The international economy is riding a powerful wave of renewed growth fed by historically low interest rates, U.S. fiscal stimulus, and strong economic growth in China, according to Scotia Economics’ flagship report, Global Outlook.

“Activity in the major developed nations has been led by a burst of growth in the United States and the long-awaited revival in Japan,” says Warren Jestin, Scotiabank chief economist. “G7 industrial production has risen by more than 2 1/2% over the past year, although these gains have been dwarfed by a year-over-year surge in industrial output of 19% in China, 10% in Korea and 7% in India.”

According to Global Outlook, the transition to stronger activity remains uneven among G7 countries. The U.S. locomotive is on a roll, with businesses ramping up orders, production, hirings and investments to meet the demands of an expanding global economy. Robust household spending is helping to revive growth in the U.K., while conditions are still generally soft in the euro zone. Mexico is regaining momentum, building upon the improving prospects throughout the Americas and the strength in commodity markets.

“Canada has stumbled from G7 growth leader to the middle of the pack because of the aftershocks from intensifying competitive pressures, particularly a rising currency,” adds Jestin.

Two of Canada’s key U.S. market areas — autos and housing — will likely remain buoyant, but will show little further growth in the period immediately ahead. A stronger pace of activity is tilted towards the western provinces, given its upbeat energy sector. The remaining provinces are grappling with ar-reaching fiscal restraint and, in central Canada, manufacturers are particularly sensitive to the stronger Canadian dollar and higher energy costs.

“While Canada is still America’s largest foreign supplier, the country’s share of U.S. imports has been edging lower since the mid-1990s,” says Jestin. “Canada has been a relatively small supplier to Asia, but here too, our share of the region’s imports has slipped over the past decade. Merchandise exports to China total less than 3% of external sales and 1% of China’s foreign purchases, with fully two-thirds of these shipments commodity-based. A similar story exists for trade throughout Asia, and this imbalance will grow until we move up the value-added curve, and increase both the scope and scale of sales to the region.”

Slower growth and a much stronger exchange rate over the past year have tempered inflation trends in Canada. Jestin expects that “the Bank of Canada will stay on the sidelines until the final quarter of 2004 — passing on further rate cuts as it looks for stronger U.S. growth to give the Canadian economy a lift, but lagging the Federal Reserve Baord because of our sub-par performance. In this environment, Canada-U.S. interest rate differentials should vanish over the next year and become negative farther out the yield curve.”

As for the Canadian dollar, Jensen says “despite Canada’s softer growth prospects, the currency will be boosted by strong commodity markets and a track record of sustaining trade and fiscal surpluses. Unfortunately, a stronger currency will further add to Canada’s competitive challenges and the urgency of dealing with them.”

Scotia Economics notes that a recovery is emerging in Latin America, bolstered by the strength in commodity-related exports and improving consumer and investor confidence that is building upon the containment in inflation.

The bank says the euro zone economy continues to struggle, with persistent high levels of unemployment undermining consumer confidence and spending.

It notes that asian growth prospects have improved significantly, with virtually every country in the region piggybacking on the exceptional strength of China’s expansion.

Scotiabank says Australia will continue to benefit from the regional growth and commodity boom, though higher borrowing costs and a stronger currency are likely to take the edge of its strong housing market and foreign trade.