Lower interest rates, continued power in the western provinces, a strong loonie and growth in infrastructure, construction and service sectors will keep Canadian employment levels well above those in the United States next year.

This is how Warren Jestin, senior vice president and chief economist at Bank of Nova Scotia, broadly views Canada’s economic outlook for 2008.

In a presentation in Montreal today, Jestin and other Scotia colleagues bottom-lined their views on the current economic situation and what it means for both the Canadian economy and personal portfolio strategies as we head into the new year.

The underlying trend for the Canadian dollar, he predicts, is upward. While he expects the loonie to find its way down to about US96¢, he’s calling for an average close to US$1.05 over the next year.

South of the border, Jestin sees the fallout from the subprime mortgage crisis negatively impacting the U.S. economy well in to 2009, and is expecting a minimum of three more interest rate cuts from the U.S. Federal Reserve.

“The Fed is basically out of sync with the rest of the central banks,” he said. “The U.S. dollar will be prone to a broad deterioration against other global currencies.”

Thus, overwhelmingly, the trend is toward global portfolio diversification to balance overweight U.S. dollar positions. Jestin said the U.S. is going to have a tough time reversing its US$800 billion merchandise trade shortfall — dominated by the trade deficit with China — with commodity prices on the rise and consumption of low-cost goods strong.

“Our twin trade and fiscal surpluses, a more cautious monetary policy and the tendency for global investors to diversify their portfolios across currencies and asset classes also favours the Canadian dollar,” said Jestin.

Beyond the short-term trends related to the asset-backed commercial paper problems in the U.S., Jestin dubbed the longer-term trends “the new, the old and the green,” referring to the new era of competition from emerging markets, the fact that the population is aging and the explosive growth of industries related to environmental remediation.

Vincent Delisle, director of portfolio strategy at Scotia Capital began his presentation by discussing the death of market complacency.

Investors are far more risk averse in the post-subprime crisis environment and Delisle believes this massive re-pricing of risk will continue into the new year.

Delisle pointed to the fact that while interest rates are low, late-cyclical sectors such as energy and mining should be underweight but added that he believes we are entering a period of preference for non-cyclical sectors, such as gold, staples and utilities.

“We expect a lot of opportunities for fear and for joy,” said Delisle.

Highlights of today’s presentations are available at www.scotiabank.com.