expectations. going forward, there are risks, on both the upside and the downside, to this outlook for the canadian personal savings rate. canadian households could remain more cautious, chastened by the recent financial and economic trauma, leading to more durably elevated savings. some of the issues brought to the fore by the crisis, such as retirement funding, could also alter household savings behaviour over the nearer term. over the next few days, the federal, provincial, and territorial finance ministers will meet to discuss these issues, in recognition of their importance to canadians. finally, more protracted u. s. and global recoveries could restrain canadian households, by affecting both the confidence and economic prospects of canadians. on the other hand, there is a risk that, as growth returns, the resilience of canadian households through the crisis could lead to declines in the savings rate that are sharper, and increases in household borrowing that are larger, than the bank has projected. whatever happens, the bank ’ s monetary policy reaction to consumer behaviour will always be driven by its implications – taken in conjunction with all other relevant factors – for inflation over the medium - term horizon. households and financial stability in canada household finances are also important for financial system stability. as was painfully learned from the u. s. experience, a stable financial system is fundamental for the effective functioning of the economy and the financial welfare of citizens. in this regard, there are two important considerations. first, financial and price stability share common determinants but have different time horizons. inflation continuously reflects real shocks and / or policy responses, while financial vulnerabilities are much less predictable. they develop over time and can persist for longer than expected. simply put, behaviour consistent with price stability over the medium term could simultaneously build financial stresses over a longer horizon. second, when evaluating the financial condition of canadians, we need to look beyond the aggregate for possible changes in distribution of debt among households. the financial system review ( fsr ) is a semi - annual bank publication that examines developments in the financial system and provides an analysis of policy directions in the sector. in our most recent fsr, we judge that most of the risks to the stability of the canadian financial system have ebbed in recent months. at the same time, our assessment of the risks related to household balance sheets is that they have increased further. as noted in the fsr, the vulnerability of canadian households to adverse wealth and income shocks has grown in recent years.

. household wealth. 5 this sustained, higher savings rate will produce a historically weak recovery in u. s. consumer spending and accounts for the bank ’ s relatively subdued forecast for overall u. s. economic growth ( chart 4 ). canada ’ s household sector canadian household finances were in better shape going into the crisis than those of americans. the canadian personal savings rate was higher and household debt was lower ( chart 5 ). the ratio of consumer spending to gdp, at 55 per cent, was below the longer - term average in canada. as a consequence, when the crisis struck, canadian households were less vulnerable. moreover, throughout the downturn, canadian labour and housing markets held up better ( charts 6 and 7 ), meaning that the incomes and net worth of canadians were not as hard hit as those of americans ( chart 3 ). so, while there is no doubt the financial crisis and accompanying recession have been painful here, canadians have had less need to increase savings to restore their balance sheets. still, canadians have saved more. the personal savings rate in this country rose to an eightyear high of 5. 5 per cent in the second quarter. the bank projects that this rate will moderate only slightly over the medium term. we view the sharp increases in household savings as residential investment accounted for roughly 14 per cent of gdp growth from 2003 to 2005, inclusive. subprime mortgages accounted for 20 per cent of new mortgage originations in 2005 and more than 22 per cent in 2006. it is worth noting that in an environment of rising unemployment, the savings rate of u. s. households that are working has risen even more sharply than the aggregate numbers suggest. for example, ricardian equivalence predicts that households would save more in response to higher government deficits, anticipating the future tax liabilities required to address the rising public debt. to the 2002 – 04 average over the next five years. largely precautionary, that is, reflecting uncertainty about the economic outlook and financial conditions. as the economy begins to grow again and confidence is gradually restored, we expect that some of these precautionary savings will be unwound, and that some consumers will take further advantage of unusually low borrowing rates. indeed, our current stimulative monetary policy is meant, in part, to encourage such behaviour. stronger growth in domestic consumption will be necessary to offset weak external demand in order to restore the canadian economy to balance and inflation to target. recent data have been consistent with these