World economic growth is set to moderate in 2007 as China, India and other emerging countries outpace North America, according to the chief economist of the Bank of Nova Scotia.

In Canada, interest rates will likely fall and the Canadian dollar should rebound, Warren Jestin said Tuesday in an outlook report.

Growth in 2007 and 2008 is expected to slip to an average of about 2.5% in North America and 2% or less in Europe and Japan,

China should stay on a 9%-plus growth track, with India not far behind and growing by about 8% annually. Mexico, Brazil and a number of other countries will also continue to exceed the performance of the mature G7 countries by a significant margin.

“The near-term outlook will be driven by ‘new age’ factors related to the rising importance of Asia and other emerging regions,” said Jestin.

“However, a powerful array of demographic factors linked to an aging world population, rising dependency ratios and inevitable labour shortages in developed nations is also looming on the horizon.”

Scotiabank said it also expects short-term interest rates to head lower in both the United States and Canada, with “the U.S. Federal Reserve is expected to trim rates by three-quarters of a percentage point by the summer, more if the housing setback deepens,” Jestin said.

The Bank of Canada is likely to reduce its bellwether rate by half a percentage point as the disappointing economic performance in the second half of last year spills into 2007, he said.

The Canadian dollar, for its part, is likely to rebound later this year on the country’s relatively sound domestic fundamentals and weak U.S. dollar underpinnings – positioning the country well “to attract global investors looking for opportunities in the resource sector or for low-risk ways to diversify U.S. dollar positions.”

British Columbia will continue to outperform the national economy in 2007, led by a strong non-residential construction sector. Ongoing 2010 Winter Olympics preparations and activity in the energy and mining sectors will help offset weakness in the forestry sector.

Ontario’s economic performance will remain below the national average as manufacturers continue to struggle with a strong Canadian dollar, high energy prices, intense overseas competition and moderating U.S. growth.

In New Brunswick, several large-scale energy projects should help sustain expansion in 2007, Jestin said, with mining activity benefiting from the reopening of zinc mines amid strong global demand.