gordon thiessen : update on economic and monetary developments in canada opening statement by mr gordon thiessen, governor of the bank of canada, before the standing senate committee on banking, trade and commerce, ottawa, on 6 april 2000. * * * i very much appreciate the opportunity to appear regularly before your committee. i would like to use this particular occasion to update you on economic and monetary developments as well as to discuss any issues that you may want to raise. let me first give you an overview of the developments in the past year. when i appeared before you last april, there was still a high degree of uncertainty in the global economy related to the 1997 - 98 financial crisis in emerging markets and the associated fall in world commodity prices. and because of these difficulties, the pace of economic activity in canada had slowed. but by mid - 1999, our economy had regained its momentum, supported by buoyant us demand, a rebound in commodity prices, and a pickup in domestic spending. over the four quarters of 1999, output expanded by about 4¾ % and 425, 000 new jobs were created, taking the national unemployment rate down to 6. 8 % by this february - its lowest level in 23 years. at the same time, the underlying rate of inflation remained low. why has canada rebounded so quickly from the external shocks of 1997 - 98? i believe it is because canada ’ s economic policy foundation is stronger today than it has been in several decades. this foundation has two cornerstones. one is the improved fiscal positions of governments that have led to a declining ratio of public sector debt relative to the size of our economy. the second is an environment of low and stable inflation that is expected to persist because it is anchored by the bank of canada ’ s target for inflation control. since the early - 1990s, canadian monetary policy has been based on a commitment to explicit targets for inflation control. this commitment has helped to moderate fears of a resurgence of inflation, has assisted the bank in taking timely action in response to changing economic and financial conditions, and has improved our public accountability. a crucial part of our monetary policy regime is our floating exchange rate. without that, we could not have canadian inflation targets. a good measure of the success of our monetary policy framework based on inflation targets and a flexible exchange rate is that canadian interest rates have remained lower than comparable us rates, apart from the period of turbulence in 1998. these lower rates reflect canada ’ s lower inflation rate, and the expectation

deal with their problems. some of the initial uncertainties involved in setting up and getting these imf adjustment programs going have been resolved. and there are now some encouraging signs of improved confidence and financial stability in the region. among the industrial countries, japan is the one most affected by the spillover effects from its asian trading partners. not only are its trade links with them important, but this external shock comes at a time when the japanese domestic economy is much less buoyant than was anticipated earlier. substantial loan exposure by japanese banks to the asian region has also weakened an already ailing financial sector in that country. but it is important to note that japan has the financial wherewithal to deal with its banking difficulties and that a series of measures to combat these problems and to strengthen the economic recovery have already been taken. additional financial sector and fiscal measures were announced recently. at this stage, the situation in asia is still evolving, and, while prospects have improved, we cannot be sure just how quickly and effectively the south - east asian, korean, and japanese economies will respond to the adjustment measures that have been taken. what about the potential effects of all this on canada? since our trade with asia, including japan, makes up less than 10 per cent of our total exports, the direct effects will be relatively modest. but we must also take into account the indirect effects that work through our other major trading partners and through the prices of some of the products we sell abroad. indeed, the implications of the asian crisis for global economic growth and for primary commodity prices on world markets will probably have a more important impact on canada than the reduction of our exports to asia. the fallout from asia will no doubt have a dampening effect on canadian output growth for the current year. but there are also other, more positive, developments that could well work to mitigate this effect. as i said before, economic performance in our major trading partners in the west, particularly the united states, has been somewhat stronger than anticipated. and even though our short - term interest rates have risen, canadian longer - term rates have been falling, along with their counterparts in the united states and europe, reflecting declining inflation and lower inflation - risk premiums. these longer - term rates are an important element in both business investment decisions and household spending on consumer durables and housing. the bank continues to monitor the situation carefully and to appraise the overall effect of these positive and negative influences on our economy. it is clear, however