Scotia Economics has bumped up its growth forecast for this year on the strength of a revised forecast for the U.S. economy.

In a new report, Scotia raised its U.S. real GDP growth call to 3.1% for 2011, an increase of 0.4 percentage points. However, it expects this year’s more robust growth to borrow from next year’s results, so it has also lowered the U.S. real GDP forecast for 2012 to 2.7% from 2.9%.

The improved short-term outlook is due to a number of factors: rising U.S. business activity; a resurgence in consumer spending; and improved household confidence due to further fiscal stimulus agreed upon at the end of last year.

“But the more favourable growth outlook comes at a cost,” Scotia notes. It points out that U.S. longer-term interest rates have moved sharply higher on growing concerns over inflation, the absence of a credible plan to reduce its rising debt burden, and the potential for ‘crowding out’ as business credit demands eventually move higher.

For Canada, it has raised its forecast for domestic GDP growth for 2011 by 0.3 percentage points to 2.7%, “primarily reflecting a stronger export profile.” For 2012, it sees growth slipping slightly to 2.6%, “with continuing strength in business investment and resource-related activity tempered by fiscal belt tightening and restrained consumer spending.”

“Canadian output will continue to benefit from the expanding production in the commodity-rich regions, while improving U.S. economic conditions will bolster Central Canada’s large manufacturing sectors. Businesses are expected to remain big purchasers of machinery & equipment, with manufacturers and processors taking advantage of the last year of government incentives focused on upgrading the country’s lagging productivity performance. Canada should also benefit from increased foreign investment inflows and strong immigration attracted to this nation’s comparatively solid economic and financial performance, and more favourable longer-term fundamentals that include a high living standard supported by a diversified economy and a competitive tax structure,” it says.

Nevertheless, near-term growth prospects are constrained by a number of factors, Scotia says, including a lack of pent-up consumer demand, a cooling housing market, the end of fiscal stimulus, and the strong Canadian dollar which will continue to dampen exports and earnings, and enlarge the current account deficit.

“In this environment, the Bank of Canada will likely keep its overnight rate unchanged into the second half of the year,” Scotia predicts. “This mirrors the monetary settings of other central banks in the developed world who are awaiting signs of more sustainable and less volatile growth patterns, and upward pressure in core inflation.”

IE