TORONTO, Sept. 28 /CNW/ - Slower growth, lower interest rates and
continued strength in the Canadian dollar will be the key economic and
financial trends into 2008, according to Scotia Economics' latest flagship
report, Global Outlook, entitled More of the Same - Only Different.
The Federal Reserve's decision to reduce interest rates to offset some of
the negative fallout from the sub-prime lending crisis has put U.S. monetary
policy out of sync with the more cautious stance in Canada, Europe and Japan.
"This policy divergence will widen into 2008 as the Fed cuts rates at least
another three-quarters of a percentage point, more if current prospects for
slow growth morph into a risk of no growth over the winter", according to
Warren Jestin, Scotiabank's Chief Economist. "Upcoming inflation trends may
help to validate the policy U-turn, as U.S. wage gains lose momentum, housing
prices erode, energy prices plateau and nervous retailers resort to deeper
discounting to lure reluctant shoppers to the check-out counter."
The Bank of Canada has moved out of tightening mode and is expected to be
very cautious about reversing direction. However, with the loonie trading
close to parity against the greenback and export prospects dampened by
weakening trends in our major trading partner, our central bank may opt to cut
rates by half a percentage point around year end. "The cumulative rate
reduction will be significantly less on this side of the border because output
growth, job gains, the housing market and consumer spending are all stronger
here and likely to remain that way", said Jestin. "Fiscal settings also
provide more stimulus here and the Bank of Canada has less tolerance for
two per cent-plus inflation than its counterpart south of the border".
"Major overseas central banks have upsized their concerns about
sustaining growth", according to Jestin, "but inflation concerns are still
central to their policy agendas. With European inflation around two per cent
and Japan still on the cusp of deflation, the most likely outcome in both
regions is no change in policy settings into 2008."
Has The Economic Outlook Really Changed That Much Since Mid-Year?
According to Jestin, global economic activity was set to moderate even
before the financial quakes from the U.S. sub-prime market began reverberating
through international markets. However, Jestin indicated that these financial
aftershocks are now expected to produce a deeper and more prolonged setback
than appeared to be on the horizon in June. Even with an aggressive easing by
the Fed, the United States will move from G7 growth leader to a position
somewhere in the middle or back of the performance pack. The resetting of
mortgage rollovers at significantly higher rates and the imposition of more
rigorous new purchase requirements will prolong the period of convalescence
for the U.S. housing industry. Weakening job creation also foreshadows a
deterioration of consumer confidence and spending in the lead-up to the
year-end holiday shopping season. Even a temporary curtailment of the
household sector's proclivity to overbuy, overbuild and overlever would create
big speed bumps for U.S. growth through 2008.
According to Jestin, the knock-on effects of the slide in the U.S.
housing market and lower motor vehicle sales have already shown up in Canadian
exports. However, buoyant exports of energy and industrial metals, alongside
solid domestic demand, should help underpin national growth, albeit with a
marked skew in regional performance in favour of Western Canada.
While weaker U.S. activity will have a less direct impact on Europe and
Japan, the negative market fallout from increased volatility, tighter credit
and reduced investor risk tolerance are also dampening growth prospects. This,
in turn, will spill over to many emerging economies. However, massive
longer-term infrastructure investments, in conjunction with surging consumer
spending, should be sufficient to keep growth in China from dropping below
10%. Similarly, the Indian economy should continue to expand by 8% or more.
These global growth leaders will be expanding at more than four times the
average rate experienced by developed nations.
The core group of Latin American economies also are likely to stay in
expansion mode. Their external debt profiles have materially improved,
inflation is converging to North American standards, the region's central
banks have been accumulating international reserves, and the well-supervised
financial sectors remain fundamentally sound.
From a Provincial Perspective
British Columbia's growth should average just over three per cent this
year and next, with infrastructure upgrades, port expansions, mining
developments and pipeline projects boosting both public and private sector
investment. Alberta's economic growth in 2007 and 2008 should average around
4 per cent. Construction activity, largely in the oil sands, remains robust,
while higher spending power keeps the province at the top of Canada's retail
Saskatchewan should enjoy economic growth averaging just over
three per cent this year and next on the back of strong global demand for
potash and uranium, and rising grain and oilseed prices. Manitoba should
experience steady economic growth of just under three per cent, with new
hydro-generating capacity underpinning capital spending and agricultural
producers benefitting from strong ethanol demand.
While Ontario's economy will continue to be weighed down by its
export-sensitive manufacturing sector, non-residential construction will be
buoyed by a number of infrastructure, mining and commercial projects.
Provincial growth is expected to remain below two per cent through 2008.
In Quebec, construction activity, including several hydroelectric and
infrastructure projects and a number of mine developments, will underpin
growth of close to two per cent in 2007-08. Consumer spending is supported by
earlier income relief measures.
New Brunswick's economy should benefit from construction on several major
projects this year and next. The province's forestry sector is restructuring,
but strong demand will boost mining. Nova Scotia's economy will receive a
boost from offshore natural gas production this year, while activity in
aerospace, shipbuilding and machinery and equipment industries supports
No major new projects are planned for Prince Edward Island, but reduced
potato acreage bodes well for pricing prospects, while expansions in the
aerospace industry support manufacturing. Newfoundland & Labrador will benefit
this year from higher mining and oil and gas production, while several
construction projects begin in 2008.
To listen to a recent podcast 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.
For further information:
For further information: Warren Jestin, Chief Economist, Scotiabank,
(416) 866-6136; Paula Cufre, Public Affairs, Scotiabank, (416) 933-1093