By Paul Vieira

Canada is slowly digging itself out of the deep hole created by lost manufacturing capacity and lower commodity prices, with the economy on course to reach full capacity some time in mid-2018, Bank of Canada Gov. Stephen Poloz said Monday.

"The process has been gradual, more gradual than we would like," Mr. Poloz said, according to prepared remarks he was to deliver in Toronto at an event organized by the C.D. Howe Institute think tank. "Based on the progress recorded to date, we have every confidence that the economy will find its way back to full output."

He said excess capacity will be absorbed sometime around mid-2018, and inflation will converge at the central bank's 2% target. The central bank sets rates to reach and maintain 2% inflation.

Mr. Poloz's comments arrive less than 48 hours before data show how much the economy grew in the third quarter. The expectation is for annualized growth of over 3% in the three-month period.

Yet market watchers say there is an increased likelihood of another Bank of Canada rate cut as signs emerge the economy lost momentum in the fourth quarter. They also point to uncertainty about the impact of a Trump administration on Canada, especially on trade relations.

At its last rate-decision meeting in October, Mr. Poloz said officials "actively discussed" further easing but decided to keep the policy rate intact.

The central bank has pinned its hope on non-energy exports to lift Canada's fortunes, and Mr. Poloz said Monday that the export recovery since the financial crisis "has been impressive but remains incomplete."

The central bank estimates the country lost roughly 30 billion Canadian dollars ($22.39 billion) worth of export capacity as a result of the financial crisis and the years leading up to it, and has lost up to C$60 billion in income from the more recent commodity-price swoon.

He said both monetary and fiscal policies in Canada are doing their part to help the economy recover from this hole. The Bank of Canada's main policy rate has stood at 0.5% for over a year, while the federal Liberal government has pledged tens of billions of dollars in infrastructure spending and tax relief. A weaker Canadian currency, relative to the U.S. dollar, is aiding with the adjustment.

Also providing a helping hand is the services sector, Mr. Poloz said, adding it is expanding at a strong clip and has been the source of most new jobs in the past two years. Coupled with gains from more traditional nonenergy exports -- such as food, pharmaceuticals, and furniture -- "you can see that we are making realprogress in filling that hole," he said.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

November 28, 2016 20:28 ET (01:28 GMT)

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