risks surrounding our projection. there are risks on both the upside and the downside. the main risks are the ones that we have been talking about for the past six months or so. the main upside risk to our inflation projection comes from stronger household demand in canada. with the increases in house prices in many parts of the country, consumption could be stronger than expected as households borrow against the increased equity in their homes. there has been strong growth in various indicators of household credit over the past year, although the pace of growth has eased in recent months, and we have seen a slight deceleration in the annual rate of increase of new house prices more recently. so while this main upside risk remains, it appears to have diminished somewhat since october. the main downside risk continues to come from the united states, where clear weakness remains in the housing sector. but there are some encouraging signs. as i mentioned earlier, the slowdown in the u. s. housing and automotive sectors does not appear to have spread more broadly. there is evidence that a significant portion of the adjustment in the automotive sector has already taken place, while the adjustment in the housing sector continues. so, in the bank's judgment, the main downside risk to our inflation projection for canada does remain, but it has also diminished. overall, we judge that the risks to our inflation outlook are roughly balanced. in addition to these risks, we are faced with a great deal of uncertainty about the trend growth rate of potential output in canada. we are fairly confident in our assessment of the contribution of labour force growth to future potential output. however, there is a lot of uncertainty about the trend rate of productivity growth. we use the past trend rate – roughly 1. 5 per cent – as the basis for our projection of future productivity growth. but recent data on productivity have been disappointing. it is unclear how much of this weak performance is caused by cyclical factors that will be reversed in due course, and how much represents a permanent downward shift in the trend rate of productivity growth. adding to the uncertainty is the way the data tend to be revised over time. remember that you calculate productivity by dividing total output by total hours worked. both numbers are revised over time, sometimes fairly dramatically. this makes the challenge of understanding what's happening to the trend rate of productivity growth more difficult. finally, there does remain a possibility of a disorderly resolution of global imbalances. in general, the term " global imbalances

' s conventional measure of the output gap suggests that the economy was operating just above its production potential in the fourth quarter. there have also been other signs of upward pressures on capacity and inflation. in our winter business outlook survey, the percentage of companies reporting that they would have difficulty in meeting an unanticipated increase in demand was still above average. the employment - to - population ratio stayed very high in december compared with historical experience, while the unemployment rate was at a 30 - year low. finally, the bank's measure of core inflation – which we use as an operational guide – had remained slightly above 2 per cent, and above our earlier expectations, because of pressure from prices for shelter and some other services. on the other hand, there were also some signs of downward pressure on inflation. there has been an easing in the underlying trend increase in wages in recent months. and the percentage of firms reporting labour shortages in the bank's winter survey was slightly below average. overall, our judgment is that the economy was operating right at, or just slightly above, the limits of its capacity at the end of 2006. that's a quick look backwards. now, let me turn to the bank's base - case projection for the rest of this year and for 2008. overall, we project that real gdp growth will pick up during 2007, averaging about 2 1 / 2 per cent in the first half of this year, and about 2 3 / 4 per cent in the second half. the detailed breakdown can be found in the update, but the bottom line is that we project that the canadian economy will continue to operate close to its production capacity through to the end of 2008. the bank projects that core inflation will stabilize at close to 2 per cent as pressures from house prices ease and the economy remains near potential. total consumer price inflation will continue to be affected by movements in energy prices and, for the first half of the year, by last year's cut in the goods and services tax. overall, given recent energy prices in futures markets, total inflation is projected to average just above 1 per cent in the first half of the year, before returning to the 2 per cent target in 2008. that's a look at our base - case economic projection. but if there's one thing we can be certain about, it's that the economy will not evolve exactly as set out in our base case. so a very important part of our outlook is the assessment of the