by the federal reserve has so far limited the slowdown to a downturn in inventories and fixed investment. whether the slowdown in the us will be more prolonged than is embodied in the current consensus view will depend critically upon personal consumption. and, in turn, that will depend upon expectations of future productivity and hence income growth in the us. if there were to be a reappraisal of the extent of the increase in productivity growth in the us, then there might be a further downward revision of asset prices and a lower path for consumption spending. so far, the evidence, both from consumption directly, and financial markets indirectly, suggests that no major reappraisal has occurred. share prices have fallen from their peaks of last year. but price to earnings ratios remain well above historical levels. the average p / e ratio in the us since 1900 was around 14. the ratio peaked at over 30, falling back to current levels of well over 20. interestingly, the divergence of valuation between hi - tech and other companies has virtually disappeared in recent months. there has also been a reduction in the perception of downside risks to equity returns. returns on shares are usually negatively skewed ; that is, there is a greater chance of a return below rather than above its expected value. during the course of this year, the degree of negative skew has fallen in the us, suggesting that market expectations of further sharp falls is share prices have diminished. of course a reappraisal of the future growth of productivity could yet occur. the recent fall in it spending will, at least in the short run, reduce the contribution to higher productivity growth from capital deepening. it is never easy to detect changes in underlying productivity growth because a large quantity of data is needed to distinguish clearly between changes in trend and cyclical movements. nevertheless, there is no evidence to suggest that the rate at which computing processing power is increasing – doubling every eighteen months according to moore's law – has diminished. indeed, there have been suggestions that the pace of doubling of processing power is now closer to twelve months. but there is one reason for caution about estimates of higher future productivity growth, and that is the conventions used to measure output and hence productivity. it might seem obvious that a higher level of gross domestic product, produced by the same number of person - hours, is an improvement in productivity. but gross domestic product, gdp, is not value added. it is the latter which is the correct measure

mervyn king : a tale of two cities speech by mr mervyn king, deputy governor of the bank of england, at cardiff business school, cardiff university, 18 june 2001. * * * vice - chancellor, ladies and gentlemen, it was once said that economic forecasters are the unfathomable in pursuit of the unpredictable. as a student i found this odd. whenever england played wales at rugby the result was wholly predictable. the reason was simple. my fellow - student, gerald davies, ran faster than englishmen, even when he carried the ball and they didn't. economics is, unfortunately, less straightforward. yet any decision that involves an elapse of time between its implementation and its effects requires a forecast. time lags are the essence of the transmission mechanism of monetary policy. and that is why the monetary policy committee spends much time thinking about the likely future path of the economy. the severe limits on our ability to anticipate future events means that forecasts can be no more than a description of the relative likelihood of a range of possible outcomes. anyone who presents you with a point forecast for the future path of the economy is either concealing the most interesting part of their analysis, or suffering from self - deception. so the monetary policy committee presents forecasts in terms of probabilities. and it is the balance of risks to the economy which determines monetary policy. so what are the balance of risks to the british economy at present? overall, the past five years have been a period of remarkable stability for the uk. annual gdp growth has averaged 2. 8 %, and there have been 35 consecutive quarters of positive economic growth. since the mpc was set up in may 1997, inflation has averaged 2. 4 %, very close to our target of 2½ %, and been in the remarkably narrow range of 2 % - 3 % in 43 out of the past 49 months. this degree of stability reflects well on the new framework for monetary policy in this country. but if i focus today on the risks ahead, it is not simply because as a central banker i know that to every silver lining is attached a cloud, but because the small deviations of inflation from the target over the past four years give a misleading impression of the greater volatility of inflation that we might reasonably expect to see in future. there are two sources of uncertainty facing the uk at present, one domestic and the other international. both are related to imbalances. the correction of