john gieve : stability and change speech by sir john gieve, deputy governor of the bank of england, to the engineering employers ’ federation north west, warrington, 20 july 2006. * * * i am delighted to be here today. the bank of england has long connections with this region. we first set up offices in manchester and liverpool back in 1820s. that was a time when north west of england was a key hub in an emerging international economy, with the port of liverpool providing the gateway for industry in lancashire and cheshire to trade with the rest of the world, particularly textiles. the structure of the economy in the north west has of course changed markedly since those days and the region is now more associated with the aerospace, defence and pharmaceuticals industries than with textiles. here as elsewhere, recent years have been a time of rapid change in the structure of industry and the economy. we may have been talking about globalisation for years but that doesn ’ t mean it is complete ; in fact it is still gathering momentum. macroeconomic stability : a platform for change in the face of that rate of change, it may seem paradoxical that among central banks the last 10 years have been known as the “ great stability ”. the uk is an example of that. since 1992, when an explicit target for inflation was first introduced here, inflation has been stable and very close to its target. not only has inflation been low, but we have avoided the large swings in output and employment that have characterised previous periods in uk economic history. we have seen employment grow from around 56 % of the population at the trough in 1993 to over 60 % now and unemployment fall back to levels not seen since the mid - 1970s. gdp growth has been between 1 % and 4. 5 % per annum throughout. to someone like me who was in the treasury in the 70s and 80s when we experienced real booms and busts, the last 10 years have looked like a golden age ( chart 1 ). of course we hoped that the reform of economic policy would bring greater stability, but the speed and extent of that success has been unexpected. when the mpc was created in 1997 and given responsibility for meeting the inflation target, it was told that whenever inflation was more than one percentage point away from the target the governor would have to write a letter to the chancellor explaining why this had occurred. the bank ’ s current chief economist estimated that the governor would need to write a letter on average one month in every two. 1 even the

current governor thought that ‘ given past experience of inflation volatility it is likely, even allowing for the change in policy regime, to restore the lost art of letter writing to british life ’. 2 it is remarkable that not a single letter has needed to be written – yet. but stability at the macroeconomic level does not mean stability for individual firms or industries. indeed one of the virtues of macro stability is that it allows – indeed forces – firms to focus on the real long term business challenges and opportunities they face rather than how to survive or profit from the short - term cycle. it is not a paradox therefore that the great stability has also been a time of great change in industry in ownership, structure and technology. the engineering employers ’ federation has itself stated that ‘ manufacturing prospers best in a stable macroeconomic environment with low inflation, low interest rates and stable exchange rates ’. 3 that is not because they are a recipe for a quiet life but because they allow businesses to focus on what really matters – their products, their technology, their customers and their competition. in the last few years, macroeconomic stability has provided business with a platform for rapid changes in ownership, location and product mix, and for the transformation by it of all business processes in the factory, the warehouse and the office. bean, c ( 1998 ), ‘ the new u. k. monetary arrangements : a view from the literature ’, economic journal, november. ‘ the inflation target five years on ’, quarterly bulletin ‘ manufacturing in the uk ’, engineering employers federation, may 2005. globalisation and uk manufacturing looking wider than the uk, one of the most striking changes of the last few years has been the integration of china, india and countries from the former soviet union into world markets and the sharper competition that is bringing first into goods markets and, increasingly, into services also. the eef report, ‘ where now for manufacturing? ’, published at the end of 2004, highlighted the ‘ huge increase in the importance of lower - cost countries as competitors ’. just under half of companies surveyed by the eef saw china as the biggest competitive threat to their activities and nearly 60 % identified china as a major competitive threat over the next five years. that was sharply up on the equivalent figure of 18 % in 2001, illustrating that the change was occurring faster than companies then foresaw. one of the consequences of the globalisation of production is that a reduced proportion of output in the developed economies is in