In a speech released today, Bank of Canada governor David Dodge says that Canada’s medium-term prospects are good, but the short-term looks bleak and possibly recssionary.

“Clearly, the events in the United States have increased the uncertainty surrounding global economic prospects in the short run,” Dodge noted. “Last week’s tragic developments in the United States, and their reverberations around the world, obviously bring with them further uncertainty with respect to the timing and extent of a rebound in economic activity.”

Dodge says that it is too early to fully assess the consequences for our economy, but that the Bank’s initial efforts involve trying to estimate the direct effects of disruption in sectors such as transportation, finance, and tourism. “The terrorist attacks on the United States will also affect consumer and business confidence worldwide, including here in Canada. It is precisely for this reason that we moved promptly this week to lower interest rates by one-half of one percentage point. This action aims to provide further support for economic growth in Canada.”

He notes that the central bank intervened to ensure liquidity to guarantee confidence in the financial system. “We stand ready to do so whenever necessary. But it is encouraging that at this juncture, with each passing day, we seem to be moving back to a more normal state of affairs in the financial system.”

He estimates that economic growth in the third quarter will likely be close to zero or slightly negative, and that we will continue to feel the adverse effects into the fourth quarter. He says the bank sees inflation sliding still, although there is a risk that world oil prices could rise sharply, depending on the fallout from last week’s events.

“A more complete analysis of the impact of last week’s events on the Canadian economy, including the effects on output and inflation in 2002, will be carried out as we prepare for our next policy announcement on October 23. Clearly, there are adverse effects that need to be assessed, but there will also be offsetting factors, from such activities as rebuilding in the United States and a return to more normal operations in both Canada and the United States, that need to be considered. Given the uncertainties surrounding all these elements, there will be a wider-than-usual confidence band around the economic outlook for next year.”

“It is important, however, that we look through the short term to the longer-term trends and potential of our economy,” says Dodge. He notes that technological changes can be expected to raise the potential of our economy to grow and to generate income gains in the decade ahead. “Once the cyclical forces that are currently constraining investment and innovation are behind us, we should see productivity and income gains from past investments and adjustment. And the way will be clear for further innovation and growth. Thus, the medium-term outlook for growth in output, employment, and incomes in Canada is very favourable.”