mervyn king : rebalancing the united kingdom ’ s economy speech by mr mervyn king, deputy governor of the bank of england, to the british chambers of commerce national conference, london, 23 april 2002. * * * for a decade now, the british economy has grown at an average rate of close to 3 % a year, just above its long - run trend rate. the spare capacity created by the recession of the early 1990s has gradually been used up. unemployment has more than halved from over 10 % in early 1993 to around 5 % now, on the internationally standardised measure. and growth has been more stable than for decades. but overall this stability has concealed the contrasting fortunes of different sectors in the economy. since 1997 household spending on consumption has risen, on average, by 4 % a year in volume terms. it is most unlikely that consumer spending can continue to rise at this rate. the trade deficit has widened sharply in recent years, reaching some 3 % of gdp at the end of last year. and the increase in the trade deficit would have been even larger had it not been for an improvement in the terms of trade, the ratio of export to import prices, which rose by 8 % over the past five years. the result of the widening trade deficit, and the improvement in the terms of trade, is that domestic demand has been able to grow faster than output. over the past five years, domestic demand has risen by over 6 % more than output - slightly more than the excess of demand over output in the late 1980s. in turn, net trade has made a negative contribution to output growth for six years in succession. a continuation of that trend would be unprecedented in britain's modern economic history. the strength of consumption and the weakness of net exports have led to an imbalance between manufacturing and services. manufacturing profitability has fallen by more than half over the past five years, while in less easily traded services profitability has been broadly unchanged. we, on the mpc, understand the problems facing many of you. so, let me explain what we can and cannot do about them. the need to rebalance the british economy is clear. domestic demand is likely to be able to grow at no more than the rate of growth of total output ; indeed, if the trade position is to improve it will have to grow by less. and within that figure, we need to allow room for the growth of public services. how will this re - balancing of demand come

, falling commodity prices and potential spillovers from the possible exit of exceptional monetary policy in advanced economies? and second, how can we manage the tension between the need to recognise when one sovereign ’ s debt has become unsustainable and the need to avoid contagion across countries in times of stress? there are many ways in which sovereigns are like banks in terms of the liquidity risks they face. cross - border capital flows can “ run ” – just as deposits can “ run ” for banks. and the majority of a sovereign ’ s assets – claims on future taxpayers, are both hard to value and inherently illiquid – so, like banks, they are susceptible to runs by international investors, which even if not based on fundamentals, could threaten their solvency by raising borrowing costs. sovereigns are particularly exposed to run risk or a sudden “ stop ” if they have borrowed in foreign currency – the so called “ original sin ” – as large depreciations raise the domestic burden of repaying the debt, particularly if there is a shortage of foreign exchange reserves. in the euro - area, countries have become painfully aware of the risks of borrowing in a domestic currency that individual sovereign states have no right to issue. but of course, sovereigns are also very different from banks. by definition, their finances are not regulated by any authority, and there is no legal framework for dealing with bankruptcy or resolution, giving them more discretion to default. instead, we have imf surveillance ( which is weaker than bank supervision ) and a complex and often messy process whereby markets and the official sector deal with sovereign debt restructurings. while there are important differences between sovereigns and banks, i think there are enough parallels to draw some insights. 4. problems with the global financial safety net hume himself recognised that the nature of sovereign flows created an incentive to insure against a sudden stop, lamenting : “ there still prevails, even in nations well acquainted with commerce … a fear, that all their gold and silver may be leaving them 7. ” there are different ways for countries to insure against the risk of sudden stops in capital flows : ( i ) individually through the stockpiling of foreign exchange reserves, ( ii ) via collective arrangements with other countries, for example regional reserve pooling or swap arrangements or ( iii ) through the international monetary fund ( imf ). this multi - layered global safety net has some advantages but it seems to me that the current configuration is sub