mr. thiessen reports on the future performance of the canadian economy notes for remarks by the governor of the bank of canada, mr. gordon thiessen, to the canadian club of winnipeg, in winnipeg on 25 / 3 / 98. it can take anywhere from one to two years for monetary actions to have their full effect on the economy. because of this, the conduct of monetary policy must be based on a view of what the economy will be like - - not tomorrow, not in a month - - but rather in one to two years ’ time. that is why in speeches in vancouver and toronto last year i spoke about where the canadian economy might be heading in the future ; what this might imply for our economic performance over the medium term ; and what should the contribution of monetary policy be. understandably, these important issues can get pushed aside because of the public focus on the current economic situation and on recent movements in short - term interest rates and in the external value of the canadian dollar. today, i would like to use this opportunity to revisit these medium - term issues. in doing so, i will be underlining the crucial role played by productivity improvements in our economic performance. the best place to start is with a brief review of the recent record. recent economic performance as we approach the end of the decade, we can take satisfaction in the good economic performance of the past two years and in the notable improvements in our economic fundamentals. the canadian economy has expanded at an average annual rate of 4 per cent since mid - 1996 and, even with the dampening effects of the asian crisis, it is expected to continue to grow at a healthy pace this year. this should contribute to further gains in employment and reduce the amount of unused capacity. inflation is low, and we are committed to keeping it low. last month, together with the federal government, we announced that we would extend our target of holding inflation inside a range of 1 to 3 per cent to the end of 2001. moreover, government deficits have virtually disappeared, and the ratio of public debt relative to the size of our economy is finally on a downward path - - for the first time in about 25 years. low inflation and improved fiscal health represent major contributions towards the sounder economic fundamentals i mentioned a moment ago. they are no doubt the main reason why our interest rates have been below us rates. the other key area where there have been important improvements in recent years is in the private business sector.

and, indeed, in other industrial countries ) has slowed so sharply since the mid - 1970s. i do not propose to try to untangle this puzzle today. nonetheless, there are a few points i would like to make with respect to the canadian situation. the sharp rise in the world price of oil in the 1970s no doubt dealt a major shock to canadian industry. because of our climate and because of the importance of primary commodity production in our economy, we are major users of energy. adapting to higher energy costs certainly took considerable time. [UNK] in my view, two other important factors inhibited productivity improvements through much of the 1970s, 1980s, and early 1990s : large fiscal deficits and high inflation. government deficits through the 1980s and early 1990s tended to crowd out private sector investment by appropriating an ever - increasing share of canadian savings. it was, of course, possible for businesses and governments to get foreign financing. but the accumulation of a large public sector debt and the rapid buildup of foreign indebtedness eventually resulted in appreciable premiums being built into our interest rates. high inflation through the 1970s and 1980s had a similar effect on interest rates. for these reasons, interest rates were high, even after adjusting for inflation. this discouraged some of the investment that would have contributed to gains in productivity. moreover, because high inflation increases uncertainty about the future, businesses and individuals seek protection from its ravages or try to profit from it. either way, scarce economic resources were diverted from productive investments towards hedging and speculative investments. i do not mean to suggest that the factors i have mentioned here explain all of our productivity problems. but they no doubt worked against the investment that was needed to help us adjust to both the oil price shocks of the 1970s and the global forces of the past two decades, and to make headway in terms of productivity growth. let me now turn to the question of what we can expect in terms of productivity in the future. future productivity trends and canada ’ s economic potential increases in productivity do not just happen. we need to work hard to achieve them. in a world of rapid technological change and intense international competition, there are opportunities and incentives for productivity gains - - provided we do what is necessary to take advantage of the possibilities. productivity comes from the interaction of business investment in new capital equipment, a skilled labour force, and the adoption of new technology. it takes entrepreneurship and innovation to pull it all together. typically, this interaction