mr thiessen reviews the canadian economy and monetary policy in unsettled times speech by the governor of the bank of canada, mr gordon thiessen, to the greater victoria chamber of commerce in victoria, british columbia on 7 / 12 / 98. when the asian crisis erupted in the summer of 1997, few observers anticipated that international financial markets would still be under its influence more than a year later. most expected that the crisis would be contained and resolved relatively quickly. but then who could have foreseen a year ago that the japanese situation would deteriorate as much as it has ; or that russia would declare a debt moratorium, jolting markets everywhere, and increasing financial pressure on parts of latin america? all these unexpected developments have slowed world economic activity. canada ’ s very open economy has not been immune to these forces. the sharp decline over the past year in the demand for, and the prices of, the key primary commodities we produce has taken its toll. british columbia has been particularly hard hit because it produces and exports a larger share of such goods than other canadian provinces. these developments have been reflected in the value of our currency, which has declined substantially against the u. s. dollar. all this seems to have provided fertile ground for some pessimistic scenarios. indeed, some commentaries have raised the spectre of global recession and deflation, implying a consequent downturn for canada. are such concerns justified, or are they an overreaction to events? i believe that the pessimistic commentary has been overdone. given the global uncertainty and financial market volatility of the past year, canada has been coping relatively well. it is normal for people to feel queasy and to fear the worst when caught in the kind of stormy seas we have encountered in the past year. but the important thing to remember is that these days canada is better positioned to ride out the storm. and we will feel much better if we can keep our eyes on the horizon – for there are signs that the sky is clearing. what i would like to do this morning is to put the recent changes in the global economic and financial environment in perspective. next, i will look at the implications for the world economy and for canada in particular. i will finish with a discussion of the bank of canada ’ s response to the international turbulence. global financial problems in perspective i will spare you the detailed chronology of the past year ’ s events. you are probably already too

is still the main uncertainty at this point. but the recent legislation to rehabilitate its banking sector, which is at the core of japan ’ s problems, and other measures proposed to stimulate the economy are grounds for cautious optimism. if these are implemented in a sensible, systematic fashion, the world economic outlook will brighten considerably. another factor that added to the pessimism through the early autumn was the concern about a “ credit crunch ” in the united states that could spread elsewhere, including here in canada. however, the recent interest rate reductions by the u. s. federal reserve have eliminated the worst scenarios envisaged at the time. some of the rise in interest rates on “ less - than - prime ” debt, which occurred during the autumn because of concerns in global markets about risk and liquidity, has reversed. and the availability of credit is slowly improving. this is not to say that we are completely out of trouble yet ; or that there is no longer considerable uncertainty out there. but, for the reasons i have discussed, i certainly do not believe that the scenarios of worldwide recession and deflation are very likely as we look ahead. as for canada, it is true that we have been hit hard by the more than 15 % decline in commodity prices over the past year. it is also true that those lower prices, together with the slowing world economy, are affecting our export industries – a fact that this audience probably knows only too well. it is also evident that the nervousness and volatility in financial markets have made some canadian consumers and businesses less confident, affecting domestic spending plans. as a result, the canadian economy has expanded much more moderately this year than in 1997, when it grew by more than 4 % ( fourth quarter over fourth quarter ). as we look ahead to 1999, the considerable degree of global uncertainty that is still lingering makes all economic forecasts more tentative than usual. because financial stability is so important for household and business confidence, the expansion of our economy will be influenced by how quickly global financial markets stabilize. still, with accommodative monetary conditions and recent solid employment gains, spending by canadian households and businesses, while slowing, should continue to contribute to an expanding economy. and, based on the bank ’ s current assessment of the world economic outlook and canada ’ s improved competitiveness, our exports should continue to grow. the monetary policy response to the international turbulence let me now turn to monetary policy. you will not be surprised to hear that