to continue to fall as debt is rolled over, or new debt taken on, at lower interest rates. in addition, over three - quarters of household debt is in mortgages, which have financed the purchase of houses. households have also been accumulating financial investments. in fact, the net worth of the household sector has been rising, although, of course, the assets and debts are not equally distributed across households. the important point i want to make is that, if you take the household sector as a whole, it is not buried under a mountain of debt, with high servicing costs, no assets, and no spending power. second, the personal savings rate. in this case, there are valid concerns that we have been underestimating savings by ignoring capital gains, particularly on investments in stocks, given the rise in the stock market. if we look at the conventional measure of personal savings, the savings rate of 3¼ per cent in the fourth quarter of 1996 is indeed low. but this does not mean that it could not remain low for a time ( or even go lower temporarily ) while the economy is recovering. this is, in fact, what we would expect to happen if significant numbers of households decided to cash in some of their accumulated financial assets in order to spend. third, the high unemployment rate. this argument sounds like a " catch 22 " : the high unemployment rate discourages people from spending, which keeps unemployment high, which discourages spending still more. i believe that this grim picture overstates the problem, given that over 90 per cent of the workforce is employed. and yes, there are still cutbacks and layoffs, especially in the public sector. however, private sector employment continues to expand. since the beginning of 1996, the private sector generated some 210, 000 net new jobs, six times as many as were lost in the public sector. undoubtedly, employment concerns remain, but the quickening of output growth that began in the second half of last year should lead to sustained growth in private sector employment over the course of 1997, and to improved consumer confidence. you can see that i did not find the arguments against a strong comeback in consumer spending persuasive. moreover, these negative influences must be weighed against the size of the easing in interest rates that has taken place since late 1995. short - term rates are down by about 3 percentage points, medium - term rates by 2 percentage points and longer - term rates by 1½ percentage points. another indicator

bank ’ s inflation - control target range. together, these improvements in our basic economic circumstances have facilitated the major decline that we have seen in domestic interest rates over the past year or so. many interest rates in canada are now at their lowest levels since the 1960s. and for maturities of up to 10 years, they are also below comparable u. s. rates by the widest margins we have seen in many years. some of the gloom about the economy during the past year had to do with the perception that the stimulus to economic activity from the decline in interest rates was taking a long time to have its effects on spending and employment. there are, of course, lags in the impact of monetary policy actions on the economy that are widely believed to be of the order of 12 to 18 months. however, what may not have been widely appreciated was that the reductions in short - term rates that began in the spring of 1995 initially just reversed the runup in rates that occurred after the mexican currency crisis and before the 1995 federal budget. the real easing in monetary conditions relative to 1994 effectively started only in late 1995, following the quebec referendum, and continued for one year to late 1996. therefore, it is not surprising that signs of the response to that easing have only been apparent quite recently. because of the lags involved, the contribution of the easier monetary conditions to a stronger expansion in output and employment should continue for some time. thus, we expect the economy to expand at rates in excess of the growth in potential output through 1997 and 1998. in other words, we anticipate that the margin of unused capacity in our economy will shrink substantially over the next couple of years. as i noted, there are those who view this outlook with scepticism. for them, it is not a question of lags. they argue that the current very low interest rates will not do enough to encourage additional household spending, given high debt levels, a low savings rate, and high unemployment. i will not tell you that these factors cannot temper the response to low interest rates. of course they can. but i do not believe they are sufficiently important to offset it. let me take the arguments in turn. first, household debt levels. yes, they are high relative to personal disposable income - - over 90 per cent. but the burden of servicing this debt represents only 8 per cent of disposable income - - well down from the peak in 1990 - - and is expected