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Global Economic Research

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Global Forecast Update

New Year Wish List — More Growth

We expect that global growth will build momentum, albeit gradually, over the

next two years. The Federal Reserve has introduced another and significant

round of non-conventional monetary accommodation that, along with the

winding down of household deleveraging in the U.S., will help support

increased spending, homebuilding and risk-taking at a time of increased

federal fiscal restraint. The central banks in the euro zone, the U.K. and

Japan will provide more support as needed.

Many of the larger developing nations have already implemented additional

monetary and fiscal stimulus to maintain comparatively stronger growth

trajectories in the absence of more robust conditions in the developed

economies. These countries and regions have the financial and institutional

capabilities to rebalance towards more domestically generated growth.

In particular, increased infrastructure spending will underpin demand

for most commodities and keep prices at profitable levels.

However, global growth remains comparatively soft and uneven

heading into the New Year. The developed nations are still stuck in the

slow lane of activity. Economic performances range from recession

through much of Europe, to minimal growth in Japan and only

moderate advances in Canada and the U.S. in 2013.

The pace of growth in the developing countries is comparatively firmer.

While activity is still relatively sluggish in Brazil, it is generally good in

Mexico, India and South Korea, and relatively solid in most of the other

major Latin American and Asia-Pacific nations. Recent evidence

suggests that China's economy is regaining momentum in response to

renewed stimulus and improved domestic spending.

A number of developed economies are implementing the medium-term

structural adjustments needed to reduce major budget shortfalls,

restore domestic competitiveness, and regulate financial institutions.

With inflation pressures mostly absent, short-term borrowing costs will remain at rock bottom levels. Yields on

longer-dated securities are expected to begin trending modestly higher from historically low levels in 2013

against the backdrop of ongoing sovereign credit differentiation, a renewed strengthening in economic activity,

and an eventual upward drift in inflation expectations.

In an environment where the major developed economies are underperformers, are savings-deficient, and have

lower interest rates, their currencies will tend to have a weakening bias against many of the developing economies.

The yen and euro are likely to underperform widely; whereas the U.S. dollar is expected to underperform the

Canadian and Australian dollars as well as the Scandinavian currencies, mainly on relative fiscal fundamentals,

monetary policy and selective commodity price strength.

Many of the developed economies undergoing a multi-year period of fiscal and economic restructuring will need

more time to regenerate stronger growth in the absence of much stronger domestic-led growth in the Asia￾Pacific and Latin American regions that would re-invigorate international trade. The U.S. economy has the

potential to be a relative outperformer in 2013 and 2014, especially if a credible medium-term fiscal

consolidation plan engenders confidence. U.S. households and financial institutions have refurbished their

balance sheets, export competitiveness has been enhanced by low currency-adjusted unit labour costs, overall

activity is finding support from expanding energy production and comparatively low and stable prices, and there

is considerable consumer and business pent-up demand, particularly for housing and other big-ticket items.

Index

Overview

Forecasts

International

Commodities

North America

Provincial

Financial Markets

December 20, 2012

1-2

3-4

4

5

6

7-8

-1

0

1

2

3

4

5

6

00 02 04 06 08 10 12 14

annual % change Scotiabank forecast

Average:

1980-

2011

World GDP

Source: IMF, Scotiabank Economics.