And a number of governments too have been restricting their spending and raising taxes, aiming to restore sustainable fiscal positions. This process of deleveraging in other advanced economies creates significant challenges for Canada’s financial stability. Specifically, the slow growth path resulting from deleveraging in our largest trading partner – the United States – creates a headwind to Canada’s economy.
This headwind has, in particular, been holding back Canada’s exports, which are far from recovering from their plunge at the start of the recession. As a result, Canada has relied on domestic demand – mainly spending by households – to achieve even a modest rate of economic growth (Chart 6).