Ongoing adjustments of macroeconomic and credit excesses will be the trend in 2008, according to a new report from Bank of Nova Scotia’s global economic research team.

“Global economic growth will decelerate in the New Year as the aftershocks of the U.S. subprime crisis reverberate through financial markets,” said Pablo Breard, Scotiabank’s vp 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.”


In Latin America, improved debt sustainability, sizable international reserves and further development of financial sectors offer insulation from the aftershocks of the U.S.-led subprime 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.

In Europe, 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.

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.