Canada, U.S. won’t drive global growth over next two years: Scotiabank

The two forces driving the global economy—household spending and business activity— are accelerating or remaining strong in most economies, says Scotiabank’s global outlook report, released Jan. 12.

That’s leading to “a strong backdrop for Canadian growth, even though NAFTA and other geopolitical factors weigh on the outlook,” says Jean-François Perrault, senior vice-president and chief economist at the bank, in a release.

However, despite synchronized growth across the globe, wage and inflation developments continue to diverge, the bank says. In Scotiabank’s view, countries such as India, China and Germany will lead as we move into 2019.

In Canada, the United States and the United Kingdom, wage and inflation dynamics “require a continued withdrawal of monetary stimulus,” while both Europe and Japan are experiencing sluggish inflation.

Read: We’re in a ‘classic late cycle,’ says economist

All the while, “trade and political developments in the United States, worries about equity market valuations and more generalized concerns about the length and sustainability of the current expansion” continue to haunt markets.

In its forecast tables, Scotiabank calls for global real GDP of 3.7% in 2017 (estimated), followed by 3.8% in 2018 and 3.6% in 2019. For Canada, real GDP is estimated at 2.9% for 2017, and forecast at 2.3% and 1.7% for 2018 and 2019, respectively. That compares to 2.3%, 2.5% and 1.8% in the U.S.

Read: Brace for a bumpier ride in 2018: Unigestion

Rate hike outlook

Even though Canada’s growth is expected to slow over the next two years, Scotiabank forecasts the Bank of Canada will be pushed to hike interest rates by 75 basis points due to inflation pressures. The report calls for three rate hikes in 2018—on Jan. 17, in May and in October—and predicts the Canadian dollar will hover “around the 80 cent range for most of the year.”

Read: Expect lagging loonie in 2018

The main challenge for the BoC will be weighing economic risks, such as household indebtedness and ongoing NAFTA talks, against incoming data.

Meanwhile, the report says the Federal Reserve will also raise rates by 75 bps, with the next increase will be in March. In 2019, Scotiabank expects two more hikes by the Fed, leading to “a terminal neutral rate of 2.75%.”

More highlights

• Europe: Growth has far exceeded expectations in 2017 and is set to increase to 2.7% in 2018. As inflationary pressures remain virtually non-existent, it’s likely that current central bank policies will remain in place for the foreseeable future.
• Latin America: Strong acceleration in growth is anticipated in Peru, Chile and Colombia, where a combination of higher commodity prices and political developments is expected to lead to increased business confidence, investment and infrastructure spending.
• Mexico: Growth is expected to accelerate to 2.4% in 2018, owing to strong household spending and rising investment.

Also read: Will BoC hike rates if Trump dumps NAFTA?