of commerce. as many of these have been going for quite a while, we have in many cases been able to establish their usefulness as predictors of the not - yet - available official data. second, we also rely on the information provided by our network of regional agents who have about 8000 business contacts across the country. they can often help the mpc understand what lies behind puzzling movements in the official data or in the business surveys. and, though the evidence they provide is more qualitative rather than quantitative, they can give us early warning of major cyclical developments. the outstanding example here is in the aftermath of the collapse of lehman brothers and the subsequent near - seizure of the global financial system in early october 2008, when our agents reported many of their contacts saying that “ orders had fallen off a cliff ” – the first real indication of the severity of the contraction that was to follow over the next nine months. the sharpness of that contraction, as well as its unexpected nature, can be seen in chart 1, which plots the path of four - quarter real gdp growth on top of the fan chart associated with the mpc ’ s projection for growth, conditioned on prevailing market interest rates, made in august 2008. given that each shade of green corresponds to 10 % of the possible outcomes and the whole fan covers 90 % of the possible outcomes, it can be seen that the mpc had collectively assessed the probability of contraction over the four quarters to 2009 q2 as about a half, but the probability of growth being less than – 1½ % as just 1 in 20. now the mpc does not attempt to calibrate the probabilities associated with tail events precisely. but it is a fair bet that, if we had, then we would have put the chances of a contraction as large as the ons ’ s current estimate of 6 % as being virtually negligible. it is worth stressing that we were not alone in thinking a very severe contraction in activity was unlikely. almost all forecasters were in the same boat. for instance, when we prepare our projections each quarter, we also canvass the views of outside forecasting bodies. their assessment of the probabilities of various ranges of possible outcomes was very similar to ours. chart 2 illustrates the same point, but puts it into a broader context. the blue line shows the actual path of four - quarter gdp growth over the period since the creation of the mpc, while the pink line shows

sector and to the economy more generally. it is somewhat analogous to seismologists trying to predict earthquakes along a fault line. it is impossible to predict the day and magnitude of a shock with any precision, but it may be possible to say something about the likelihood of an earthquake occurring within a given period from seismic measurements and indicators of latent stress. now it might seem natural to measure the severity of a recession by the magnitude of the fall in output. indeed, a recession is sometimes characterised in the media as being two or more consecutive quarters of falling output, with the end of the recession being marked by a return to expansion. but that is not a very useful definition, as the mere resumption of growth will still leave some plants idle and some workers unemployed. from an economic perspective, it should be the margin of unused resources in the economy – the difference between actual and potential output – that we care about. and it is also the margin of unused resources that determines how much the economy can grow during the recovery before it puts significant upward pressure on inflation, the control of which is the mpc ’ s primary objective. the problem is that the level of potential output is inherently difficult to measure. for an individual firm, the notion of capacity is slippery. a car manufacturer might be able to say how many units can be produced if all production lines are operating 24 / 7, but he knows that to do so would prevent essential maintenance and impair the firm ’ s ability to produce output later. and in the service sector, the notion of capacity is even more complex. what is the capacity of a law firm, for instance? one might be able to say how many hours the existing partners could work, but that is not the same as how much output they could produce. moreover, it is impossible to match unemployed workers to unfilled vacancies instantaneously, so it is not appropriate to ask what level of output could be achieved if all of course the margin of spare capacity is only one determinant of inflation. other factors include commodity prices, the exchange rate and inflation expectations. and the rate at which the margin of spare capacity is closed may also matter – so - called “ speed limit ” effects. those who wanted a job were actually in one. the frictions and the institutional characteristics of labour and product markets need to be taken into account too. economists studying business cycles have used a variety of approaches to construct proxies for potential output. one is to assume