, its underlying momentum going into 1999 is much greater than most had supposed. this is confirmed by some of the advance data for early 1999. so even if growth slows, as expected, the us economy should continue to operate at high levels. there are also signs that the sharp economic downturns in some of the asian countries most affected by the financial crisis are bottoming out. the economy of south korea has started to expand, and in thailand economic activity seems to have stabilized. however, a broad - based recovery in the region has yet to take hold and will depend, to an important degree, on economic conditions in japan. here in canada, the impact of the global turbulence since the summer of 1997 was felt mainly through the lower demand for the key primary commodities we produce and the 20 % decline in their prices between mid - 1997 and end - 1998. but consumer and business confidence were also affected, and that dampened domestic spending. consequently, the canadian economy expanded by just under 3 % through 1998 ( fourth quarter over fourth quarter ) compared with over 4 % in 1997. however, after some weakness through last summer and early autumn, our economy showed renewed strength recently. helped by buoyant us demand, easing global financial strains, and the rebound from major labour disruptions, economic activity grew at an annual rate of 4. 6 % in the final quarter of 1998. and this was accompanied by robust, broad - based employment gains through the closing months of 1998 and into early 1999. with world economic and financial conditions still fragile and the timing of a firm recovery in primary commodity prices uncertain, projections for 1999 remain tentative. but with recent healthy employment growth, domestic spending should continue to contribute to an expanding economy. and sustained us demand, coupled with our improved competitiveness, should continue to bolster our exports. altogether, we are looking at a somewhat more positive scenario than seemed possible last autumn. the response of monetary policy to international turbulence let me now say a few words about how the bank responded to the exceptional global events of the past couple of years. as commodity prices tumbled, we became less well - off as a nation. distressing as that is, it is a reality canada had to face. and our currency moved downwards, reflecting – not causing – the drop in our economic prosperity and the need to adjust. when shocks like this hit us from time to time, movements in the external value of the canadian dollar help ‘ buffer ’ the shock and smooth the process of adjustment.

compromising the stability of the system. i would now like to turn to our economic situation and monetary policy. the state of our economy the past year has been a trying one, both for the world economy and for canada. still, considering the seriousness of the global difficulties we have been facing, the canadian economy has coped much better than expected, and certainly better than in the past. this is because it is in sounder shape now than it has been for many years. canadian businesses have been investing in new technology to increase productivity and efficiency. governments are no longer draining national savings to finance huge budget deficits. and with the bank of canada ’ s commitment to inflation control targets, inflation is low and stable. but what about our economic prospects as we look ahead? let me start with the financial climate. global financial markets have been calmer recently compared with the turbulence last autumn after russia declared a debt moratorium. cuts in official interest rates around the world since then, and the success of some emerging market economies in addressing their problems, have clearly helped. international investors ’ fears have abated, and markets seem to have regained a sense of their ability to assess risks and discriminate among borrowers. when it comes to the world economic environment, there is still uncertainty out there. but there are also positive elements in the picture. one area of uncertainty is the financial problems in brazil and the extent of related economic weakness in latin america more generally. if the brazilians follow through on their fiscal adjustment program and limit the inflationary fallout from the depreciation of their currency, financial market pressures should ease, and growth in brazil should resume next year. but the foremost uncertainty in the outlook continues to centre on japan, where the economy remains in a slump. nevertheless, if present efforts at bank reform continue, and if stimulative macroeconomic initiatives are pursued systematically, the japanese economy should begin a gradual recovery, perhaps by late 1999. the economic expansion in the other industrial countries, which together account for about half of world output, should remain relatively well sustained. in europe, economic activity has softened, but interest rate cuts since the autumn and the easing of global financial strains should help support confidence and domestic spending in coming months. the most positive element, certainly from a canadian perspective, has been the remarkable performance of the united states. that economy ended 1998 on a much stronger note than had been expected, growing at an annual rate of 6 % in the fourth quarter of 1998. thus