 1.5%, through the mid-October 2023, when it sits at 1.2%. Mortgage interest costs detracted from CPI from mid-October 2020 through mid-June 2022 and have since added to CPI on a steadily rising basis, reaching a high of 1.2% in October 2023.

Notes: CPI contributions are on an annual percentage basis. “Other expenses” include land transfer costs and commissions on the sale of real estate. Contributions of homeownership-related inflation are also known as owned accommodation.

Sources: Vanguard calculations, based on data from Refinitiv and Macrobond, as of November 28, 2023. 

Mexico

Our outlook for year-end 2024

1.5%–2%

Economic growth,
year-over-year

Increasingly restrictive policy should cause growth to moderate to just below trend as inflation falls amid a slowdown in consumption, labor markets, and global economic growth. A decline in manufacturing and non-oil exports bears watching. Most exports are bound for the U.S., where we anticipate a slowing economy. A recovery in investment from a postpandemic slump, at least partially attributable to U.S. nearshoring, is a supportive factor.

3.6%–3.8%

Core inflation, year-over-year

We expect inflation to continue its deceleration toward the higher end of the 2%–4% target range set by the Bank of Mexico (Banxico) as services inflation remains sticky. Resilient consumption and a rise in electricity tariffs represent upside risks, while a stronger currency and a slowing global economy could help moderate price increases.

9%–9.5%

Monetary policy rate

Mexico’s policy rate is at its highest since 2005, having shot up by 7.25 percentage points since June 2021. We expect Banxico to begin cutting rates in the second quarter of 2024 as risks to growth increase and the pace of inflation continues to slow. A policy rate in a range of 9%–9.5% at the end of 2024 would continue to be restrictive.

3.4%–3.6%

Unemployment rate

The labor market has been robust, with the unemployment rate falling below 3% in 2023. We expect unemployment to rise to the mid-3% level in 2024 due to interest rates remaining restrictive and an anticipated slowdown in the U.S. and other developed markets economies.

What I’m watching


U.S. GDP and what it could mean for Mexico’s exports

“There’s a strong correlation between U.S. economic growth and Mexico’s U.S. exports. Some 80% of Mexico’s exports go to the U.S., accounting for nearly 30% of Mexico’s GDP. If U.S. growth slows appreciably, that could in turn influence Mexico’s growth.” 


Vytas Maciulis

Vytas Maciulis,
Vanguard Economist

A line chart showing year-over-year growth in Mexico’s exports to the U.S. through June 2023 and year-over-year growth in U.S. GDP through September 2023.  The trajectories of both measures are highly correlated, moving in a similar direction and by a similar magnitude over the period from 2006 through September 2023. The chart shows the correlation continuing through 2024, based on Vanguard forecasts.

Notes: All percentages reflect year-over-year changes. Chart shows Mexico’s exports to the U.S. through June 30, 2023, with Vanguard’s forecast thereafter, and U.S. GDP growth through September 30, 2023, with Vanguard’s forecast thereafter. 

Sources: Vanguard calculations, based on data from Refinitiv, as of September 30, 2023.

Notes: All investing is subject to risk, including the possible loss of the money you invest. 

A closer look

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Our outlook for 2024

A return to sound money, with interest rates above inflation, is a real positive.

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