TORONTO, May 15 /CNW/ - Responding to emerging environment issues,
governments in the major developed nations are changing regulations, taxes and
subsidies to achieve ambitious long-term environmental and energy conservation
targets, according to Scotia Economics' latest flagship report, Global
Outlook, entitled Going Green... Don't Plan On Business As Usual.
    "These policy actions will have a big impact on industrial
competitiveness and relative economic performance among regions," said Warren
Jestin Chief Economist, Scotiabank. Adapting to the fallout from climate
change, which can take the form of severe droughts and other extreme weather
conditions, also carries enormous costs.
    By 2020, the European Union (EU) is aiming to reduce greenhouse gas (GHG)
emissions by at least 20 per cent from 1990 levels, derive 20 per cent of its
energy from renewable sources and trim 20 per cent of its primary energy
consumption. Achieving these goals will be a big challenge since they require
massive public and private investments and the integration of EU power
markets.
    In the U.S., President Bush has committed to reducing national gasoline
usage by 20 per cent over the next decade, a goal also aimed at restraining
petroleum imports that currently exceed US$300 billion annually. In the
absence of national targets for reducing emissions, California and other
states are tightening emission limits and mandating the use of alternative
energy sources such as wind and solar.
    The greening of the policy agenda has rapidly gathered momentum in Canada
as well. "Ottawa and the Provinces are setting new environmental targets and
unveiling multi-billion-dollar spending initiatives," said Jestin. The new
federal accelerated depreciation incentive for machinery and equipment
purchases also will help support energy-efficient investments.
    Jestin reports that "Ottawa has opened the door to equivalency agreements
that will allow each Province and Territory to lead its own clean air agenda.
This flexible approach recognizes both the unprecedented co-operation required
among all levels of government and each jurisdiction's different industrial
structure, prior policy settings and resources."
    "But as Kermit the Frog told us years ago, it's not that easy bein'
green," said Jestin. A wide array of technologies and processes is being
championed to mitigate environmental impact, yet the path from innovation to
implementation is often not smooth.
    "Globally, meaningful progress requires major adjustments in all nations.
China, the second-largest annual producer of GHG emissions after the U.S.,
India, and many other emerging industrial nations rely on coal-burning power
generation to help fuel their fast-track growth," adds Jestin. "These emerging
nations are going to have a very difficult time implementing, let alone
affording, the huge expenditures needed to reduce pollution intensity and
improve energy efficiency."
    Canada's potential as an energy super-power hinges on developing its
massive non-conventional petroleum resources, largely in Alberta. As oil sands
output ramps up, investment in new technology will be needed to limit the
relatively high GHG emissions from their extraction. While a number of options
have been proposed to meet the substantial power demands of major resource
developments, all of the alternatives carry multi-billion-dollar price tags.
    New environmental requirements are not the only factors altering the
competitive landscape. Intense global competition, the soaring loonie, high
energy prices, and on a longer-term basis, the aging of the baby boom
generation, greatly complicate strategic planning. At the same time, the green
agenda will unleash enormous business and employment opportunities.
    From a Canadian perspective, the gradually decelerating trend in domestic
activity that emerged in mid-2006 has continued into the early part of 2007.
This more moderate economic profile is expected to persist, with output growth
averaging just 2.3 per cent this year and 2.7 per cent in 2008. The
downgrading in growth expectations remains centred on the manufacturing
sector, which is grappling with intense international competition and the rise
in the Canadian dollar in recent years.
    "Given the moderation in U.S. growth now underway and the renewed
strengthening in the Canadian dollar, further production cuts and factory job
losses are likely in the coming months," said Mr. Jestin. "Looking further
ahead, however, these cost cutting measures alongside an accelerated pace of
business investment should eventually put the sector on a firmer footing. It
should also begin to narrow the wide performance gap between the
manufacturing-dominated economies of Central Canada and the resource-rich
Western provinces."
    After three straight years of robust expansion, U.S. real economic growth
will likely drop to an average of around 2.5 per cent over the next two years
as the continuing downturn in the housing sector puts greater pressure on
consumer spending. The external sector should prove supportive, however, as a
weakening U.S. dollar and ongoing strong foreign demand point to continuing
gains in export volumes.
    The developing Americas region as a whole will post a slower, yet more
sustainable, economic expansion. Growth differentials between the more stable,
better-performing economies, Brazil, Chile, Mexico, Peru and Colombia, and the
post-crisis fast-growing countries, Argentina and Venezuela, will tend to
narrow.
    Western Europe is on a moderate growth trajectory averaging around two -
2.5 per cent through 2008. Nevertheless, the combination of higher interest
rates, an appreciating euro, slower growth in overseas markets and fiscal
deficit reduction will dampen the rate of expansion.
    Japan is also on track to record moderate GDP growth of about 2 per cent.
The impetus will come largely from business investment and foreign trade, as
the government remains focused on spending restraint, and consumer spending
gains will remain subdued. Developing Asia, led by China and India, will
remain in the top ranks of the global growth charts.
    From a provincial perspective, British Columbia should remain near the
top of the growth pack this year and next, led by activity in the construction
sector. Large-scale expansion in the oil sands will continue to spur growth in
Alberta as the construction boom spills over into the non-resource and service
sectors. Saskatchewan's economy is expected to grow by close to three per cent
this year and next, benefiting in part from strong support from the mining
sector and the impact of increased North American biofuel production. Manitoba
should also witness steady growth through 2008 mainly due to public investment
in infrastructure, as well as expansion of hydroelectric and wind power
capacity.
    The expansions in Ontario and Quebec are expected to lag the national
average in both 2007 and 2008, as their beleaguered manufacturing sectors
continue to weigh on production. However, Ontario's large service and
construction sectors will help keep the province moving ahead, while Quebec
will benefit from expanded hydro investments.
    New Brunswick's economy will be supported by several energy-related
construction projects underway, and by the mining sector that is being buoyed
by strong global demand and high commodity prices. Nova Scotia will also
benefit from increased energy and metal mining production. Newfoundland and
Labrador should rival Alberta for the top growth spot in 2007 as output
rebounds in the offshore oil, and metal mining sectors. Prince Edward Island
will likely lag the other Atlantic provinces because of a lack of major
construction projects, though food and aerospace manufacturing should continue
to expand.
    To view a recent Webcast of Scotiabank's Chief Economist, Warren Jestin,
and ScotiaMcLeod's Director of Equity Trading, Fred Ketchen, presenting the
Global Outlook, visit www.scotiabank.com.
    The Global Outlook and other Scotia Economics publications are available
at www.scotiabank.com and on Bloomberg at SCOE.

    Scotia Economics provides clients with in-depth research into the factors
shaping the outlook for Canada and the global economy, including macroeconomic
developments, currency and capital market trends, commodity and industry
performance, as well as monetary, fiscal and public policy issues.