important for open trading nations like ours : sustainable fiscal policies, a monetary policy based on inflation targeting, a flexible exchange rate, and flexible markets that can respond to changing economic circumstances. by following these prescriptions, both australia and canada should be well placed to cope with whatever developments come about in the global economy. but we must also work hard to help shape that global economy. we need to do our utmost to ensure continued free trade in goods and services and to resist protectionism. and we must work together and with other countries to make the international financial system as efficient and effective as possible. an important part of that effort must be to modernize the imf. with a stronger international system and solid domestic policies, both australians and canadians can look forward to continued strong economic growth in the years ahead.

the second half of next year and throughout 2008. slower u. s. growth has clearly caused canadian gdp growth to fall short of expectations in the second and third quarters. after expanding at a 3. 6 per cent annual rate in the first three months of this year, gdp growth slowed to only 2 per cent in the second quarter, and we expect a similar figure for the third quarter. but it's important to think of this as a mild, and likely very short - lived, cyclical slowdown for canada. with near - term weakness in the u. s. economy, net exports will likely exert a considerable drag on canadian growth. however, consumer spending and business investment are expected to remain robust. overall, we at the bank of canada project 2. 8 per cent growth for real gdp in 2006, slowing to 2. 5 per cent next year but coming back up to 2. 8 per cent in 2008. core inflation is expected to move a bit above 2 per cent in the coming months but return to the 2 per cent target by the middle of 2007 and remain there through 2008. total inflation will likely average about 1 1 / 2 per cent through the second quarter of 2007, before returning to the 2 per cent target and remaining there through to the end of 2008. the main upside risk to the canadian economy continues to relate to the momentum in household spending and housing prices. this momentum is linked to strong consumer credit growth. by increasing home equity and thus expanding the availability of collateral, the recent strong increases in house prices have contributed to robust growth in consumer credit. there is a risk that these linkages could be stronger than assumed or that house prices could continue to grow more rapidly than expected, resulting in higher - than - projected household spending and, hence, greater upward pressures on inflation. the main downside risk to the canadian economy relates to the possibility of a sharper slowdown in the housing sector in the united states and a broadening of the weakness in the housing sector to consumption and investment. a larger decline in domestic demand in the united states would lead to decreased demand for canadian exports and broader weakness in the canadian economy. this development would also lead to lower inflation. the slower growth in the u. s. economy is a sharp reminder of just how important a role its powerful appetite plays in absorbing the exports of many countries and just how critical that strong u. s. demand has been to global economic growth. of course, the united states has been far from