prices, and strong domestic demand, the magnitude of the recent appreciation appears to be stronger than historical experience would have suggested. the second major development affecting the canadian outlook is the weakening of prospects for the u. s. economy, and the third is a tightening of credit conditions. despite these tighter credit conditions, the momentum of domestic demand in canada is expected to remain strong. but the combined effect of a weaker u. s. outlook and a higher assumed level for the canadian dollar implies that net exports will exert a significant drag on the canadian economy. given these developments, the bank revised its projection for growth. we now project canada's gross domestic product to grow by 2. 6 per cent in 2007, 2. 3 per cent in 2008, and 2. 5 per cent in 2009. with the economy moving back towards balance, and with the direct effect of the stronger canadian dollar on consumer prices, core inflation is projected to gradually decline to 2 per cent in the second half of 2008. total cpi inflation is expected to peak at about 3 per cent later this year and then move back down to the 2 per cent target in the second half of 2008. 4 but there are a number of upside and downside risks to the bank's inflation projection. the main upside risk is that excess demand in the canadian economy could persist longer than projected. the main downside risk is that output and inflation could be lower if the average level of the canadian dollar were to be persistently higher than the 98 cents u. s. level that we assumed in the report, for reasons not associated with demand for canadian products. given recent information, both the upside and downside risks appear to be greater than they were when we completed the report. in the report, we said that after considering all factors, we judge that the risks to the bank's inflation projection are roughly balanced, with perhaps a slight tilt to the downside. and we also said that we judge, at this time, that the current level of the target for the overnight rate is consistent with achieving the inflation target over the medium term. conclusion let me conclude. the canadian and u. s. economies remain highly integrated, and there is every indication that our economic ties will remain strong. but developments in the global economy and the growing prominence of emerging economies have important implications for policy - makers on both sides of the border. indeed, while our economies are highly integrated, they have different structures, and they respond differently to shocks that are increasingly

global in either nature or origin. so, it is important that policy - makers heighten their focus on the need to promote and enhance flexibility. our economies must be able to adjust to changing circumstances. if we are successful in this effort, not only will both the canadian and u. s. economies be able to deal with economic shocks, but we will also be able to sustain strong economic performance in north america. and that is the best outcome for canadians and americans alike. the projection for total cpi excludes the impact of the recently announced one - percentage - point cut in the federal gst, which would be effective 1 january 2008.