China will power the global economy in 2004, Canada will trail the U.S., and interests rates may drop this month. That’s just some of the predictions made by BMO Nesbitt Burns’ chief economist Sherry Cooper in her outlook for 2004.

“The global economy is rebounding, led by China,” Cooper says. She adds that the U.S. economy has finally taken off, too. “The internal momentum is now very strong. Boosted by tax cuts and low interest rates, consumer spending will remain robust and corporate profitability will continue to move upward,” she says.

Cooper says that the steep drop in the U.S. dollar will boost net exports and help to reduce the U.S. trade deficit. “Election-year spending will also add to the fervor.”

With the U.S. central bank reluctant to raise overnight rates, further declines in the greenback are likely, Cooper predicts. “We are looking for the euro to hit $1.35 or higher, the yen to touch 100 or lower, and the Canadian dollar to approach US 82.5¢. In this environment, commodity prices — most notably gold — will continue to rise, despite recent multi-year highs.”

Against this backdrop, Cooper says the Canadian economy will improve and the cyclical sectors of the stock market should continue to outperform. “Generally, strong profit growth across the industrial world bodes well for at least 8%-to-10% gains in stocks this year. The surprise could well be on the high side,” she says.

Although she predicts that inflation will be more of an issue in 2005 than in 2004, she thinks the U.S. Federal Reserve Board will begin raising interest rates this summer.

In this environment, Cooper suggests that the Bank of Canada could well cut rates at its January 20 meeting. “After all, the economy is underperforming the U.S., inflation remains very low and the loonie has increased to over 78¢ in recent days.”

Cooper concedes that there are many risks to the outlook: terrorism, inflation/deflation risk, a run on the U.S. dollar, the corporate earnings outlook, and a wary, possibly over-extended U.S. consumer. “But things turned out much better in the second half of 2003 than many had expected, and the stock markets around the world have had their best showing in years,” she notes.

She is predicting “better-than-4% growth” in the U.S, and that Canada will post “3%-plus growth”.

“Europe and Japan will also rebound, although to barely 2% real growth rates. China will continue to be a driving force in the global economy,” she predicts. “The combination of strong U.S., strengthening G7 and booming emerging Asia create a rosy picture indeed for incumbent politicians and the ’04 economy,” Cooper concludes.