will also depend on our workforce – who is working and until what age, and whether workers can move easily to where the best jobs are and where they are most needed. in light of all these unknowns, the bank of canada has to use various models, indicators, as well as information gathered from businesses, and a good deal of judgment to come up with its estimates. 3 our analysis focuses on the two variables that determine actual output and whose trends determine potential output, that is, labour input ( or total hours worked ) and labour productivity ( or real output per hour worked ). the results of our most recent analyses tell us that the output gap is sizable and that the growth rate of potential is likely to remain fairly steady at around 2 per cent in coming years. but, before i go into further detail on the outlook, let me step back and describe how we got to where we are now. a tale of troughs and trends for that i have a short story and a long story. i ’ ll begin with the short story : the recession. as i said, canada weathered the global financial crisis relatively well, but we were severely affected nonetheless. in the space of three quarters in 2008 and 2009, the level of output fell by 4 per cent. the export - oriented sectors ( including resources ) were hardest hit, with gdp dropping by 15 per cent ( chart 1 ). across canada, almost 400, 000 jobs were lost. see s. poloz, “ returning to natural economic growth ” ( speech to the vancouver board of trade, 18 september 2013 ). in practice, separating potential from actual output amounts to distinguishing between the underlying trend and cyclical movements in output. different approaches can be used to extract these trends, ranging from very simple mechanical filters to structural models. bis central bankers ’ speeches the recession also led to a drop in the growth rate of potential output ( chart 2 ). some businesses shut their doors. machinery and other capital were left idle or scrapped altogether. rather than investing in new capital, other firms made do with old equipment. these factors combined to make workers less productive. our best judgment is that trend labour productivity growth might have fallen to less than half a per cent during that period and that potential output troughed at about 1. 5 per cent. but as i said, there is also a long story. that story has two parts : trend labour productivity and trend labour input. trend labour productivity i ’ ll start with trend labour productivity. from the mid

##pates and confidence increases. the weaker economic outlook implies greater and more persistent economic slack than previously anticipated, with the canadian economy now expected to return to full capacity by the end of 2013. as a result, core inflation is expected to be slightly softer than previously expected, declining through 2012 before returning to 2 percent by the end of 2013. bis central bankers ’ speeches the projection for total cpi inflation has also been revised down, reflecting the recent reversal of earlier sharp increases in world energy prices as well as modestly weaker core inflation. total cpi inflation is expected to trough around 1 per cent by the middle of 2012 before rising with core inflation to the two per cent target by the end of 2013, as excess supply in the economy is slowly absorbed. there are several significant risks to the inflation outlook in canada. the three main upside risks relate to the possibility of stronger - than - expected inflationary pressures in the global economy, stronger momentum in canadian household spending, and the possibility of a faster - than - expected rebound in business and consumer confidence, due to more decisive policy action in the major advanced economies. the three main downside risks relate to sovereign debt and banking concerns in europe, the increased probability of a recession in the u. s. economy, and the possibility that growth in household spending in canada could be weaker than projected. reflecting all of these factors, the bank yesterday maintained the target for the overnight rate at 1 per cent. with the target interest rate near historic lows and the financial system functioning well, there is considerable monetary policy stimulus in canada. the bank will continue to monitor carefully economic and financial developments in the canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term. with that, tiff and i would be pleased to take your questions. bis central bankers ’ speeches