Risks Are Rebalancing, but Economic Activity Remains Weak

Scotiabank Economics' Global Outlook

TORONTO, ON--(Marketwired - October 17, 2016) - Global economic activity remains weak. At roughly 3%, 2016 represents the slowest year for global growth since the Great Financial Crisis. The reasons for this underperformance are now well known, though they vary by country. They generally involve the following elements: structural adjustments in many countries, efforts to reduce overcapacity in most, recurring natural disasters, repeated geopolitical events such as 'Brexit', and upcoming national elections and potential policy changes in a number of major countries, including the United States.

Despite this weak economic performance, there are tentative signs of a long-awaited investment recovery in the U.S. In addition, Chinese economic activity appears to be picking up following the weakness earlier in the year, oil prices have risen, (a positive development for oil exporting countries like the United States and Canada) and the immediate impacts of 'Brexit' have not been as pronounced as feared.

"For the first time in a long time, we are feeling more optimistic about our forecast, even though we have revised growth down for both Canada and the United States this year," said Jean-François Perrault, Senior Vice President and Chief Economist at Scotiabank. "Taken together, the risks suggest a more balanced economic forecast."

Highlights of Scotiabank's Global Outlook include:

• United Kingdom: Post-Brexit data for the U.K. suggest a much stronger economy than we had anticipated, but we remain of the view that Brexit will come with significant long-term costs for the U.K. economy.
• Europe: Eurozone, growth will be above potential, at about 1.3% in 2017 and 1.5% in 2018.
• Canada: We expect growth to strengthen to an average of close to 2.0% in 2017-18, supported by infrastructure spending, stronger exports, and a gradual turnaround in oil & gas sector investment. B.C. and Ontario are expected to be the fastest growing provinces next year. Alberta should come out of recession and grow by 2.1% in 2017.
• United States: The stronger year-end hand-off, coupled with a further improvement in domestically generated spending, points to U.S. real GDP averaging a somewhat better 2.2% rate in 2017.
• Latin America: A modest acceleration in economic activity is expected in the Pacific Alliance countries, reflecting higher prices for some commodities and stronger global growth.
• Asia: China is on track to meet the official real GDP growth target of at least 6.5% y/y in 2016. Stimulus is supporting momentum in the short term, yet it is creating larger economic imbalances.
• Capital Markets: We assume that the Federal Reserve raises rates at a moderate pace beginning with a 25 basis point hike in December. Scarcity of supply of tradeable fixed income instruments will get worse in the medium term, moderating the impact of tightening U.S. monetary policy on the longer end of the yield curve. We expect Canadian government bond yields to remain below the U.S.
• Currency: We expect a 25bps Fed tightening in December to support the U.S. dollar (USD) and a further increase in U.S. rates to underpin broad gains well into 2017. We have lowered our British Pound to USD target to 1.20 for early 2017, but feel "overshoot" risks remain significant.
• Commodities: Accounting for faltering base-case fundamentals and the upside risk of an OPEC deal, we expect WTI prices to average $44/bbl in 2016 before gaining to $53 in 2017 and $57 in 2018. Metals are expected to find their bottom in 2016, though recovery dynamics between individual metals remain mixed.

Watch a video of Jean-François Perrault discussing Scotiabank's Global Outlook here: https://youtu.be/Wx33lic0aWQ