go. this evidence, which had been accumulating through the summer, led the bank to scale back its previous expectations for economic growth during the second half of 2001 and the first half of 2002. consequently, on 28 august, we lowered interest rates to support domestic demand growth and to keep inflation near the target of 2 per cent over the medium term. the events of 11 september, and their repercussions around the world, added a further major element of uncertainty to the near - term prospects for the global economy and for canada. because of this heightened uncertainty, the bank took the exceptional step of lowering interest rates by one - half of a percentage point on 17 september, outside our regular schedule of fixed announcement dates. we also moved immediately after the attacks, as did other major central banks, to provide additional liquidity to the financial system to ensure its smooth functioning. at times like these, a key factor in preserving confidence in the prospects for our economy is a financial system that continues to work effectively. the ongoing economic effects of last month's shock are very difficult to assess. we know that there was a clear and immediate impact on certain sectors ( such as air transportation and tourism ) and on those industries that rely on cross - border, just - in - time delivery. but how large the total impact will be and how long it will last are very difficult to gauge. what is even more difficult to evaluate at this stage are the implications for consumer and business attitudes. the recent events are unlike anything we have ever experienced in north america. so it will take some time before we can fully understand their consequences. when we take into account the direct effects of the terrorist actions in the united states, their immediate negative impact on business and consumer confidence, and the adjustments necessary to deal with increased security risks, it is now clear that economic growth in canada in the second half of 2001 will be close to zero or slightly negative. this means average growth for the year as a whole of about 1 ½ per cent. how quickly growth will resume will depend crucially on geopolitical developments and on how soon consumer and business confidence return to normal. by their very nature, geopolitical developments are not easily predictable, although they will likely be more turbulent than usual for some time. also difficult to predict is the evolution of consumer and business confidence. one could think of a scenario where confidence would be restored quickly. in such a case, fairly robust growth could resume by the second quarter of 2002. on

financial positions of state and local governments. in the federal sector, the taxes paid on huge realized capital gains and other incomes related to stock market advances, coupled with taxes on markedly higher corporate profits, have joined with restraint on spending to produce a unified budget surplus for the first time in nearly three decades. the important steps taken by the congress and the administration to put federal finances on a sounder footing have added to national saving, relieving pressures on credit markets. the paydown of debt associated with the federal surplus has helped to hold down longer - term interest rates, which in turn has encouraged capital formation and reduced debt burdens. maintaining this disciplined budget stance would be most helpful in supporting a continuation of our current robust economic performance in the years ahead. the fact that economic performance has strengthened as inflation subsided should not have been surprising, given that risk premiums and economic disincentives to invest in productive capital diminish as the economy approaches price stability. but the extent to which strong growth and high labor force utilization have been joined with low inflation over an extended period is, nevertheless, exceptional. so far, at least, the adverse wage - price interactions that played so central a role in pressuring inflation higher in many past business expansions - eventually bringing those expansions to an end - have not played a significant role in the current expansion. for one thing, increases in hourly compensation have been slower to pick up than in most other recent expansions, although, to be sure, wages have started to accelerate in the past couple of years as the labor market has become progressively tighter. in the first few years of the expansion, the subdued rate of rise in hourly compensation seemed to be, in part, a reflection of greater concerns among workers about job security. we now seem to have moved beyond that phase of especially acute concern, though the flux of technology may still be leaving many workers with fears of job skill obsolescence and a willingness to trade wage gains for job security. in the past couple of years, of course, workers have not had to press especially hard for nominal pay gains to realize sizable increases in their real wages. in contrast to the pattern that developed in several previous business expansions, when workers required substantial increases in pay just to cover increases in the cost of living, consumer prices have been generally well - behaved in the current expansion. a couple of years ago - almost at the same time that increases in total hourly compensation began trending up in nominal terms - evidence of