Scotia Economics has raised its GDP growth forecast and interest rate expectations for Canada on the continued stream of strong economic results.

The firm notes that the economic data out of Canada and the U.S. over the past month “have been consistently stronger than expected”.

As a result, it has bumped its 2010 GDP forecast another tick to 3.3%, after hiking its call by 20 basis points to 3.2% in early March. It is nevertheless maintaining an above-consensus estimate of 3.6% growth for the U.S.

“We continue to expect a more moderate pace of growth for both countries in 2011 as interest rates edge up and fiscal stimulus spending winds down,” Scotia Economics adds.

On the heels of the strengthening recovery, the firm now expects that the Bank of Canada will soon begin to normalize interest rates in response to inflation worries.

“By the end of the third quarter of 2011, the cumulative increase in the bellwether overnight rate is now expected to amount to 275 basis points — 75 basis points higher than in our previous forecast. By the end of next year, Canadian short-term rates should be 50 basis points above the Fed funds rate which is now expected to rise a cumulative 225 basis points,” it says.

Additionally, the firm has bumped up its forecast for Canadian housing starts on higher building permit demand, and for North American assemblies by automakers, due to recovery in that sector.

Scotia has also made some modest adjustments to its provincial outlook, although the rankings amongst the provinces remain essentially the same, with Western Canada expected to lead GDP growth through 2011, and central Canada’s manufacturing recovery continuing (both Ontario and Quebec’s GDP forecasts were revised upwards). Newfoundland and Labrador’s 2009 GDP growth was revised downwards.

Overall, Scotia notes that output growth around the world continues to gain momentum, “underpinned by very accommodative monetary and fiscal policies, the gradual re-opening of credit taps, and the strong cyclical upswing in inventory restocking… Nevertheless, the renewed upward trend in borrowing costs, emerging fiscal restraint, household deleveraging in many overindebted countries, restructuring in a number of key industries, and the reregulation of the financial sector should contribute to a more moderate growth performance in 2011.”

IE