The global economy will continue to exhibit more fizzle than sizzle, according to a report released Tuesday by Scotia Economics, while RBC Financial forecasts that U.S. economy will outperform the Canadian economy is 2004.

“Momentum has faltered in both the United States and Canada, activity in the Euro zone has stalled, weakness in industrial production is undermining the U.K. expansion, while growth in Japan is barely above breakeven level,” says Warren Jestin, Scotiabank’s chief economist, commenting on the release of the Global Outlook report.

“A litany of factors — the sudden and sharp drop in the U.S. dollar, emerging pockets of deflation, ongoing geopolitical risks, and the fallout from SARS in Southeast Asia — has conspired to throw an already wobbly global economy further off balance,” adds Jestin. “Here in Canada, our performance edge over the United States has been blunted by a sharply rising currency, a localized SARS outbreak in the Greater Toronto Area and an incidence of mad cow disease in Alberta.”

Jestin predicts that the United States will likely grow by about 2 1/4% this year and just over 3% in 2004 to win the G7 growth sweepstakes. Canada is in runner up position — with 2% growth in 2003 and 2.7% next year — followed at a considerable distance by Europe and Japan.

According to Jestin, “the U.S. economy is overbought, overbuilt and overleveraged. These fundamental imbalances will dampen the revival in household and business spending south of the border expected to be generated by additional tax cuts, ultra-low borrowing costs and the sharp U.S. dollar reversal.”

The Global Outlook highlights that the most likely economic outcome is a lengthy convalescence — both in North America and abroad — because the rebound in activity, profits and revenue momentum will continue to be subdued and uneven.

Monetary authorities are already reacting to the realization that growth will be slower, inflation lower, profits leaner and the recovery longer than had been expected at the turn of the year. After lowering its bellwether funds rate to a 45-year low of 1% in late June, the U.S. Federal Reserve may take out additional rate insurance to prevent U.S. inflation from falling to inappropriately low levels if the economic doldrums linger through the summer.

To combat deteriorating regional conditions, the European Central Bank has cut interest rates a full percentage point this year to 2%. Central banks in a number of other European and Asian countries have followed suit. The Bank of Japan is buying equities and high-yield corporate bonds to shore up its banking system.

“The 10 cent(US) rise in the Canadian dollar during the first half of 2003 has effectively neutralized the Bank of Canada’s bias to gradually nudge up domestic interest rates,” says Jestin. “Looking ahead, the Bank will likely follow the Fed in easing over the summer, with more to come as the economy lags through the fall.”

In a separate release, economists at RBC Financial predicts that Canada will grow by just 2.3% this year, accelerating to 3.3% in 2004.

RBC sees the U.S. slightly outperforming the domestic economy next year, ending five consecutive years of the Canadian economy outperforming the U.S.

As with Scotiabank, RBC notes that Canadian economic activity has taken a blow from the outbreak SARS, the mad cow scare and a weak U.S. economy so far this year.

According to RBC, the outlook for tourism is gloomy. ” The overall Canadian industry now has to contend with a fresh set of challenges posed by a return of the Canadian dollar to something closer to its long-run fair rate of exchange,” says RBC.

Ontario will be hit hardest since about 60% of foreign visitors to Canada travel to Ontario. RBC says that the province’s GDP growth for 2004 will likely come in about three-quarters of a percentage point lower than would have otherwise been the case. B.C. and Ontario are tied for last place in economic growth this year, it says, with Newfoundland expected to lead the country thanks to a strong energy sector.

With excess capacity and the appreciating Canadian dollar keeping any threat of inflation well contained, RBC says that the Bank of Canada is expected to remain on the sidelines until the second half of 2004. “By then, a well-established U.S. recovery and a stronger Canadian economy will lead the Bank to resume hiking rates in a bid to remove excess stimulus from the Canadian economy in accordance with its medium-term goal of keeping inflation at 2%.”