bank has been formally confirmed, accompanied by a clear mandate. the floating exchange rate regime and the explicit target for price stability have worked well. several segments of the swedish economy have been deregulated, though less has been done in this way in the labour market than in markets for goods and services. but the labour market organisations have been working on their own account to improve the system for wage formation. as a result of all this, the swedish economy is doing better than we have seen for a long time. the economic upswing has now continued for more than six years, during which annual gdp growth has averaged around 3 %. and notwithstanding the strong growth of demand, inflation has been lower than one would expect from earlier relationships. everything suggests, moreover, that the economy will continue to impress. last year, gdp growth was 3. 8 % and the increase in employment was the highest in the past twenty - five years. another indication of the good circle in which the swedish economy is developing at present is that forward - looking gdp assessments have also been revised upwards, whereas forecasts of inflation have not been adjusted upwards to the same degree. financial market pricing is also a tribute to the present credibility of swedish economic policy. who would have believed a decade ago that the swedish economy would achieve such a favourable path? the successful combination of relatively high gdp growth and low inflation can in principle be attributed to a number of factors. one may be the plentiful supply of unutilised resources after the crisis in the early 1990s. a change in pricing behaviour may have contributed once the rate of inflation had been brought down to a low and stable level. increased competition in connection with, for example, deregulations, globalisation and it commerce may also have played a part. but it may also have to do as well with an upward shift in trend productivity, so that more goods and services can be produced without an increase in prices, in other words, a higher rate of potential growth. it can be argued that all these factors have in fact contributed to the favourable development. when the upswing started there were plenty of unutilised resources. it is highly likely that pricing behaviour in a low inflation regime differs from that when inflation is high. another circumstance worth mentioning is that both external and domestic competitive pressure have increased and led in many cases to downward price adjustments or just a slow increase. the most recent figures for inflation are one of several illustrations of this phenomenon. while this is strictly speaking

you in may 2000, our economy was growing vigorously, bolstered by strong domestic and u. s. demand. indeed, with signs of emerging capacity pressures, and with the need to sustain non - inflationary economic growth in canada, the bank raised interest rates the day after our appearance before this committee. these higher interest rates led to some cooling off in domestic demand in canada. what we, and most other analysts, did not anticipate was the abrupt slowing in u. s. economic growth. this is the factor that has contributed to a greater - than - expected moderation in economic activity in canada. since february, the bank has been saying that we expect growth in the first half of this year to be very modest. and we have indicated that, by the middle of 2001, the canadian economy will probably be operating somewhat below potential. overall, the information received to date is broadly in line with the bank's expectations. the monthly numbers have been volatile : some have been weaker and some have been stronger than anticipated. but they are generally consistent with our view that the weakness in the first half will be mainly associated with inventory adjustments in markets facing soft demand — in particular, motor vehicles — and with adjustments in other industries — notably electronics and telecommunications equipment. the bank continues to believe that, after very modest growth in the first half of 2001, economic activity in canada will pick up in the second half and strengthen further in 2002. let me explain what we are basing this on. despite lower production in the three high - profile sectors i just mentioned, aggregate economic activity continues to grow, buttressed by underlying strength in other areas, including the energy sector, retail sales, housing, non - residential construction, and most service industries. supported by recent tax cuts that boost disposable income, final domestic demand should continue to expand. and we expect a recovery in foreign demand in the latter part of the year, encouraged by the substantial reductions in u. s. interest rates. nonetheless, there are uncertainties about the exact timing and strength of the pickup in u. s. growth. here in canada, we have lowered interest rates significantly to support growth in total demand in line with our objective of keeping inflation close to 2 per cent over the medium term. since january, the bank of canada has cut rates by a total of 100 basis points, bringing the overnight rate — the rate that corresponds to the u. s. federal funds rate — down to 4¾ per cent