Economists at Bank of Nova Scotia have trimmed their forecasts for U.S. gross domestic product (GDP) growth this year following weak first quarter results. But, they note that there’s upside potential in the U.S. economy, too.
In a new report, Scotia Economics says that “the stalling out in U.S. activity in Q1 — attributable in large part to severe winter weather — has prompted us to revise down our 2014 U.S. GDP growth forecastfrom 2.8% to 2.6%.”
However, it still expects the U.S. economy to gain momentum in the year ahead, noting that recent indicators are pointing to a “broad based rebound in consumer and business spending”. As a result, it expects the U.S. economy to accelerate its growth rate to 3.2% next year.
The forecast for Canadian GDP growth remains unchanged at 2.2% for 2014 and 2.5% for 2015. “While strengthening U.S. demand and a more competitive currency should support a pickup in Canadian exports and business investment, lacklustre job growth and household debt aversion are tempering consumer and housing activity,” it says.
The firm has also nudged its European forecast higher to 1.1% this year and 1.4% in 2015, up from 1.0% and 1.3%, respectively. However, it says the risk of protracted low inflation persists, and it sees “the considerable possibility” of a rate cut if the Euro strengthens from current levels. Alternatively, it says, “A new targeted long-term refinancing operation is also a viable option later in the year if credit conditions do not improve.”
As for Russia, Scotia is slashing its forecast to just 0.7% growth this year, down from its previous call of 1.5%, citing the ongoing geopolitical tensions in the Ukraine, which continue to weigh on Russia’seconomic conditions, currency and sovereign credit profile.
Conversely, it is boosting its forecast for South Korea, saying it now expects that country’s economy to expand by 3.6% in 2014 and 3.2% in 2015; up from its earlier forecasts of 3.1% and 2.9%.
“June marks the fifth anniversary of the global recovery. While this year and next are shaping up to deliver better growth performances, the rebound remains the slowest on record and prone to recurring weakness,” it says. “Many advanced countries are still being stressed by the lingering aftershocks from the financial crisis, most notably fiscal restraint in the public sector and balance sheet restructuring and debt reduction in the private sector, though the drag from these adjustments is lessening.”
Additionally, it notes that some emerging market countries “have been implementing economic reforms which have taken a short-term toll on growth”. Many nations around the world have also been temporarily affected by abnormal weather conditions this year, it says. And, the unrest in the Ukraine has elevated geopolitical risk again, too, it adds.
“Nevertheless, leading economic indicators — the high frequency purchasing managers’ reports for manufacturing and services, as well as equity prices — point to improving conditions around the world,” it says, noting that global growth is projected at 3.3% this year, and 3.6% in 2015; which is up from 3.0% in 2013, but remains well below the 4.8% average annual gain in the years leading up to the financial crisis, 2003 to 2007.
While China remains the global growth leader, it is decelerating, Scotia says, and, “the global economic landscape is being reshaped by the diverging performance trends between the United States and China.”
“The growth gap between the United States and China will remain large, but will continue to converge since there is more upside potential for the U.S. economy, and more downside risk for the Chinese economy,” it concludes.