The global economy is going through some fundamental shifts, and governments, as well as business, must innovate to cope, suggests a new report from Scotia Economics.

The report, authored by Warren Jestin, senior vice president & chief economist, says that Europe’s sovereign debt problems probably won’t trigger a ‘double dip’ recession, neither will the lingering problems in the US real estate market. However, that doesn’t mean that there’s blue skies ahead. Rather, the report suggests, “the legacy of economic and financial challenges confronting many countries and industries suggests that we will experience a rocky road to recovery — a journey that won’t be taking us back to the world that existed before the recession began.”

Indeed, it predicts that as “Canada and the U.S. move from recovery into renewed expansion in 2011, growth is at risk of slowing materially.” It points out that governments will be seeking to cut deficits, borrowing costs will be heading higher, the cyclical boost from inventory rebuilding will have dissipated, and credit will be constrained due to fallout from the financial crisis.

Emerging markets are likely to drive global growth in the years ahead, it notes. “Over the next decade, international economic locomotion will come increasingly from powerhouses such as China, India and Brazil. Their influence on world trade and financial markets also will grow substantially,” it says.

“Successfully tapping into these new opportunities hinges on the willingness of Canadian businesses to explore unfamiliar markets and our ability to identify niche products and services where our skills and resources provide a unique competitive edge,” the report notes.

At the same time, the increasing demand for natural resources to fuel this growth will also lead to massive investments to boost energy efficiency, contain greenhouse gas emissions and improve air and water quality. “The number of ‘green’ jobs created in Canada and other developed nations will likely exceed those lost in traditional manufacturing by a wide margin,” it suggests.

Additionally, countries such as Canada will be coming under increased demographic pressure, with an aging population and declining labour force participation rates. “This demographic time bomb is a powerful reason for governments in Canada and other jurisdictions to take decisive action on fiscal reform sooner rather than later,” it says.

This trend will also create its share of new opportunities in industries such as healthcare. “The retirement bulge also will create abundant demand for advisory and lifestyle products and services,” it adds.

Moreover, these conditions will create tough new challenges for governments. “When it comes to helping Canadian businesses and households adjust to the confluence of these new age, old age and green age realities, our governments have a ‘to do’ list that extends well beyond reversing the recent run-up in federal and provincial deficits. Tax reforms are already well on the way to establishing a globally competitive tax environment for businesses. Further improvements in workforce skills and labour flexibility are also essential to maintain our national prosperity and enable us to compete with the best in the world. High priority also must be given to enhancing the efficiency of Canada’s urban infrastructure,” the report suggests.

Delivering these reforms while also controlling deficits is going to require governments to address issues such as healthcare costs, streamlining the current complex system of federal-provincial transfers, reforming Employment Insurance, it says. “There is little if any leeway for governments to use traditional tools, such as public subsidies, to insulate domestic businesses from the powerful forces reshaping the global economic landscape. Scarce public resources should be used to enhance our global competitiveness which ultimately is the foundation of our national prosperity,” the report concludes.

http://www.scotiabank.com/cda/content/0,1608,CID8339_LIDen,00.html