mr thiessen gives an update on the canadian economy and on the state of year 2000 readiness in the canadian financial sector speech by mr gordon thiessen, governor of the bank of canada, to the chamber of commerce regina, saskatchewan on 23 september 1999. * * * it is always a pleasure to return and speak to people in my home province. this time, we are here for a meeting of the bank of canada ’ s board of directors. once a year, our board meets outside ottawa, in a different part of the country. this year, we are delighted to be in regina. today, i would like to give you an update on the canadian economy – its recent performance and its prospects. i would also like to brief you on the state of year 2000 readiness in the canadian financial sector. the recent performance of the canadian economy here in saskatchewan, you know only too well that the last couple of years have been difficult for the canadian economy, especially for producers of primary commodities. but there is reason for optimism as we look ahead. to fully appreciate why, we need to understand the international shocks that have buffeted our economy since mid - 1997 and how we have dealt with them. the global financial crisis, which started in southeast asia in mid - 1997 and spread to other countries during 1998, led to a sharp decline in the world prices of primary commodities. by this time last year, the average price ( in us dollars ) of key commodities produced in canada had fallen by about 20 % over the course of the previous 18 months. and when russia declared a standstill on the servicing of its debt in august 1998, the effects were felt far and wide. conditions tightened in financial markets everywhere. many highly rated corporate borrowers in the industrial countries were faced with a reduction in the availability of credit and with higher borrowing costs – the same conditions that faced governments from emerging - market economies. nevertheless, the canadian economy has fared surprisingly well over the past year. of course, we have not experienced booming conditions. indeed, some of our primary sectors, such as farming, continue to struggle with low prices. grain prices, in particular, have been plagued by ample global supplies and weak demand. but, on the whole, the economy has performed well. i expect that when the numbers for the third quarter of this year are out, they will show that output has grown by about 4 % since the third quarter of 1998. this compares with growth of only 2½ % over the same period

to reverse part of last autumn ’ s easing, by raising interest rates twice this summer, in an effort to return the economy to a more sustainable, non - inflationary pace. the fed ’ s success in preventing the us economy from overheating and bringing it down to a “ soft landing ” is critical for the world economy and especially for canada. the worst case for us would have been for the fed to have delayed action and risked another inflationary boom. not only would this require more drastic tightening by the fed down the road, but it could well lead to a recession – another episode of boom and bust. the bank of canada did not follow the two interest rate increases made by the fed this summer. while there is no reason that changes in us interest rates should automatically trigger similar movements here, neither is it the case that such developments are irrelevant for us. canada is closely integrated into the world economy and international financial markets. developments in the united states, the world ’ s largest economy, will always have a major global impact. when it comes to canada, the central bank must carefully assess the economic and financial circumstances in the united states that are behind any move by the fed and their likely implications for our economy. sometimes this will mean that the bank of canada will respond to a fed move and sometimes it won ’ t. the interest rate actions taken by the fed this summer improve the odds of continued, non - inflationary economic expansion in the united states. this is good news for all concerned. but it also means that we cannot count on the us economy to provide the same strong stimulus for canadian exports in the future as it has in the recent past. thus, the improved outlook for europe and the firmer markets for primary commodities are particularly welcome developments for canada. these external factors, along with the relatively low domestic interest rates and improved employment conditions that i mentioned, bode well for sustained economic expansion in canada. altogether, our economy should continue to grow at a healthy pace and take up slack in production capacity. core inflation is expected to stay low over the next year, in the bottom half of the bank ’ s 1 % to 3 % target range. but as the economy begins to produce at full capacity, monetary policy will have to be mindful of the potential for price pressures. however, there is a lot of uncertainty and imprecision in our estimates of the economy ’ s capacity to produce. for example, we do not know to what extent large investments in new technology