2010: A progress report

Introduction

It is an honour to be invited here this evening to help you and the Business School celebrate its 21st anniversary. Birthdays are a natural time to pause and reflect – especially those that mark a coming of age.
Reflecting on your first 21 years, much has changed since the Business School was founded. Some of you may remember that 1989 was the year in which Nigel Lawson resigned as Chancellor and the Berlin Wall fell. You may remember less well that it was also the year that Kylie and Jason enjoyed
four Number 1 hits and Coronation Street attracted its largest ever audience to watch Alan Bradley meet his grisly end under a Blackpool tram. How time flies.

The economy has also had its fair share of ups and downs since then. After the 1990s recession, we enjoyed 63 quarters of consecutive growth, withstanding en route the effects of Black Wednesday and the dotcom bubble. Inflation targeting was introduced, the Monetary Policy Committee created and we benefitted from a sustained period of low and stable inflation. But as you know, this period of Great Stability came to an abrupt end with the largest financial crisis for at least a generation. Output fell like a stone and inflation was buffeted by a series of price level shocks. I want to continue this theme of reflection in my comments tonight. However, with 2010 drawing to a close, I will restrict my observations to events over the past year – and what they may herald for the
future – rather than your entire 21 years. A progress report for 2010.

This has certainly been a busy year. The UK economy continued along the road to recovery. A new coalition Government was formed and set in train what is planned to be the largest fiscal consolidation of the post-war period. The Government also announced a major reform of the structure of financial regulation, assigning considerable new responsibilities to the Bank of England. These events have taken place against a backdrop of strong global recovery, but one in which some countries, most notably within the euro area, continue to face acute fiscal and banking pressures, and large imbalances between surplus and deficit countries persist across the globe.

You will be relieved to hear that I do not intend to consider all of these developments tonight. Instead, my progress report will focus on two key issues. First, how much comfort should we take from the recovery seen so far and what factors are likely to determine its future vigour? And second, to what
extent are the Bank’s planned new responsibilities for macroprudential policy likely to address the ‘missing instrument’ problem exposed so painfully by the financial crisis? I will conclude with some reflections on monetary policy.

The recovery so far

There has been a strong start to this recovery. After four consecutive quarters of growth, the pace of the recovery to date compares favourably with previous episodes: output is estimated to have grown by 2.8% over the past year, quicker than at the same stage of either the 1980s or 1990s recoveries.

Some encouragement can also be taken from the composition of growth. Spending by households and businesses has begun to pickup; this despite strains on private sector balance sheets, muted disposable income growth and an impaired banking system. Over the past year, this increase in private sector spending has helped offset a weaker net trade performance, which has been particularly disappointing
given the early and substantial depreciation of sterling.

However, it is too soon to say we are out of the woods. Economic recovery has to be judged in terms of the level of output, not the rate at which it is growing. It is the level of households’ incomes that determines their well-being. And it is the level of economic activity which governs companies’
profitability and their viability. The fall in output during this recession was larger than that in either the 1980s or 1990s recession. One year of growth does not make a recovery. We need to see a sustained period of robust growth for the economy to function normally again. So what are the prospects for demand and output, and how likely are we to achieve this sustained period of growth?

To read the full speech: http://www.bankofengland.co.uk/publications/speeches/2010/speech465.pdf