Look for stronger more synchronized growth among major industrial nations in the year ahead, according to a new report from Scotia Economics.

“The United States will lead the G7 revival by a substantial margin, with output expanding by nearly 4 1/2% next year and about 3 1/2% in 2005,” says Warren Jestin, Scotiabank chief economist, referring to the bank’s Global Outlook report.

“Canada has fallen into runner-up position for the first time in half a decade and will likely trail U.S. growth by at least a percentage point on average over the next two years. While activity in Japan is reviving and should do so in continental Europe in the months ahead, both regions will experience a very muted expansion by North American standards.”

According to Scotiabank, U.S. exports will be bolstered by recent currency depreciation and the gradual revitalization of global demand.

Canadian exporters, especially those outside of the resource sector, will continue to face strong headwinds. The Canadian dollar is expected to move higher against the weakening U.S. currency, while competition from lower-cost producers can only intensify. Jestin says, “Even with high oil and gas prices bolstering energy receipts, the pervasive slump in non-energy exports is eroding Canada’s large merchandise trade surplus.”

The bank forecasts headline inflation rates to hover around 2% in the U.S., allowing the Federal Reserve to keep its bellwether rate at a 50-year low of 1% through much of 2004. With Canadian inflation moving below 2%, Scotiabank expects the Bank of Canada to cut interest rates to relieve pressure on the loonie.

“The Canadian dollar will likely follow other currencies higher, probably testing the US80¢ threshold in coming months,” adds Jestin.

Scotiabank expects the negative fallout from currency appreciation on job creation will likely temper household spending plans in the months ahead.

On the other hand, business spending will provide increasing support to the expansion. The shift to faster production and inventory rebuilding will be a key factor enabling the United States and Canada to maintain traction during the first half of 2004.

Canada’s provinces are on track to record stronger growth in 2004 after a series of setbacks this year resulted in an uneven and subdued regional expansion. Provincial exports should be bolstered by improving U.S. and overseas markets, though gains will be dampened by the strong Canadian dollar, a slow revival in tourism and unresolved trade frictions.