to the quality of public supervision and private risk management. corporate balance sheets were robust. finally, canadian household finances were not as stretched as they were in some other advanced countries. relative to the situation in the united states, in particular, the personal savings rate in canada was higher and household debt was lower. these favourable conditions meant that the bank of canada could respond aggressively with substantial monetary easing, while keeping inflation expectations well anchored. they also allowed governments to roll out extraordinary fiscal stimulus, while maintaining fiscal sustainability. the fact that our banking system was well capitalized meant that canadian banks did not face the same pressures to deleverage, and were able to maintain the supply of credit, although they did tighten the terms and conditions of lending to businesses. bis central bankers ’ speeches because the financial system in canada was functioning well, the cuts in the policy rate were transmitted to other interest rates in the economy, and effective borrowing costs for both households and businesses declined to exceptionally low levels. this helped cushion the downturn and fuel the recovery in household spending, with the result that consumption surpassed its pre - recession level as early as the third quarter of 2009. in contrast, business investment was unusually weak during the recession, and its recovery has been subdued. in the united states, the situation was, and still is, much worse. of course, the united states was the epicentre of the financial crisis. the recovery in the labour market there has been weak, restraining the growth in labour income. household balance sheets remain under pressure from elevated debt levels and the dramatic collapse in home prices. hence, the level of consumer expenditures has just recently reached its pre - recession peak and, following a sharp contraction, the housing market has yet to rebound. overall, the pace of recovery in u. s. private domestic demand has been slow. since the united states is canada ’ s largest trading partner, our exports have also been slow to recover. weak external demand, combined with the deterioration in canadian competitiveness in recent years, has led to sharp contractions in canada ’ s trade balance and a return to current account deficits. thus, despite the advantages i noted a moment ago, canada ’ s recovery has been relatively modest in comparison with previous cycles, and has relied heavily on household and government spending. going forward, the bank expects that the composition of demand will shift away from government and household spending toward business investment and net exports. in that regard, the surge in business investment that began last year is an encouraging

agathe cote : household finances and economic growth remarks by ms agathe cote, deputy governor of the bank of canada, at the canadian club of kingston, kingston, ontario, 10 january 2011. * * * introduction good afternoon and happy new year. thank you for your invitation to speak to the canadian club. this is my first public speech as a deputy governor of the bank of canada, and i am delighted to be delivering it in the historic city of kingston. in my remarks i will focus on the state of the canadian economy, with an emphasis on household finances. why does household financial health matter to the bank of canada? it matters because how canadians spend and how much they spend affect both the conduct of monetary policy and the stability of the financial system. sound household finances are vitally important for a balanced economy. collectively, households play a significant role in the functioning of the economy. household spending accounts for about 60 per cent of aggregate demand in canada, and was critical in lifting the canadian economy out of the recession. at the same time, however, canadian household finances have become increasingly stretched. today, i will touch briefly on growing household indebtedness and the risks that it poses to canada ’ s financial stability, but my comments will centre mainly on the macroeconomic outlook and the linkages between household finances and spending. i will start with an overview of current economic conditions and how the economy evolved during the financial crisis. recovering from the great recession in mid - 2009, the world economy began to emerge from the most severe financial crisis since the great depression. in canada, the recession lasted for three quarters, from the latter months of 2008 to mid - 2009. our exports fell dramatically in response to a steep drop in u. s. demand. firms cut back on employment ; some 417, 000 jobs were lost. in response to the weaker labour market, declines in net worth and increased uncertainty, household spending also fell. government spending was the only consistent source of growth throughout this period. despite these challenges, canada ’ s recovery has been stronger than that of our g - 7 peers. by mid - 2010, canadian output had returned to its pre - recession level and all of the jobs that had been lost were regained. since then, almost 46, 000 positions have been added. canada entered the recession with critically important advantages. our public debt burden was the lowest of the g - 7 countries. our monetary policy was highly credible. our financial institutions were in good health, owing