David Dodge, governor of the Bank of Canada, appeared before the Standing Senate Committee on Banking, Trade and Commerce today, along with his deputy, Malcolm Knight

Dodge’s remarks betrayed the Bank’s cautious optimism on the economy.

“As we look to 2002, the timing and extent of a recovery in economic activity will depend crucially on geopolitics and on how quickly confidence returns to normal,” he said.

Dodge noted that the Bank imagines two scenarios — one where confidence and the economy rebound quickly in 2002, and one where both are weak through much of the year. “Note that, under either scenario, the Canadian economy would still be operating at levels that are below capacity by the end of 2002. This means that inflation would continue to be below target through next year.”

He said that ongoing uncertainties mean it is still too early to characterize the economic outlook with great certainty, but that the Bank is leaning toward the optimistic scenario.

“Signs that the geopolitical situation may be stabilizing and that households and firms are beginning to adjust to the new environment, suggest a somewhat greater likelihood that the Bank’s more optimistic scenario may come to pass than was the case a month ago.”

Dodge also stressed that while low inflation is essential, it is not sufficient by itself to revive growth. “Other policies, both macro- and micro-economic, must continue to focus on enhancing productivity and raising our production potential over the medium term. This focus is extraordinarily important if we want to achieve sustained, solid economic growth and rising standards of living over time. We should not lose sight of it as we go through the current short-term difficulties.”