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Global economic growth will decelerate in the New Year

Global economic growth will decelerate in the New Year

Ongoing adjustments of macroeconomic and credit excesses will be the trend in 2008, according to Scotiabank Group's global economic research team's latest flagship report, International Views.

"Global economic growth will decelerate in the New Year as the aftershocks of the US sub-prime crisis reverberate through financial markets," said Pablo Breard, Scotiabank's Vice President and Head of International Research. "Robust momentum in key emerging-market economies such as China, India and Russia will partly compensate for slower G7 growth, contributing to correct long-standing global imbalances. The ensuing global credit squeeze may also trigger a healthy, yet volatile, process of risk repricing in both high-grade and high-yield markets."

Latin America: Improved governance, developing local financial sectors and cyclical growth strengthen Latin American resilience to US-led financial and economic shocks

In Latin America, improved debt sustainability, sizable international reserves and further development of financial sectors offer insulation from the aftershocks of the US-led sub-prime crisis. Robust domestic demand also reinforces a sense of resilience to US-inspired economic shocks. Mexico will be bolstered by improving fundamentals - with respect to strong leadership, deepening fiscal reforms and a developing local credit market - as well as increasing foreign direct investment and high oil prices.

The influence of emerging markets in shaping the length of the global economic cycle is increasing. Select countries in the developing Americas are playing a role in influencing institutional change and economic development in the region. Brazil has emerged as a key hemispheric force with a global manufacturing and diplomatic reach. Mexico continues to deepen its broad-based integration with an enlarged North American economic zone. Chile has become a model of regional institutional strength and a reliable business gateway to the Southern Asia/Pacific region. Argentina - an increasingly popular tourist destination - will likely end its isolation from global financial markets as a new administration takes office. The influence of Venezuela in core Latin American countries is diminishing.

Europe: Facing the dual challenge of currency appreciation and economic slowdown as the monetary tightening cycle reaches its peak

The advent of robust leadership in core countries such as Germany and France points to stronger regional unity in economic and foreign policy making. Energy security will remain a sensitive issue, given Russia's intensified control of the energy sector. France will likely play a more active, and perhaps more confrontational, role in global affairs under the leadership of Nicolas Sarkozy. Euro zone enlargement will continue with the inclusion of Cyprus and Malta in 2008. Turkey's conflict in Northern Iraq may heighten political risk, but should not derail the pace of implementation of structural reforms. Among the major developing European economies, Russia - the world's largest producer of oil and natural gas - will continue to reap the benefits of the recent strength in energy prices, as it continues to register east-Asian like growth numbers.

Asia: Emerging Asia will continue to set the pace through 2008

Led by China, emerging Asia will continue to set the pace through 2008, though some moderate deceleration will be evident. In general, a transition from export-led to domestically-based growth is gradually taking effect. Large trade surpluses across most of the region have helped to limit the disruptive impact of sharply higher oil prices. China will strengthen its regional economic leadership despite its vulnerability to a financial market correction. The Olympic Games, scheduled for August 2008, will be a showcase of the nation's global influence; however, India and Japan will remain key regional forces contributing to nurture a better integrated Pan-Asian economic zone. The development of China's financial sector and securities market will continue, yet asset-bubble fears might emerge, driven by asset-price
adjustments in developed countries. Taken together, Asian foreign exchange reserves total approximately US$4 trillion, giving the region enormous influence over global currency and securities markets. Electoral uncertainties in India and Japan, governance shocks in Thailand and Pakistan and deteriorating security conditions in Afghanistan have the potential to materially shape the regional risk profile through 2008.

International Views is a seasonal report, issued four times a year, by Scotiabank Group's global economic research team. Providing unique insights into the economic and political environments in some 34 countries, representing 90% of the global GDP, International Views is one of many global research reports prepared by Scotiabank Group's Global International Research Team. The full report can be accessed on-line at www.scotiabank.com.

Scotiabank Group's global economic research team provides clients with in-depth research into the factors shaping the outlook of the global economy, including macroeconomic developments, currency and capital market trends, as well as monetary, fiscal and public policy issues.

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