andrew bailey : it ’ s a recovery, but not as we know it speech by mr andrew bailey, governor of the bank of england, mansion house, london, 1 july 2021. * * * introduction lord mayor, there has been nothing usual about the last sixteen months. even long - standing neighbours like the bank and the mansion house have had to resort to video conferences rather than popping round for a word. and one of the trickiest issues for all of us is dress code and etiquette – is this a ties on or off video, who knows? i can admit that i don ’ t seem to be a very good predictor of dress code. but you did throw me not long ago lord mayor, when we had a video call about an hour before we were both speaking at an event, and i can reveal that you were dressed in a mansion house bomber jacket. so, white tie to black tie to bomber jacket. i should say that by the time of the event, the lord mayor had changed into something more conventional. the story so far conventional is not a word i have used about the performance of the economy in the last sixteen months. last calendar year, uk gdp declined by an annual growth rate of 9¾ %, and based on our last forecast in early may we expect it to grow by 7¼ % this year. it ’ s more meaningful to express the level of activity relative to the end of 2019 ( pre - covid ). at the end of last year, the gap was 7¼ %, on the latest numbers to end april it ’ s around 5 %, and we expect the gap to be closed by the end of this year. although that would still represent two years of lost growth, relative to the expected path of activity prior to the pandemic. the good news is that the economy is only around 5 % smaller than it was eighteen months ago – and in view of what we have experienced, that is good news – and the gap is closing quite rapidly. but let ’ s pause for a moment on the good news that the economy is only 5 % smaller. in any conventional time, even in the depths of a recession, that would scarcely qualify as good news. let me add a second leg to this unconventional point. in a typical recession – to the extent there is such a thing – there is a hit to demand relative to the supply capacity of the economy which leads to an output gap, higher unemployment and weaker inflation. for

the pre - covid pattern of lower trend growth will bring its own challenges, and there is a strong argument for not accepting this state of affairs as either inevitable or acceptable. stronger growth in potential supply supported by stronger investment and productivity growth will make the covid recovery easier. the covid shock has required an increase in public and business debt to smooth the impact. this is a necessary and sensible response. but that cost has to be managed, and it will be easier to do that with a higher trend rate of growth, boosted by stronger investment. although business investment recovered from a low base following the financial crisis, it was weak in the period prior to covid. improvements in automation appear to have led to only modest gains in productivity and output. might this be a reflection of the rather larger share of high labour input service industries in the uk and a lower share of manufacturing? not really, because the pattern appears to hold at a sectoral level as well. this evidence points to the importance of raising productivity growth, supported by investment, in order to make it easier to handle the debt legacy of covid and offer some protection against the risk that the decline in the labour supply during the pandemic proves more persistent. there is an interesting issue of whether such a change is already under way as part of the immediate response to covid. online retailing is an example of a sector where the impact has 4 / 5 bis central bankers'speeches included higher productivity and investment to support the more digital service. over the pandemic period, investment in intellectual property products ( which includes things like investment in software and research and development ) has held up better than other types of investment, particularly compared with investment in commercial buildings and transport equipment. this supports the idea that a move to digital is underway. it is too soon to tell to what extent changes seen over the last year or so will persist and further expand. but i think it is fair to say that more investment to support growth will be needed and that is why the bank, treasury and fca have emphasised working with the financial sector to ensure the supply of productive finance to support investment is available. let me conclude with a reflection on monetary policy. the economy is bouncing back rapidly, which is good news. with that has come a rise in inflation, and we expect that rise to continue in the near term as we go through the rest of this year, such that cpi inflation is expected to pick up further above the target, owing primarily