dropped sharply in the fourth quarter. the unwinding of these factors should provide some support to growth of real activity in the near term. indeed, the most recent data suggest that economic activity in 2006 is off to a solid start. payroll employment expanded briskly in january - - the latest month for which figures are available - - on top of sizable gains over the preceding two months. although these increases contain some bounceback from the effects of the hurricanes, they also likely reflect underlying strength in labor demand - - an impression that is corroborated by the recent low readings on initial claims for unemployment insurance. in addition, the underlying pace of activity in the industrial sector has been quite robust recently. real household spending continued to climb in january ; although unseasonably warm weather that month left an imprint on the data, the result suggests some underlying strength in this sector. housing activity has, on balance, been a bit softer recently but still remains at a high level. overall, the fundamentals appear sufficient to support continued economic expansion. underlying productivity growth remains strong, the financial positions of households and businesses remain conducive to spending, and, if we have no further run - up in oil prices, the drag on activity from higher energy prices should diminish over time. and the outlook for activity abroad is quite favorable. in japan, the expansion appears to be broadening, and signs suggest that the japanese financial sector may finally be stabilizing. prospects in europe are gradually improving, particularly in germany, after several years of sluggish growth. many emerging market economies also are doing well, with exports providing a significant boost to activity in these countries. these developments should provide some ongoing support to the u. s. economy. the inflation outlook the continued surge in energy prices was the dominant factor affecting inflation last year. rising energy prices contribute to consumer inflation in several ways - - by boosting prices for gasoline and other energy goods ; by raising the price of non - energy goods and services as firms pass on increased energy costs ; and by putting upward pressure on expectations of future inflation. despite those pressures, core inflation has, as i mentioned, remained contained, a result likely attributable to a range of causes. the decline in the economy's energy intensity is one of the factors that has restrained the passthrough of energy prices into core inflation in recent decades. as energy prices started to rise in the 1970s, households responded by purchasing products that were more energy

won ’ t try to suggest that the model does more than it can, despite being the best of breed. a healthy degree of caution has to be applied to all such exercises. still, i think you ’ ll find the results interesting. we begin with a base case and use our model to identify a set of conditions that are sufficient for the resolution of global imbalances. these include : • increasing u. s. private savings rates and maintaining them through time at 6 per cent of gdp ; bis central bankers ’ speeches • engineering a gradual, timely and credible fiscal consolidation in the united states, europe and japan ; • allowing the real effective exchange rate for china to appreciate by 20 per cent, while the u. s. dollar depreciates by 15 per cent ; • implementing policies to stimulate domestic demand in china and emerging asia ; and • pursuing a program of gradual but meaningful structural reform in europe and japan to raise potential growth. this should not be interpreted as a goldilocks scenario. it might be possible to do much better with more ambitious and concerted action ; however, it is sufficient to stabilize government debt and deficits, together with current account balances, at sustainable levels. we might call it a “ good, ” as opposed to “ great, ” outcome. in an alternative scenario, we ask what would happen if the implementation of these corrective measures were delayed by five years ( i. e., over our projection horizon ), after which time they are allowed to kick in. in other words, this alternative scenario eventually course corrects and is by no means as bad as it can be. the results for the good and ( somewhat ) bad scenarios are shown in the graph below. postponing the required policy measures in emerging asia, including china, and in the advanced countries produces a cumulative 8 per cent decline in world and u. s. gdp relative to the baseline, while the difference in china ’ s gdp is roughly 12 per cent. in 2017, world gdp is lower by over us $ 7 trillion, and it could well be much worse ( chart 8 ). a third, and separate, scenario that we conducted on an earlier occasion is in many ways even more interesting. it asks what would happen if fiscal consolidation and household balance - sheet repair were actively pursued in the advanced countries – whether voluntarily or driven by impatient financial markets – but without the support of rising external demand in those countries that needed it ( i. e., absent exchange rate