Bank of Nova Scotia economists are trimming their forecasts for U.S. and Canadian gross domestic product growth, and weakness is bleeding through to the bank’s global GDP forecast, too.

In a research note, economists at Scotiabank (TSX:BNS) say they are maintaining their estimate for global growth this year at 4.4%, while trimming next year’s estimate down a notch to 3.7%. “But this year’s projected economic gains mask some important changes in regional performances. Downward revisions to growth expectations for the United States, Canada, and some other countries, for example, have been offset by upward revisions to growth in a few other nations such as Germany and India,” it says.

For the United States, Scotia has lowered its forecast for GDP growth this year and next to 2.6% and 2.1%,
respectively, a reduction of 0.4 percentage points in both years. “The downgrade reflects revisions o Q2 output as well as a softer growth profile for the second half of the year,” it says.

This weaker U.S. growth, combined with more moderate domestic consumer and housing activity, is also pushing Scotia to lower its GDP growth forecasts for Canada to 3.0% in 2010, and 2.3% in 2011, a reduction of 0.3 percentage points in both years.

“While the nascent economic recovery on both sides of the border is expected to be relatively sluggish, healthier household and fiscal balance sheets give Canada the performance edge,” it says.

On the global stage, Scotia says that while the recovery continues to move forward, growth is downshifting “to a weaker, rather than a stronger, performance profile”.

“For the better part of a year now, Scotia Economics believed that the policy-induced rebound in economic activity — even in the countries hardest hit by the housing bust and associated credit crisis — would eventually give way to a prolonged period of economic convalescence, particularly in some of the advanced economies where households, financial institutions and governments are reducing their debt-heavy balance sheets. This transition appears to be happening quicker, and apparently is bumpier, than had been envisaged,” it says.

“Internationally, pockets of economic strength persist,” Scotia adds, “especially among the emerging nations where domestic conditions remain quite robust.”

With this generally weaker outlook though, it is also revising its interest rate forecast. Scotia says it now expects the US Federal Reserve Board to keep its overnight rate unchanged at 0.25% through the end of the third quarter of 2011. It also sees the European Central Bank holding its benchmark rate at 1.0% through the end of Q3 2011.

“Canada’s diversified economy should continue to gain support from the ongoing global demand for resources and firm commodity prices. However, less favourable trade prospects with the United States, and a slowing housing market, will likely reinforce a more cautious Bank of Canada policy,” it adds. “We now expect that the overnight rate will end 2011 at 1.75%, 50 basis points lower than our prior outlook.”

It also says that as risk aversion dissipates, it continues to expect that the Canadian dollar will appreciate against the U.S. greenback, challenging parity again in the second half of 2011.

IE