TORONTO, Jan. 15 /CNW/ - Economic growth will probably average two per
cent or less in the United States, Western Europe and Japan in 2008 because of
the lingering fallout from tightening credit conditions, reduced global trade
momentum and more cautious household spending attitudes, according to Scotia
Economics' latest flagship report, Global Outlook, entitled Gearing Down.
    "Canada's performance will be bolstered by significant fiscal stimulus,
stronger consumer fundamentals and still-buoyant commodity exports, though
growth is unlikely to average above 2.2 per cent over the next two years,"
according to Warren Jestin, Scotiabank's Chief Economist. "For the major
developed nations, the economic landscape is likely to be characterized by a
significant weakening in production and job creation through the first half of
2008 followed by a lengthy period of convalescence."
    According to Mr. Jestin, "softening G7 domestic demand will temper the
performance of other nations." China's growth may fall back into single-digit
territory, though gains in international market share and robust domestic
demand should keep its rate of expansion above 10 per cent in 2008. "While the
key drivers vary considerably across nations, ranging from strong
infrastructural development to robust commodity exports, India, Russia and a
number of emerging nations will continue to outperform traditional developed
economies by a substantial margin," added Mr. Jestin. From a monetary policy
perspective, the risks of a more challenging inflation environment beyond 2008
are outweighed by immediate economic risks and the likelihood that core
inflation is going nowhere fast in the months ahead. In the United States, the
credit crunch and associated recession in residential sales and construction
foreshadow a further slippage in job creation and consumer spending,
encouraging retailers to aggressively discount prices to lure cautious
shoppers to the check-out counter. With the risk that financial contagion
could trigger a deeper and more prolonged setback, the Federal Reserve is
expected to cut interest rates by at least another percentage point over the
winter.
    "The U.S. balance of payments does not suggest that the period of dollar
depreciation is nearing an end," said Mr. Jestin. Softening domestic demand
has already tempered import growth at a time when currency depreciation and
robust sales to emerging nations have underpinned double-digit export gains.
However, with imports nearly 70 per cent above export receipts, a prolonged
export outperformance is needed to allow a substantial reversal of the
US$800 billion trade shortfall. Jestin warns, "since the trade deficit must be
financed by massive capital inflows, the U.S. dollar is vulnerable as long as
deficit remediation lags actions by nervous foreign investors to cap or
diversify heavily overweight U.S. dollar positions.
    "The loonie's meteoric rise against the U.S. currency partly reflects
Canada's newfound attraction as a resource-rich economy in a resource-short
world, a positive for the currency that will be sustained by continued
buoyancy in commodity markets through 2008," said Mr. Jestin. "Our twin
merchandise trade and fiscal surpluses, a more cautious monetary policy and
the tendency for global investors to diversify their portfolios across
currencies and asset classes also favour the Canadian dollar. Even if, as we
expect, an emerging trend to slower growth and lower inflation encourages the
Bank of Canada to cut domestic interest rates by another half a percentage
point in the first half of 2008, underlying economic fundamentals will
probably keep the loonie flying high."
    While the one-two punch from currency appreciation and weakening U.S.
activity has dampened Canada's expansion, relatively buoyant commodity markets
will underpin growth, particularly in the western resource-based provinces.
    Strong public and private construction activity, especially in the
lead-up to the 2010 Vancouver Olympics, a vibrant mining sector, positive
interprovincial migration and solid income growth should maintain British
Columbia's output growth of 3 per cent in 2008.
    Alberta's breakneck growth should moderate somewhat, but remain strong at
3.4 per cent in 2008, given robust province-wide construction activity,
including continued oil sands development. Relatively elevated drilling costs
and uncertainties over the specifics of Alberta's new royalty regime, to take
effect in 2009, have heightened the decline in gas-targetted drilling activity
this year, though a modest rebound is expected in 2009.
    Saskatchewan's economy will be fueled by robust mining activity, an
inflow of new residents and solid income and wage growth, leading to 3.1 per
cent output growth this year. The agriculture sector will benefit from record
wheat and canola prices and significant expansion in canola crushing capacity,
though hog producers are under pressure.
    Manitoba should expect growth of 2.5 per cent in 2008 as public
construction remains brisk, particularly with major work on the Wuskwatim dam
this year. Mining exploration is on the rise, while the manufacturing outlook
is supported by strength in transportation equipment, including buses and
aerospace parts.
    A healthy service sector and solid non-residential construction activity
should help to offset continued weakness in Ontario's manufacturing and
forestry sectors, resulting in output growth of 1.5 per cent this year. Weak
U.S. demand will continue to drag down Ontario's auto sector.
    Quebec will witness similar goods-sector weakness, limiting growth to
1.7 per cent in 2008. The aerospace industry, however, will remain a bright
spot. Personal income tax cuts and the celebration of Quebec City's 400th
anniversary this year should benefit retail sales, while robust construction
activity, largely in the public sector, will support investment spending.
    Solid economic growth of 2.3 per cent is expected for New Brunswick in
2008, led by strong construction and mining activity (including the
development of a new potash mine) and the start-up of an LNG import terminal.
    Nova Scotia's growth should average 2.1 per cent this year, also driven
by construction and mining activity. Employment gains, largely in the service
sector, will help to offset weakness in manufacturing. Natural gas production
is expected to slow in 2008, while forestry prospects continue to deteriorate.
    Prince Edward Island is expected to post the lowest growth across the
Atlantic provinces this year due to a lack of new major construction projects
on the horizon.
    Newfoundland & Labrador is expected to average growth of 2.0 per cent in
2008, largely garnering support from nickel mining and energy activities, with
offshore oil & gas production expected to peak this year. Although a net
migration outflow of residents continues to affect the province, the
government has launched a campaign to help stem the flow.
    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
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