drop in productivity we have seen over the recession. unusually, the decline in output appears to have been much bigger than the decline in employment when normally we observe the opposite result. in terms of the impact on unemployment, this has been a good thing, helping to dampen the cost of the recession in terms of lost jobs. but this raises further questions about how much slack there is in the uk labour market as the economy begins to grow and generate new jobs. the behaviour of productivity in the recession also raises the question of whether the uk productivity growth trend over the medium term has shifted. if it has, we may make big mistakes basing our assessment of underlying growth on past productivity trends. in my view, these puzzles mean we should be particularly circumspect and cautious at the moment about the assumptions we make about the growth of the supply - side potential of the uk economy and the related issue of the margin of spare capacity. the late 1990s and 2000s saw a wave of supply - side optimism about uk economic performance – but in my view this reflected one - off shifts in labour market performance rather than an improvement in the underlying trend rate of productivity. 11 given the evidence of weaker productivity growth, it makes sense for policymakers to make relatively conservative estimates of uk mediumterm growth potential going forward. inflation and current monetary policy at the beginning of this speech, i said that a healthy economy is normally a growing economy. and that raises the issue of how uk monetary policy should best play its part in sustaining the recovery by contributing to the underlying health of our economy. monetary policy can help sustain and support the emerging economic recovery in two main ways. the first is through the impact of the current settings of policy on the growth of demand. it clearly does not make sense to tighten monetary policy dramatically in the current climate in a way which totally undermines the growth of the economy. however, if interest rates were moved up gradually from current levels, in a well - communicated strategy that was understood by the public, the business community and financial markets, the cost of borrowing would still be low in real terms and i do not believe that the recovery would be seriously damaged. indeed, for the many uk households which rely on the income from savings and investments, this could provide a powerful boost to confidence by signalling the beginning of a return to more normal economic conditions. the other very important way in which monetary policy can support recovery is by maintaining confidence in price stability over the medium term. the mandate for the

seen against the background of a sharper fall in output than we experienced in previous post - war recessions. but two more positive aspects of the early stages of this recovery are worth highlighting. first, employment has been more resilient than in past recessions and appears to have turned around more quickly than in the previous recoveries. the total number of people in employment in the uk has increased by over 300, 000 since last winter, according to the official labour force survey. 2 chart 2 shows this contrast with previous economic cycles very clearly. employment is down by not much more than 1 % on its level at the peak of the cycle in 2008, compared with a decline of around 5 % at the equivalent phase of the early 1980s and early 1990s cycles. this employment picture points to a rather mild recession in terms of the labour market, which contrasts with the much larger fall in gdp relative to previous uk downturns. the resilience of employment through the recession should help to sustain consumer confidence. it is also a positive indicator about medium - term economic prospects – as companies would not be retaining and taking on workers if they were not reasonably uk economic growth averaged 2. 5 % in the sixty years 1948 to 2008. in the year to 1982q1, gdp in the united kingdom grew by 2 % and in the year to 1993q2, it grew by 2. 1 %. however, if growth is measured from the trough of output in 1991q3, growth in the first year of the 1990s “ recovery ” would be just 0. 5 %. between the three months dec 2009 to feb 2010 and the period june to august 2010, total employment increased by 315, 000 according to the labour force survey. optimistic about their future business prospects. the recent growth of employment has been driven by the private sector and that should also give us encouragement that the private sector can generate job growth that will more than offset the public employment cuts that may be in prospect following the spending review. i will come back to this point later. a second positive feature of the early stages of this recovery is that we have seen some evidence of rebalancing in the uk economy. manufacturing output is growing much more strongly than the services sector, reversing the pattern of services - led growth that prevailed in the decade before the financial crisis. over the last year, we have seen the strongest rate of growth of manufacturing output that the uk has experienced in over 15 years – as chart 3 shows. according to