activity and inflation. what this implies for the monetary stance and the level of interest rates will inevitably vary between countries and regions as different monetary authorities make their own judgements about the pace and extent of tightening appropriate to their own circumstances. indeed, some monetary authorities in the asia - pacific region, where growth has been stronger and inflationary worries greater, have already begun to tighten policy. elsewhere, in the uk and many other major economies, the current settings of monetary policy still reflect the aggressive loosening of policy to counter the severe downside risks of the recession a year ago. as these downside risks recede and recovery becomes more firmly established, it will be important to reassess how much of that stimulus is still needed to keep the economy on a steady course consistent with low inflation. conclusion the turnaround in the global economy over the last year has been quite impressive, given the scale of the shocks from the financial crisis. that should give us grounds for encouragement that continued growth in the global economy will provide a supportive backdrop for recovery in the uk – even if some of our important markets, such as the economies of the euro area, may be turning around more slowly. indeed, the imf ’ s mediumterm forecasts for the world economy over the next five years point to stronger global growth than we experienced in previous recoveries from the major recessions in the 1980s and 1990s, as chart 8 shows. but there are also many uncertainties affecting the current outlook for the global economy and i would highlight four key influences which will shape the recovery which does unfold over the next few years. first, i have argued that an improvement in business and consumer confidence has been a key ingredient in the economic turnaround so far. and in the absence of further shocks to the global economic system, we should expect confidence among firms and households to continue to recover, supporting the growth of private sector spending and helping the recovery to build momentum. but given our experience in recent times, we cannot rule out new shocks which could set back recovery. second, a major financial adjustment is taking place in the major economies of europe and the united states as banks adjust their lending behaviour and seek to rebuild their balance sheets. this adjustment will continue to dampen the recovery in demand on both sides of the atlantic too some degree, though its impact should lessen as the process of financial repair and rebuilding progresses. third, world growth in the recovery so far has been particularly strongly driven by the performance of asia and other emerging

markets, and their dynamism has to a large extent offset slower growth elsewhere. in my view this is not a flash in the pan, but a structural feature of the world economy that we are now living in, and we should expect a continuing impetus to global growth from this direction. however, as we saw in the mid - 2000s, there is also the associated risk of upward pressure on inflation from global energy and other commodity prices, if the momentum of world growth becomes too strong. fourth, the high degree of stimulus provided by fiscal and monetary policy to combat the recession will need to be withdrawn over a period of time. returning budget deficits to a more sustainable level will require a prolonged tightening of fiscal policy in many countries, including the uk. monetary policy can provide an offset by continuing to support the growth of private spending – though the appropriate degree of monetary stimulus will need to be continually reassessed in the light of the progress of the recovery at home and abroad and its impact on inflationary pressures. given the turbulence we have seen in the major economies of the world over the last two years, it is very natural to worry about setbacks to the recovery, both in the uk and overseas. in the past, economic recoveries have not been smooth and linear. so we should expect to see some variability in growth rates, both at home and abroad, as this recovery develops. however, looking through this data volatility, there are also good grounds for expecting the growth of the world economy to continue to provide a healthy support to the uk ’ s economic recovery over the years ahead. and, over time, that is likely to bring a different set of policy challenges to the ones we have been facing over the course of the recession.