FULL TEXT-Speech by Bank of Canada Governor

Feb 4 (Reuters) - Following is the full text of a speech given by Bank of Canada Governor Mark Carney in Winnipeg on Thursday:

It is a pleasure to be here in Winnipeg. Today, I intend to elaborate on elements of the Bank of Canada's economic outlook. After putting the recession in context and offering the Bank's perspective on the shape of the recovery, my remarks will focus on Canada's corporate sector. A focus on business is appropriate in Manitoba. This province is not only the geographic centre of our country, but also mirrors Canada's economic diversity. Manitoba's distinctive blend of primary, manufacturing, and service businesses represents a true cross-section of the Canadian economy. A focus on business is also appropriate at this stage of the economic cycle. A key determinant of the pace and sustainability of Canada's recovery will be how investment and hiring intentions of businesses in all sectors evolve as policy stimulus begins to fade. My message is relatively straightforward: the thaw is coming. That may sound a little premature to someone standing at the corner of Portage and Main in early February, but it broadly captures the state of our economy. While its pace will likely be somewhat muted (given the depth of the recession) and while there may be setbacks, the recovery has begun. After a brutal economic winter, spring is within sight. There is, however, a catch. The economic climate that Canadian business will face will be considerably different. Canada is entering this period of adjustment with many strengths, but the efforts required of us will be historic. The Global Recession In the fall of 2008, the intensifying financial crisis triggered a deep, synchronous global recession. The economic shock in the United States was spread-and in many cases amplified-through trade, finance, and confidence channels. We are just emerging from the worst economic downturn since World War II. The speed and virulence of the slowdown took business by surprise. Over the turn of last year, there was the equivalent of a corporate heart attack: inventories surged, production was slashed, capital spending budgets eliminated, and employment cut. The cascade of collapsing demand through global supply chains shook widely held perceptions. Given the shock of the downturn, many firms understandably have been waiting for confirmation of the recovery before acting. The Canadian Recession in Context Canada experienced a short, sharp recession. In its depths last year, with the exception of government spending, all major components of aggregate demand declined. At its worst, industrial production fell 15 per cent. Canadian exporters suffered particularly, owing to the sharp fall in the components of U.S. economic activity that matter most for Canada. For example, U.S. demand for motor vehicles fell by more than half and housing starts by two-thirds. In response to this new profile of U.S. demand, major Canadian industries (particularly the automotive and forestry sectors) began deep restructurings, which continue to this day. The recession has had a considerable impact on employment. At its depth, 400,000 Canadians lost their jobs and the unemployment rate spiked by almost 3 percentage points to its highest level in more than a decade. Although the deterioration of the labour market appears to have stopped, too many Canadians who want to work are still out of a job, and many of those still employed are working fewer hours than they would like. As painful as our recession was, Canada has suffered less than most other advanced economies. Domestic demand, fixed capital investment, and employment in Canada all held up substantially better than in the United States. Real GDP fell cumulatively by 3.3 per cent in Canada. That compares with declines of just less than 4 per cent for the United States, about 5 per cent for the Euro area, 6 per cent for the United Kingdom, and more than 8 per cent for Japan. Canada's better performance can be explained by two factors. First, with a highly credible monetary policy and the strongest fiscal position in the G-7, Canadian policy-makers were able to respond swiftly and effectively with extraordinarily accommodative measures. The Bank of Canada began cutting interest rates in December 2007 and proceeded with a series of aggressive reductions until our key policy rate reached one-quarter of one per cent in April of last year, the lowest it can effectively go. Further, the Bank then provided extraordinary guidance on the likely path of interest rates necessary to achieve the inflation target in order to maximize the monetary stimulus from its policy rate. Fiscal stimulus has already been substantial and will continue to have an important impact on growth this year. Second, Canada entered the recession with notable advantages, including a well-functioning financial system, strong corporate balance sheets, and relatively healthy household finances. In addition, our economy has a demonstrated ability to adjust quickly to changing circumstances. We will have to draw on these advantages as the world emerges from recession. While the downturn was synchronous, economic performance across markets and sectors is likely to be increasingly diverse. For some Canadian businesses, the recovery may prove as challenging as the downturn.