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The outlook has been gradually improving, despite the persistent European debt crisis and consequent economic uncertainties. Against this backdrop, the main drivers of growth will continue to be private consumption and investment. External demand is also expected to be increasingly supportive. By contrast, fiscal consolidation will work in the opposite direction. In all, growth is projected to be around 2¼ per cent in 2012 and 2½ per cent in 2013.

The plans for fiscal consolidation presented in recent federal and provincial budgets are intended to ensure fiscal sustainability, and the decisions to implement these measures while the economy is strong were good ones. Imbalances remain in the housing sector, but they have been attenuated by actual and expected tightening of mortgage lending standards. The Bank of Canada’s highly accommodative monetary stance is appropriate in light of the downside risks to the economic outlook and the fiscal tightening, but withdrawal of monetary stimulus will be warranted when these risks recede.