After a very strong performance during most of last year, output slowed down markedly in the autumn, mainly because of faltering export demand. Output growth is likely to have remained weak through the winter, but the pause is expected to be fairly short-lived. Economic fundamentals are sound, and activity should pick up in the second half of this year if the US recovery accelerates as expected and the present uncertainties diminish. Even though the recent rise in inflation was partly due to one-off factors, price pressures are beginning to build.

The Bank of Canada will need to raise interest rates further this year and next in order to avoid overheating. The planned shift in the fiscal stance, due to a substantial increase in spending, increases these overheating risks. Even though the medium-term fiscal situation is still solid, the government will eventually need to control the underlying sources of spending pressures, particularly in the health care system.