The Canadian economy needs policies that embrace global openness, incorporate flexibility and look beyond the short run in order to prosper in the future, said Paul Jenkins, senior deputy governor of the Bank of Canada, at a conference in Toronto on Monday.

Policies supporting economic openness have helped the Canadian economy prosper in recent years, and this is an important strategy to maintain in the years ahead, Jenkins said: “I believe the possibilities going forward are truly tremendous. That openness will enable us to meet future challenges.”

It is also crucial that policies incorporate flexibility to allow businesses to seize opportunities as they arise, Jenkins added. Furthermore, policy-makers must anticipate future economic trends to establish the policy framework for longer-term success.

In particular, policy-makers should focus investment on three areas: human capital, physical capital and natural resources capital.

Jenkins acknowledged that the year ahead will be very challenging. The BofC expects the Canadian economy to contract by 1.2% in real terms this year: “2009 is going to be a difficult year for the Canadian economy. The degree of uncertainty that we are facing is highly unusual.”

That said, the Canadian financial system is far healthier than virtually every other jurisdiction, Jenkins said, but he noted that significant “stresses and strains” are weighing on the system and that it is crucial for the state of the global financial system to improve before the economy can begin to recover.

“A precondition for economic recovery globally and in Canada is a stabilization of the global financial system,” Jenkins said.

He added that measures taken so far by the BofC, including interest rate cuts and liquidity facilities, have helped establish the framework for an economic recovery. Earlier on Monday, the central bank announced a new Term Purchase and Resale Agreement Facility for private sector instruments as part of its efforts to boost liquidity in securities markets.

“The measure that we introduced today is really an extension of the measures that we’ve been taking all along,” Jenkins said. “This is a further step in the direction of the bank to try to facilitate getting the financial system up and running effectively.”

The BofC will continue to focus on keeping inflation low and stable, and establishing the conditions to improve the functioning of the Canadian financial system, Jenkins added.

The BofC expects economic growth to pick up in 2010, growing to an average annual rate of 3.8%.

Other speakers at the conference on Monday, which was presented by Colleges Ontario, agreed that an improvement in the state of financial markets is crucial to an economic recovery.

“What needs to happen before we see any indication of a recovery, is confidence returning to financial markets,” said Jayson Myers, president of the Canadian Manufacturers and Exporters.

Meanwhile, Jim Stanford, an economist with the Canadian Auto Workers, said the crisis indicates a need for greater regulation of financial markets. Discussions among policy-makers about enhancing regulations have so far fallen short of the necessary changes, he said: “I think we need a lot more controls on the financial system both nationally and internationally.”