Economists at Bank of Nova Scotia have raised their forecasts for the global economy, citing the increasingly widespread recovery.

In its Global Forecast Update published Thursday, Scotia is now calling for a 2.2% global contraction this year, up half a percentage point from its previous forecast, noting that a “synchronized turnaround” appears to be underway. “Importantly, we believe that the renewed, and generally moderate, momentum will be sustained, with global output likely to post an average increase of 2.8% in 2010, marginally higher than our prior forecast,” it says.

Scotia economists point out that, “For many of the countries around the world hit hard by the cascading recession and credit crunch, in the euro zone for example, the turnaround began in the second quarter. Nations that stumbled but did not fall, such as China, Australia, India and Brazil, also posted stronger growth in Q2. But for other countries, such as the United States and Canada, the upturn likely began in the July-September period, while for others, like Mexico and Russia, output is poised to rebound later this year.”

The firm notes that large economic contractions are typically followed by big expansions, but in this case “the pace of renewed activity will be moderated”, it says, due to the effect of household deleveraging, a more cautious lending environment, and ongoing competitive issues magnified by increasing protectionism and destabilizing currency shifts due to the weaker U.S. dollar.

Scotia adds that Canada was a relatively late stage victim of the recession, and will likely lag a bit on the way out too. It now expects 2010 output growth to average 2.8% in Canada, up from 2.5%, and 3.0% in the US, up from 2.8%. “We continue to anticipate some moderation in growth through the second half of 2010 as inventory adjustments slow and government stimulus spending begins to unwind,” it notes.

“Returning to a stronger growth trajectory requires a significant and broadbased rise in export volumes to the United States, and increasingly around the world as well, that will be slow to materialize,” it adds.

“With the recovery just getting underway, the Fed and the Bank of Canada are expected to keep their benchmark overnight rates unchanged at 0.25% through the first half of 2010. But as the global expansion takes hold, longer-term borrowing costs are expected to trend higher, especially in the United States where the rapid and large escalation in U.S. government indebtedness should continue to put downward pressure on the U.S. dollar,” it concludes.

IE