Aug 25 (Reuters) - Bank of Canada Deputy Governor Timothy Lane is scheduled to speak about the outlook for the Canadian economy on Tuesday at 1:00 p.m. Eastern (1700 GMT). Here is the text of the speech, to be delivered in Kingston, Ontario.

“Good afternoon. It’s a great pleasure to join you at this year’s CABE meeting. The theme of the conference, “managing the recovery,” is particularly timely: As we move past the gravest dangers of the financial crisis toward better days, attention has turned to the policy challenges posed by the recovery. “Managing the recovery” may turn out to be almost as interesting as managing during the crisis! While the outlook is clouded by uncertainty, there are encouraging signs that we will return to positive growth this quarter. Stimulative monetary and fiscal policies, improved financial conditions, firmer commodity prices, and a rebound in business and consumer confidence are spurring the growth of domestic demand. Globally, the vigorous policy actions taken by monetary and fiscal authorities appear to have reduced the probability of an extreme negative outcome for the global economy. But there remain significant upside and downside risks to the outlook for the Canadian economy. As we return to positive growth, policy-makers are facing difficult decisions when and how to remove stimulus, how to secure the stability of the global financial system, and, importantly, and over the long term, how to set the stage for a return to rising living standards. It is this last challenge that I’d like to focus on later in my remarks. I will start with a few comments on how the recovery is likely to unfold and the forces that will be driving it, and what this outlook means in terms of the output gap. Then I’d like to look at Canada’s growth trajectory beyond the recovery by focusing on two key variables that affect both potential and actual output labour input and productivity. Given the significant changes foreseen in the labour market and their implications for output, it’s clear that Canada, like many other nations, needs to improve its productivity if we are to reap the benefits of sustained growth. I’ll also touch on the important role of monetary policy and financial system policy in setting the stage for sustainable growth. After I conclude, I’d be happy to respond to comments and questions. The outlook for the economy The Canadian economy is expected to start growing again this quarter. Our July Monetary Policy Report discusses the factors underpinning this earlier-than-expected resumption of growth. Globally, there are signs of a nascent recovery. More specifically, the U.S. economy is likely to start recovering this quarter, and growth is also picking up again in China, a major source of demand for raw materials. In Canada, domestic demand is strengthening, supported by improved financial conditions, a rebound in consumer and business confidence, and firmer commodity prices. We are projecting Canada’s GDP growth at -2.3 per cent for 2009, 3.0 per cent for 2010, and 3.5 per cent for 2011. Canada’s economic recovery will be supported by a combination of factors, which is likely to make it somewhat more robust than elsewhere. First, the composition of economic activity in the United States as it recovers will prove favourable to Canadian exporters as the sectors hit hardest by the recession, such as housing and automobiles, rebound. Second, Canada’s relatively well-functioning financial system will enable credit to meet the needs of an expanding economy. A third supportive factor is the underlying strength of household, business, and government balance sheets. These favourable circumstances are expected to support the return to economic growth, with the output gap closing by mid-2011. Of course, many uncertainties remain and economic forecasters are notoriously more prone to error around turning points in the cycle. The July MPR identifies the upside risk of economic momentum in Canada being stronger and more sustained than expected. On the downside, the risks relate mainly to the external sector. There is a possibility that financial conditions may normalize more slowly than expected, and further setbacks cannot be precluded. Two downside risks require elaboration. First, it’s important to bear in mind that a good deal of the impetus for the recovery, in Canada and worldwide, is coming from the public sector from policy actions by governments and central banks. The scale of fiscal expansion has been quite substantial. Monetary policy has also been eased aggressively, bringing policy interest rates close to their effective lower bound in most advanced economies. In Canada, the target overnight rate of 1/4 per cent is reinforced by our conditional commitment to keep the rate at its current level until the middle of next year. This monetary easing counters other factors such as tighter lending conditions and wider-than-usual yield spreads on corporate bonds that would otherwise have resulted in tighter overall financial conditions. Other central banks, given the situations they have been facing, have gone even further by providing additional stimulus through quantitative and/or credit easing. In many countries, the authorities have also had to provide substantial direct support to financial institutions facing difficulties. Although we have been spared that in Canada, this support has been an important bolster for the global recovery. While these policy actions have been timely and effective, they imply that the incipient recovery depends to a considerable degree on official action. At what stage will private demand be robust enough to make the recovery self-sustaining? Clearly, we haven’t reached that point yet.