Despite a severe retrenchment in housing activity and motor vehicle sales, the U.S. economy managed to stay on a modest growth path during the first half of 2008, according to the latest global outlook released today by Scotia Economics.

But the negative fallout from the subprime crisis is expected to continue to weigh on the global economy, Scotia economists say.

“Without another injection of fiscal and/or monetary stimulus, however, recent economic resilience will likely give way to a broad-based weakening in U.S. conditions by year-end,” says Warren Jestin, chief economist at Bank of Nova Scotia.

“Bottom line, we expect U.S. growth in 2009 to be even weaker than this year’s paltry 1.5% advance,” he says.

“While the pathways to prolonged economic lethargy vary across countries, growth is unlikely to reach 1.5% in Japan through 2008-2009 and is expected to fall to this level in the UK and Europe over the next year,” says Jestin. “The sudden shift from credit expansion to credit crunch, widespread layoffs in financial services and the unwinding of excesses in real estate activity are rooted in structural imbalances that will take years, not months, to resolve.”

The report adds that weakening domestic demand in the major developed nations will temper the pace of expansion in China, India, Russia, Brazil and other emerging markets.

As a result, the great divide in performance between the traditional and emerging nations may actually widen as global growth recedes. Even if growth in China drops by two percentage points towards 9% next year, the growth multiple will jump to 6:1. Growth rates in India and Russia are expected to be at least four times the average for G7 nations.

Here at home, Canadian growth is being dragged down by weakening U.S. demand, the loonie’s return to parity and exceptionally high oil and natural gas prices.

The report states that the loss in Canadian manufacturing exports has been cushioned by a big run-up in commodity receipts, which now represent more than half of the value of merchandise exports.

“Canadian output growth will probably not exceed the U.S. outcome in 2008, because inventory swings and weather-related disruptions triggered a mild contraction on this side of the border at the beginning of the year and massive fiscal stimulus is temporarily levitating U.S. demand. Difficult adjustments in the auto sector also are bound to impose a significant challenge in both countries,” says Jestin.

The combination of weakening demand with higher inflation in the developed economies highlights the big influence emerging market demand for commodities is having on global economic trends, the report notes.

While the inflationary impetus from commodities should diminish in the months ahead, prices for many energy, industrial and agricultural products will be supported by robust demand from powerhouses like China, India, Russia and Brazil.

“Looking ahead, sputtering European growth is expected to preempt further European Central Bank (ECB) rate increases and will likely encourage the Bank of England to cut rates by year-end,” says Jestin. “In the United States, risks to growth and financial market stability are expected to trump inflation concerns, with the Fed once again adopting a bias towards lower rates over the winter. With lower inflation on this side of the border, the housing market entering a slump and export volumes weakening, the Bank of Canada will likely follow suit.”

Against a background of U.S. dollar volatility and weakness, the Canadian dollar is expected to have an appreciating bias and to average above parity in 2009.