The fallout from the terrorist attacks on the United States has impacted the Canadian economy, possibly throwing it into recession. The governor of the Bank of Canada, David Dodge, expects that the third quarter of 2001 will be one of little growth, or possibly a slight decline. The damage and disruptions resulting from the terrorist attack on September 11 has weakened both the United States and Canadian economies. Canadian economists expect the American economy to recover rather quickly. There is a great deal of uncertainty about the future course of the Canadian economy especially given the international political situation.

The damage to lower Manhattan is estimated at $20 billion, and disruption resulting from the attacks will reduce U.S. output by another $25 billion in September. As the U.S. economy falters, the Canadian economy is impacted through international trade. Air and cross-border traffic has been significantly reduced. Shrinking stock market prices have the potential to weaken the economy still further and the consequences of a possible military action by the U.S. could be significant.

The Conference Board of Canada, in a report released September 21, estimated that Canada's GDP will shrink by a 0.5 percent annual rate in the fourth quarter of this year. Growth will also be down in the first quarter of 2002 by an estimated 0.25 percent.

The Bank of Canada cut interest rates by half a percentage point on the day of the attack and bank governor Dodge appears to be willing to cut interest rates further should the economy need more liquidity. Mr. Dodge does not believe that the Canadian government should stimulate the economy by means of deficit spending.

(Updated October 1, 2001)