Global economic growth is expected to exceed 4% in 2004, the best performance in four years, according to a new forecast from National Bank of Canada.

The bank says the main regions of the world will all experience expansion. After recording GDP growth of 3% in 2003, the U.S. economy should grow by 4.5 % in 2004. The bank says U.S. employment has finally fallen in step, which should ensure a self-sustaining recovery.

The Canadian economy will grow more modestly-in the neighbourhood of 3% in 2004. The banks says growth gap between Canada and the U.S. stems from the impact of the rising Canadian dollar, which poses a challenge to the manufacturing sector. However, according to Clement Gignac, chief economist of National Bank, “Canadian manufacturers are in better shape to face the music than they were 10 years ago. They are in a much stronger financial position today, and the world economic environment is definitely more favourable.”

He adds that businesses will have to invest more to boost output if they want to maintain their competitive standing and improve their profitability.

The bank forecasts the loonie to soar even higher to US80¢ by the end of 2004. Aside from the depreciation of the U.S. dollar, compounded by the United States’ twin deficits, with both its budget and current account reaching record levels, Gignac sees two more reasons for the Canadian dollar to continue its upward trajectory. First, Canada has a glowing balance sheet: It is the only G7 country to record budget and current account surpluses as well as declining net foreign debt. Second, because it is endowed with natural resources, Canada benefits from the higher commodity prices resulting from the simultaneous recovery occurring around the world.

National Bank says the loonie’s surging value will force the manufacturing sector to rationalize jobs. This is why overall employment gains are expected to be modest, particularly in Quebec and Ontario.

According to Marc Pinsonneault, National Bank economist responsible for provincial projections, economic growth in both these provinces will fall below the national average.

In terms of interest rates, the rising dollar means that the price of imports will drop significantly, which will enable monetary authorities to maintain the benchmark inflation rate at barely 1% to 1.5% in 2004. Consequently, National Bank expects the Bank of Canada to keep interest rates quite low next year, and possibly even trim its bellwether rate again early in the new year to rein in the loonie.

Lastly, National Bank forecasts stock markets to continue climbing, though without any fanfare. Rising profits and low interest rates have set the stage for favourable conditions. However, indexes can be expected to rise more modestly than in 2003.

Gignac says that “While you could earn good returns in 2003 just by being in the market, things will be different in 2004. Picking the right sectors will be key to earning good returns.”