The economy accelerated in the last quarter of 2003 as export volumes rebounded and inventories rose, but final domestic demand was weak. With lower import prices and the end of special factors, inflation has fallen below the central bank’s target range. Going forward, the expected world trade recovery, together with a strengthening of internal demand, should help output growth return to above its potential rate later this year while inflation should remain subdued. Given low inflation and doubts as to the strength of the rebound, the Bank of Canada has eased monetary policy three times this year. With planned budgetary restraint, the current policy mix appears appropriate, as long as vigilance is exercised over expenditure. However, the monetary stimulus will need to be withdrawn once robust economic growth is in place. Fiscal policy should continue to focus on maintaining the downward trend in the debt burden before ageing pressures accumulate...