TORONTO, April 12, 2018 /CNW/ - The global economy is on the cusp of a long-feared escalation in trade tensions, the dominant risk of the Trump presidency. The tension between the United States and China is leading to heightened financial volatility, affecting virtually every asset class. An escalation in retaliatory trade policies would have very significant implications for the US and China, with consequences impacting other countries. This threat looms large over economic outcomes, and on central bank actions in North America.

"Setting aside trade risks, all indications suggest that global expansion remains solid, largely synchronized and resilient," said Jean-François Perrault, Senior Vice President and Chief Economist at Scotiabank. "Global trade volumes are rising at levels not seen since mid-2011, despite concerns about trade protectionism."

The NAFTA negotiations stand in some contrast to the acceleration in trade protectionism undertaken by the US. The Trump Administration appears willing to compromise on key demands in a rush to secure a revised NAFTA for the fall US midterm elections. Since NAFTA-related uncertainty has been a drag on Canadian and Mexican activity, an early deal could potentially lift many of the negative consequences associated with the trade negotiations.

The strong rise in global industrial production has led to a significant increase in commodity prices relative to last year. This strength is expected to last, despite trade-related increases in risk aversion resulting in some softness in prices in March. The impact of strong global demand is most evident in the energy sector, with WTI expected to average US$65 per barrel, up nearly US$15 per barrel from 2017 levels.

Highlights of Scotiabank's Global Outlook include:

• Canada: Scotiabank Economics continues to look for slowing, but still above-potential growth with projected real GDP growth to decrease to 2.2% in 2018 and 2.1% in 2019.
  
  
• United States: Turbocharged by fiscal stimulus, growth remains robust and is projected to increase to 2.6% in 2018 and 2.4% in 2019.
  
  
• Capital Markets: To keep inflation from rising too much above its target, the Bank of Canada will need to raise rates by 50 bps by end-2018 and a further 75 bps by end-2019. US rates are expected to increase by 25 bps twice more in 2018 with two further hikes in 2019, taking the Fed funds rate to 2.75% at end-2019.
  
  
• Currency: With higher oil prices, Canadian rates rising and those in the US forecast to rise less than anticipated by the market, the Canadian dollar is expected to strengthen through the year, with the potential for an even more aggressive appreciation if the NAFTA negotiations are concluded.
  
  
• Europe: Momentum remains solid, in spite of a softening in indicators early this year. GDP growth is expected to slow somewhat from last year's torrid pace.
  
  
• Latin America: Prospects remain generally strong for the Pacific Alliance, owing to the strength of the global economy and higher commodity prices. At 3.6%, two full percentage points above 2017's growth, Chile will lead the Pacific Alliance countries in growth this year.
  
  
• Mexico: Indicators reveal that domestic and external demand are leading to a significant acceleration in activity relative to last year (to 2.4% in 2018 from 2.0% in 2017), despite NAFTA-related uncertainty and the upcoming election.

Read Scotiabank's Global Outlook online at: http://www.gbm.scotiabank.com/scpt/gbm/scotiaeconomics63/globaloutlook.pdf

About Scotiabank Economics

Scotiabank 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. Our reports are available at www.scotiabank.com/economics.

About Scotiabank

Scotiabank is Canada's international bank and a leading financial services provider in North America, Latin America, the Caribbean and Central America, and Asia-Pacific. We are dedicated to helping our 24 million customers become better off through a broad range of advice, products and services, including personal and commercial banking, wealth management and private banking, corporate and investment banking, and capital markets. With a team of more than 89,000 employees and assets of over $923 billion (as at January 31, 2018), Scotiabank trades on the Toronto (TSX: BNS) and New York Exchanges (NYSE: BNS). For more information, please visit www.scotiabank.com and follow us on Twitter @Scotiabank.

SOURCE Scotiabank