Bank of Nova Scotia economists are tweaking their global economic outlook in light of the emerging fiscal turmoil in Europe and early economic results.

“We continue to maintain our strong cyclical uptrend in output growth for 2010. However, the outlook for 2011 and beyond remains less favourable due to structural and fiscal headwinds facing developed economies globally. These include deleveraging by households in heavily-indebted countries, increasing fiscal retrenchment, ongoing restructuring and competitive adjustments in key industries, the normalization of interest rates, and a move towards greater financial sector oversight,” it says.

In particular, it has adjusted its foreign exchange outlook, downgrading its outlook for the Euro in the wake of the sovereign debt crisis in Greece, and the spreading contagion in the rest of Europe. “The austerity measures being introduced by a number of countries will put additional pressure on the currency in the near term,” it says.

“The risks of [European Central Bank] interest rate hikes being later and less aggressive than we previously thought have risen. Accordingly, we now look for the euro to weaken throughout 2010, closing the year at 1.26 before staging a modest recovery the following year as market focus once again turns back to U.S. fiscal imbalances.”

Scotia notes that the market turmoil has so far been limited to Europe, but there are signs that the currencies of other major developed economies, including the British pound and the Japanese yen, may come under pressure too.

“In contrast, the strong macroeconomic fundamentals for the Canadian dollar remain well entrenched. Therefore, we have not made any change to our expectation that the loonie will continue to hover around parity versus the greenback in the near-term and then resume its appreciating trend,” it says.

Scotia has also only made minor adjustments to its Canadian and U.S. macroeconomic forecast. “With a slightly stronger-than-expected first-quarter performance, Canadian GDP growth in 2010 is now pegged at 3.4%, up from our earlier estimate of 3.3%. Conversely, a slightly softer-than-anticipated Q1 output advance in the United States has led us to lower this year’s annual average gain to 3.5% from 3.6%.”

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

It has also tweaked estimates for provincial GDP, following Statistics Canada’s preliminary estimates of industry-based provincial GDP for 2009, “slightly accentuating our outlook for stronger gains in the resource-rich regions over the next two years.”

The other notable change in forecast is for China, where it now sees 10.3% growth this year. “We believe that a decision, at least in principle, has been reached within the Chinese leadership regarding a shift in exchange rate policy and that Beijing will soon announce a return to the gradualist adjustment approach that was in effect between 2005 and 2008,” it adds.

IE