Speaking in Australia, David Dodge, governor of the Bank of Canada, gave a fairly upbeat assessment of Canada’s economic prospects.

Dodge appeared today at the Sydney Institute and the Canadian Australian Chamber of Commerce in Sydney, Australia. He said that he’s, “feeling pretty positive right now about our prospects, despite the fact that the pullback we are now seeing in the U.S. economy is larger, and has come faster, than we had expected.”

The U.S. slowing has serious implications for global demand, he conceded, and it hits Canada particularly hard.

He reiterated the Bank of Canada’s projections that U.S. economic growth will average 2% to 2.5% in the last half of this year and the first half of 2007. Activity should then recover to above 3% in 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,” he noted. “After expanding at a 3.6% annual rate in the first three months of this year, GDP growth slowed to only 2% 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,” he stressed. “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% growth for real GDP in 2006, slowing to 2.5% next year but coming back up to 2.8% in 2008.”

Core inflation is expected to move a bit above 2% in the coming months but return to the 2% target by the middle of 2007 and remain there through 2008, he said. Total inflation will likely average about 1.5% through the second quarter of 2007, before returning to the 2% 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,” he explained.

“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,” he noted. “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.”

He went on to stress the importance of free trade and IMF reform. “We need to do our utmost to ensure continued free trade in goods and services and to resist protectionism,” he said. “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.”