mr. george gives an assessment of where the uk economy has come from and where it is headed speech by the governor of the bank of england, mr. e. a. j. george, given at the institute of directors annual dinner in london on 19 / 11 / 98. my lord and president, deputy lord mayor, your excellency, my lords, ladies and gentlemen. let me put some of the recent newspaper headlines alongside the facts, in order to put things in perspective. first, on the world economy, the headlines read : • • • meltdown warning in the wake of economic slowdown. g7 nations try to halt slide to depression. last ditch bid to avert global crisis. and these are just the supposedly serious newspapers! the facts are that world output growth is expected by the imf to be 2 % this year and 21 / 2 % next - compared with 4 % in 1997. and the oecd expects growth in the oecd area of 21 / 4 % this year, 13 / 4 % in 1999, recovering to 21 / 4 % in the year 2000 - compared with 3 % in 1997. that certainly is a very marked slowdown, but it is hardly meltdown or recession. and on our own economy - the headlines read : • • recession looms. the economy is hurtling headlong towards recession. and even : • it ’ s official - the economy is shrinking. the facts are that for the past 6½ years the british economy as a whole has grown at an average annual rate of over 3 % - which is well above its long term trend rate of some 2 % - or, if you are optimistic, some 2½ %. and we were still growing, at an annual rate of some 2 % in each of the last two quarters, on the latest published data. at the time these headlines were written a month or so ago not one of the 28 independent professional forecasting organisations surveyed by consensus forecasts was expecting output to fall in 1999 ; and their average expectation was for 1 % growth next year. that is broadly in line with our own latest best guess in the mpc. your own most recent iod forecast in september suggested slightly stronger growth next year. it is true that consensus forecasts have since revised down their mean expectation - to just over ¾ % growth ; but even now only one of the 28 contributors expects output to fall. on unemployment in the uk the headlines read : * jobs gloom deepens as

risked overheating, particularly in the labour market, where reports of shortages not just of skilled but even of unskilled workers, were becoming widespread. the situation was seriously complicated by an increasing imbalance between the domestic and the internationally exposed sectors of the economy. domestic demand for goods, and particularly for services, was unsustainably strong, and large parts of the economy were doing very well on the back of that - though they didn ’ t make too much of a song and dance about it. but other sectors, those most exposed to international competition - most of agriculture, large parts of manufacturing and some service sectors - were already then having a much more difficult time. understandably, they were more vociferous. they had been hit, initially, by the exaggerated strength of sterling against the major european currencies in the run up to decisions about the euro. and they were hit, subsequently, by the successive waves of turmoil spreading through the world economy which saw exchange rates fall and demand dry up in asia and elsewhere. so, faced with this dilemma, what were we to do? it is true that the external factors - unhelpful as they were in a more fundamental sense, in terms of the imbalance in the economy - did act as a restraining influence on overall aggregate demand and on inflation, and that meant we had somewhat more time than we would otherwise have had to moderate the growth of domestic demand. but even allowing for that we in fact had no choice but to tighten policy. it wasn ’ t that we didn ’ t know that the internationally - exposed sectors were under the hammer we ’ d have had to be blind as well as deaf not to have known. our problem was that if we had held back more than we did, in order to shelter the exposed sectors, we would have put the whole economy - including the sectors we were trying to protect - at risk of accelerating inflation. and that would have meant eventually having to tighten policy more abruptly, which would much more certainly have plunged the economy into serious recession, a bit further down the road. the harsh reality is that monetary policy can only target the economy as a whole - it cannot realistically seek to shelter particular businesses or particular sectors or particular regions, however much we might all wish it were otherwise. and, in relation to the economy as a whole, the effective choice in the situation we faced was not whether or not to tighten, but whether to tighten sooner, and by less, or