Global economy slowing: Scotiabank

By Steven Lamb | October 20, 2004 | Last updated on October 20, 2004
3 min read

(October 20, 2004) The global economic recovery that was much-touted in 2003 is facing pressure on several fronts, as countries adjust to soaring commodity costs and increased currency volatility, according to Scotia Economics’ Global Outlook report. But the report says that the North American economy will lead the world in 2005.

“NAFTA will lead the G7 by a wider margin in 2005, with Canadian and U.S. growth converging around 3%. Neither country will match Mexico, which is on track to win the NAFTA growth sweepstakes after a prolonged period of weakness,” says Warren Jestin, Scotiabank chief economist.

Growth in Canada is seen hitting 3% in 2005, thanks largely to continued strength in our export sector, which has been remarkably resilient in the face of the rising Canadian dollar. While 2003 saw rapid appreciation in the loonie, the loonie has risen 3% versus the Euro on a year-to-date basis, while gaining 2.4% against the U.S. dollar. It topped the 80-cents-US mark Wednesday morning, the highest it has been in a decade.

“The jump in net foreign sales this spring accounts for two-thirds of the 4.3% annualized real GDP gain in the second quarter,” says Jestin.

A large part of Canada’s strong export economy can be credited to rising commodity prices, especially in the energy and metals markets. At the same time, though, domestic inflation is expected to remain tame in historical terms.

“Canadian inflation is expected to surpass the Bank of Canada’s 2% target by late 2005. While domestic growth, buoyed by the strength in the resource sector, may be slightly better than in the United States, a higher exchange rate will help keep domestic price trends below U.S. levels,” Jestin says in the report. “This will provide the central bank with latitude to tighten policy gradually as well, with the overnight rate expected to end next year at 3.75%, three-quarters of a percentage point above the current level.”

The report says the U.S. dollar will remain weak throughout 2005, due to the twin fiscal and current account deficits. At the same time, Canada will continue to lead the G7 in fiscal balance while enjoying its traditional trade surplus. This surplus is expected to be fattened by continuing strength in commodity prices.

On the provincial level, Scotiabank says commodity prices will give a boost to the Western provinces and the Maritimes, while manufacturing-based economies in Ontario and Quebec will face “headwinds” as they try to absorb the added cost of raw materials.


While emerging markets such as China and India will face economic slowdowns, the report predicts their growth will easily double that of the G7 nations.

“Activity is beginning to take a breather in Japan, and U.K. domestic demand will likely cool in the months ahead,” says Jestin. “Euro Zone activity has very limited upside potential against a background of rising energy prices, the prospect of further currency appreciation, ongoing fiscal constraints and continued caution in monetary policy.”

“Asia is already a global trendsetter in industrial activity, driving trends in many manufacturing and commodity markets,” the report says. “As the region’s exchange reserves and financial resources accumulate, it will begin to reshape the balance in international financial markets as well.”

China’s GDP should grow by about 7.5%, down from 9% in 2004.

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Steven Lamb