Despite the sharp rise in interest rates in 2022 and 2023, real GDP is projected to grow by a robust 2.8% in 2024, and slow only gradually to 2.4% in 2025 and 2.1% in 2026. With immigration expected to step down from recent peaks, labour demand cooling somewhat, and less scope for households to further draw down savings, consumption growth should soften, though remain solid. Meanwhile, business investment is projected to expand moderately. Downside risks to the growth forecast include persistent inflationary pressures that delay anticipated cuts in the policy rate, and an increase in trade tensions. Upside risks include a continuation of recent strong productivity growth and deregulation of key sectors of the economy.

With inflation showing signs of settling at a level consistent with the Federal Reserve’s target, further easing of monetary policy is likely to be warranted over the next two years. Large budget deficits are expected for the foreseeable future, while fiscal pressures from ageing are rising, underlining the need for a significant fiscal adjustment over the medium term. Reforms of the visa system for skilled workers could help address immediate high-skilled labour shortages in priority areas.

GDP grew at a robust pace of 2.9% in 2023 and growth has remained strong through the first three quarters of this year, despite the sharp rise in borrowing costs in 2022 and 2023. Private consumption growth over this period has been solid, reflecting brisk real wage gains. Public consumption growth has also continued apace, led by subnational governments that find themselves in strong budget positions thanks to resilient tax revenues and historically large amounts of federal aid distributed during the pandemic. Investment growth has been strong in some sectors, possibly reflecting the effects of new industrial policies legislated in recent years, although housing investment, impacted by higher interest rates, has remained subdued. At the same time, headline inflation has continued to fall from its peak of 7.2% in June 2022 to 2.3% in October 2024—approaching the Federal Reserve’s 2% target thanks in part to declines in energy prices. Core inflation has also fallen towards the 2% target, albeit less rapidly. This combination of falling inflation amid strong growth is due in part to the continued unwinding of adverse pandemic-era supply factors, a surge in immigration, and an increase in labour productivity. According to the Congressional Budget Office, over the past three years annual net immigration flows have roughly tripled relative to the average flow observed over the five years preceding the pandemic. Meanwhile, labour productivity growth has rebounded from its low in 2022 and has recently been running well above its pre-pandemic average. A range of output, price, and labour market indicators suggest the economy is currently operating near full employment.

Partly reflecting this strong domestic demand, the current account deficit—at well over 3%—is large and remains almost double pre-pandemic levels. After narrowing modestly in 2023, the deficit widened through the first three quarters of 2024 amid a strengthening dollar and declining primary income balance that currently stands at its lowest value since the early 2000s. A labour strike affecting ports primarily along the East and Gulf Coasts of the United States began in October and threatened to significantly disrupt global supply chains. A deal was reached just a few days after the strike began that will keep the ports open until mid-January 2025 as negotiations continue.

With monetary policy easing having begun in the third quarter of 2024, further policy rate cuts are likely to continue until early 2026, with the policy rate settling at around 3¼ to 3½ per cent, a good bit above pre-pandemic levels. The Federal Open Market Committee will continue reducing asset holdings of Treasury securities and agency debt and agency mortgage-backed securities into 2025.

The budget deficit is expected to remain very large at over 7½ per cent of GDP on a general government basis with the debt-to-GDP ratio above 120% and rising. Though pandemic-era support for households, businesses, and subnational governments has largely unwound, there is a structural mismatch between higher spending, including on mandatory social programmes due to population ageing, and a tax base that has narrowed over the past decade. The forecast assumes that the tax reductions in the Tax Cuts and Jobs Act (TCJA), which are scheduled to expire at the end of 2025, will be broadly extended.

Real GDP growth is expected to slow gradually in 2025 and 2026. As immigration normalises, labour demand cools, and savings accumulated during the pandemic are fully exhausted, private consumption growth will slow. Private investment growth is expected to be moderate, as the boost from declining interest rates is partly offset by a drag from households and businesses that locked in low rates during the pandemic and must now refinance at higher rates. Meanwhile, public consumption and investment growth, particularly at the subnational level, should continue to normalise from their elevated levels as these governments exhaust federal aid distributed during the pandemic. The unemployment rate will inch up but remain low, while nominal wage growth slows a bit, partly reflecting the decline in inflation. Inflation is projected to return to target by early 2026.

Risks to growth are likely skewed to the downside, although the recent pattern of unexpected resilience could continue. Stickier-than-expected services inflation that delays monetary easing, a surge in oil prices associated with a worsening conflict in the Middle East, a significant increase in trade tensions, or weaker labour force growth could all lead to lower output growth. On the upside, productivity growth, potentially fuelled by new advances in artificial intelligence, may continue to come in stronger than expected. Deregulation of key sectors of the economy could also provide a boost to growth.

The large budget deficit and rising debt ratio at a time of strong growth add to domestic demand and increase fiscal risks, both in the near-term and further ahead. Population ageing will push future mandatory pension and health outlays higher. A gradual but sustained medium-term fiscal adjustment is required to narrow the budget deficit and put the government debt ratio on a path to more prudent levels. There is scope to broaden the tax base and raise revenue in a more effective way, as well as to increase the efficiency of pension spending and reduce very high health costs. Adopting a solid medium‑term framework to improve the sustainability of public finances could help manage these pressures. Reforms of the visa system for skilled workers could help to address relatively low employment-based permanent immigration and could better align the issuance of visas with demand for professionals in priority fields, easing shortages and boosting growth. Policies that re-engage higher education students who recently stopped studying are a priority, as are further measures to accelerate the learning of economically disadvantaged students.