Higher interest rates and inflation have become a reality for Canadians. Will 2024 bring relief? And how will the still-uncertain landscape affect economic growth and consumer spending this year? Michelle Meyer, chief economist at Mastercard and head of the Mastercard Economics Institute, discusses her outlook for the Canadian and global economies in 2024—and how consumers may face tough choices, but not without some signs of positive change on the horizon.

What is the global economic backdrop for 2024?

For the global economy, 2024 should be marked by easing inflation pressures across most economies and real GDP growth that is quite comparable to what we experienced in 2023. The Mastercard Economics Institute expects real global GDP growth of 2.9% this year, compared with about 3% for 2023. The global economy is still expanding, in particular because of eased inflationary pressure across most developed countries.

Will that easing of inflation be accompanied by an easing of interest rates?

Precisely. We think that central banks are at peak rates, for the most part, and we’re looking for a broad easing of monetary policy in the second half of the year. I’ll underscore that it will really be a normalization of policy. This is not a central bank community that is cutting rates because the economy has weakened substantially, but because they have made progress on their inflation mandate. As the broader economy rebalances, this could prompt a partial “normalization” of monetary policy.

Where do you think rates will level out?

That’s up for debate, but central banks are telling us they are hesitant to return to the lower bounds that they had in the prior cycle. Rate trends will differ across different economies, but it does seem like we will be operating with higher rates for longer than we had in the post-financial crisis period from 2010 to 2019, which may end up being seen as a highly unusual time in the cycle.

Let’s talk about Canada in particular. What do you see happening in the Canadian economy in 2024?

Canada has faced a number of challenges, including large debt burdens and high interest rates, which have all been headwinds for the economy. But the tailwinds come from positive labour force dynamics—in part from immigration—and also from onshoring. While there are some cyclical challenges because of the debt overhang, there are also some positive structural forces at work in Canada. We’re looking for real GDP growth this year of 0.8%, following an estimated 1.1% real GDP growth in 2023.

You mentioned positive labour force dynamics. Can you explain a bit?

I would say immigration policy has supported labour force expansion, and new Canadians tend to have high participation rates. I think that could be a positive source of growth. Another one that’s really important is the push towards more diversified supply chains, where production moves from China or the U.S. to Canada or Mexico. When you look at the trade balances between the U.S. and their major trading partners, Mexico and Canada have definitely picked up in terms of volume of trade.

What are some of the factors affecting consumer spending in 2024?

From a global perspective, this will be a year of trade-offs for consumers. Consumers will face choices about how to spend and how to invest. As the business cycle matures, one of the dynamics influencing those decisions will be relative prices. Inflation’s ups and downs have not been uniform. In some categories that had the biggest increases, like durable goods, affordability has now improved. In other categories—particularly services—inflation took longer to take hold and we are still seeing rising prices. I think the average consumer will have to think about how much of a price increase they can tolerate for certain categories and where they might be less willing to deploy their purchasing power.

Do those themes resonate for Canadian consumers, too?

I think so, but I would say a couple of distinguishing factors are at work for Canadian consumers. One is that, although food inflation has come down quite a bit in the U.S., it is still somewhat elevated in Canada—and food, along with gas, is one of the things that impacts inflation expectations the most. Also, the Canadian housing market is under more pressure than in the U.S. Home prices relative to income have been rising for a long while, and we’ve seen growth in mortgage debt. Interest rate increases were very meaningful for households in Canada because of the more immediate passthrough in variable rate mortgages. So, there could be continued pressure on housing-related spending.

What are the risks to the outlook?

Inflation dynamics are something to pay attention to. We’re all assuming that the slowing inflation we saw in 2023 can continue in 2024 without having to compromise the labour market too much. But if inflation remains higher than anticipated, that becomes a factor for central banks and resulting the economy. Also, while we can’t really predict external shocks, we can pay attention to whether economies are prepared to withstand them. On the plus side, monetary policymakers now at least have room to respond if or when a crisis does happen.