Economists say a surprisingly resilient U.S. economy will have spillover effects on Canadian markets and economic performance this year.

U.S. gross domestic product (GDP) came in stronger than expected last week, with a 3.3 per cent annualized rate during the fourth quarter of 2023. GDP expanded 2.5 per cent over the course of last year.

Bank of Canada Governor Tiff Macklem noted last week that global growth has not slowed as much as anticipated, “largely because of the surprising resilience of the U.S. economy.” 

James Orlando, director and senior economist at TD, told that the strength in the U.S. economy is being driven by stable and robust consumer spending, which appears to have “greater staying power” – and that economic strength is expected to influence Canada.

“When the U.S. is doing well, that has spillover effects into Canada. Those spillover effects usually come through in the form of businesses seeing very robust demand in the U.S.,” he said. 

In this environment, Canadian businesses could benefit from exports to the U.S., Orlando added.

Going forward, he predicts Canada’s GDP will experience “substantial weakness,” but strength in the U.S. economy should upward pressure on Canadian GDP growth.  

“It’s providing a nice offset for Canada during a time where we really need it most,” he said. 

There are expectations that U.S. growth will slow amid higher interest rates, Orlando noted, after central banks in Canada and the U.S. have raised rates in a bid to bring down inflation.

But projections for a U.S. downturn “keep getting pushed further and further out,” and Orlando questions if it will occur at all. 

“It speaks to the soft landing narrative that really is grabbing hold right now,” he said. “That is positive for equity markets … the idea that we're not going to head into recession to have to bring inflation down is a great sign, a great win for the economy and for markets.” 

Diverging consumer trends

Priscilla Thiagamoorthy, a senior economist at BMO Capital Markets, wrote in a note last week that U.S. economic strength typically drives the Canadian economy higher, but there is currently a “diverging growth profile” due to different consumer patterns in the two countries.

“American consumers continued to flex their muscle in Q4 (fourth quarter) as spending climbed 2.8 per cent annualized. Meantime, Canadians remain under severe pressure,” she wrote. 

She said a key reason for the divergence is the presence of 30-year fixed-rate mortgages in the U.S., which have protected many homeowners from higher interest rates. Canadian households, meanwhile, are facing mortgage renewals at higher interest rates, which will result in “muted consumer spending this year,” Thiagamoorthy said in her report.  

In an interview with, Thiagamoorthy said U.S. household balance sheets “are in much better shape compared to here in Canada.” 

“Even when you look at the ratio of personal disposable income, it's still near a record high here in Canada, whereas the U.S. had a major deleveraging following the financial crisis and that sort of continued,” Thiagamoorthy said. 

Central bank rate path

The U.S. Federal Reserve is set to make its first interest rate decision of the year on Wednesday, after the Bank of Canada held its trendsetting rate at five per cent last week.

Economists and markets are watching both central banks for hints at the timing of rate cuts that are widely predicted to come some time this year.

RBC economist Abbey Xu told the U.S. Federal Reserve is expected to lower interest rates midway through the year, alleviating pressure on U.S. consumers. 

According to Xu, this could potentially boost Canadian production and exports to the U.S. 

Orlando noted that the Bank of Canada has the largest impact on shorter-term interest rates, but longer-term bond yields beyond five years are impacted by global financial markets. 

Any moves by the U.S. Fed to lower interest rates will push down U.S. bond yields, he said, and changes in U.S. yields will “spill over into global bond yields,” putting downward pressure on Canadian bond yields.  

U.S. election

The upcoming U.S. presidential election could also have impacts on the Canadian economy, Orlando said, depending on the outcome.

Democratic President Joe Biden’s global trade and investment policies are well known at this point, Orlando said, pointing to the incumbent president’s stances on global trade as well as his government’s investments in green technology, the climate transition, electric vehicles and semiconductors.

Canada’s federal government has moved to keep pace with investments in areas affected by those policies, Orlando noted.

With Donald Trump considered a frontrunner for the Republican nomination, Orlando said the possibility of a second Trump presidential term could prompt the Canadian government to “(reopen) the playbook” from his last term.

A potential second Trump presidency could also have implications for international trade, Orlando added.

“People are thinking about how trade (has) evolved since Trump was president to see if there is something that could change thereafter,” Orlando said. 

Thiagamoorthy noted that there was significant volatility after Trump was elected in 2016, but growth continued to trend upward. 

“There isn't much of a significant correlation between elections and economic performance,” she said.