david dodge : the canadian economy - current and future challenges remarks by mr david dodge, governor of the bank of canada, to the greater moncton chamber of commerce and the conseil economique du nouveau - brunswick, moncton, new brunswick, 24 october 2001. * * * it's a pleasure to be talking to you today, although i wish these were happier times. all of us at the bank of canada share a deep sorrow at the loss of so many lives in the 11 september terrorist attacks in the united states. among those who died were innocent citizens of many nationalities, including canadians. to their families, friends, and colleagues we extend our heartfelt sympathy. as we strive to come to terms with this tragedy and its implications for all of us, we are tremendously encouraged by the co - operation, solidarity, and determination that are abundantly evident both at home and in the international community. through this time of anxiety and uncertainty, we at the bank of canada will continue to fulfill our responsibility to support the economic well - being of canadians and to promote the stability of the domestic and international financial systems. as we all struggle to fathom the dimensions of this tragedy and to get a measure of its immediate economic effects, it is important that we look through the short term to the longer - term trends and the potential of our economy. if we are to solidify our economic performance in the years ahead, we cannot lose sight of the challenges we must meet as a nation. those longer - term challenges are my main topic for today. of course, in the current circumstances, there are also important near - term challenges for monetary policy. so i will conclude with a brief discussion of the current economic situation and the steps that the bank is taking to support domestic demand in canada. longer - term challenges to good economic performance — progress so far let me start with the longer - term challenges. the past decade was a watershed for the canadian economy. low inflation was firmly established, fiscal health was restored, and canadian businesses undertook major restructuring. in short, we made remarkable progress in improving our economic performance. let me quickly review that progress, starting with the achievement of a credible low - inflation record.... establishing a record of low and stable inflation since the early 1990s, the focus of canadian monetary policy on low, stable, and predictable inflation has helped to anchor inflation expectations and to reduce the ups and downs in economic activity. canadians have been able to make spending, saving

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