the substantial equity cushions built up in the years of plenty should act as shock absorbers in the years ahead. even the most pessimistic estimates of the total losses from sub - prime mortgages – around $ 400 billion – compare with total global financial assets of at least $ 110 trillion1. but there may be more shocks to come. the focus of current concerns is how far other assets may be impaired, as a result of the broader economic impact of this period of financial stress. this brings me to the other big uncertainty : how far will tighter credit conditions affect the wider economy – in the uk and the rest of europe as well as in north america? it seems highly likely that growth was supported by easier credit over last few years. but to what extent? when it comes to quantifying the effect of changes in credit conditions, our workhorse economic models still cannot help us very much. as far as the uk economic outlook goes, our central judgement is that financial stress will act as a significant drag on demand over the next two years. but there is a high level of uncertainty about this ; and, as we now see it, the risks, as they affect output, are tilted to the downside. these are two fold : first, that the financial crisis will persist and possibly intensify ; and second, that over time tighter credit conditions and asset price weakness will combine, and in the worst case feed off each other, to sap the strength of overall demand, and put downward pressure on inflation in the medium term. higher costs let me come now to the other major area of risk : the upward pressure on inflation from higher external costs. the most recent build up of global cost pressures is just the latest episode in a remarkable period of soaring commodity prices. oil prices have more than trebled since the start of 2004, and metals and food prices have more than doubled. strong demand, particularly from china has clearly been one major factor. but there have been supply side issues too. and the strength of some commodity prices also reflects their status as an investment class at a time of low global interest rates. over the past year alone, oil prices have risen by around 60 % in dollar terms and agricultural food prices by around 50 %. imported cost pressures in the uk will also reflect the fall in the effective exchange rate, down by 9 % since the beginning of august last year – the largest such decline since sterling left the erm in 1992. there are few reasons to expect this

uk private equity industry accounting for over 50 % of the total european market. the drivers of the city ’ s recent growth in part the city ’ s recent growth reflects – as it did a century ago – a rapid growth in international trade and financial liberalisation. globalisation has brought an expansion of world imports by 180 % since 1990 compared with an 80 % increase in world gdp. progressive upgradings of a number of emerging economies have broadened and deepened international links. higher savings in the emerging asian economies, in particular, have combined with demographic change in the west to increase demand for long - term savings instruments and a fall in their yields. 10 all these trends taken together have led to a period since 2002 of unusually high returns for holders of many financial assets and the explosive growth in new products and markets. but what is driving the growth of london in particular? one approach to this question is to ask executives in major financial companies, both in the uk and abroad, why they choose to locate business here. a number of these surveys have been conducted recently and they show several common factors. 11 london benefits from english as an international language of commerce, and from its time zone, which means the working day overlaps with asia in the morning and america in the afternoon. london also has well established financial infrastructure and telecommunication networks. many of those surveyed point to the regulatory and legal environment. this is partly a matter of the regulatory style – the “ risk based and proportionate ” approach that the financial services authority has adopted based on general principles where possible. it is partly the simplicity of dealing with a single regulator. caballero, r. “ on the macroeconomics of asset shortages ” nber wp 12753, december 2006. for example, cook, g. a. s., pandit, n. r., beaverstock, j. v., taylor, p. j. and pain, k. ( forthcoming in 2007 ). “ the role of location in knowledge creation and diffusion : evidence of centripetal and centrifugal forces in the city of london financial services agglomeration ”. environment and planning a. english law, which is also the basis for financial services law in the united states, prevails here, with the added advantage that practitioners are less likely actually to invoke the legal system. and what has been called the wimbledonisation of the uk financial markets – the sale of nearly all the british merchant banks and stockbrokers and