the rt hon sir edward george : global economic recovery - where to from here? speech by the rt hon sir edward george, governor of the bank of england, at the lord mayor ’ s banquet for bankers and merchants of the city of london, mansion house, 26 june 2002. * * * my lord mayor, mr chancellor, my lords, aldermen, mr recorder, sheriffs, ladies and gentlemen. on this great annual occasion last year i spoke about the problems that confronted us in keeping the uk economy on course in the face of the cold winds blowing from abroad. i drew attention to the risk that in seeking to avoid being sucked down into the charybdis of adverse external influences, by lowering interest rates in this country, we could find ourselves thrown onto the scylla of excessive domestic exuberance. in the event, the cruel terrorist attacks on new york and washington on september 11th - had a damaging short term impact on economic conditions everywhere. we were drawn irresistibly towards charybdis despite the resilience of domestic consumer demand, which we sought to sustain by steering towards scylla, with further reductions in interest rates. the economy as a whole became becalmed over the winter. that of course, was disappointing after 37 successive quarters of relatively steady growth. but the economy as a whole still managed to grow in the year to the first quarter - by 1 % on the present data which was somewhat faster than in a number of other g7 countries. the labour market held up well, with the number of people in employment ( on the lfs measure ) rising by 184, 000 in the year to april, to an all - time high ; and while the number of unemployed people on the same measure rose somewhat over the year, it fell on the claimant count basis, to 945, 000 in may, a 26 year low. and inflation, though rather more volatile from month to month, averaged 2. 2 % over the past year very close to our 2½ % target, although it fell to 1. 8 % in may. for only the third time in the past nine years the rate of growth in the year to the first quarter fell below the rate of inflation. so we have much to be thankful for, despite the hostile external environment we have had to contend with. we can also be grateful that the difficult international environment has not seriously undermined the stability of the global financial system - though that ’ s another story.

the key question now is where are we going from here. well, the relatively good news is that the external economic storms seem to be beginning to abate. the us in particular, which experienced negative growth in the middle of last year, saw a surprisingly strong recovery on the back of a reversal of falling stocks, over the winter ; and while this may not have continued on the same scale through the spring, consumer spending has remained encouragingly resilient. the uncertainty looking forward relates primarily to the prospects for a recovery of investment spending as we move into the second half of the year. most economic analysts - including ourselves in the bank - are reasonably optimistic, pointing in particular to the continuing underlying strength of us productivity growth despite the economic slowdown and evidence that demand for computer hardware has picked up. the consensus economic forecast is for overall growth in the us - perhaps after something of a lull in the second quarter - to pick up steadily to around trend - to 3 % or perhaps somewhat more - through the second half of the year into next. but it has to be said that many us businesses themselves seem less convinced about future earnings prospects ; and financial markets, too, remain uncertain, notably about equity valuations - partly as a result of the recent spate of corporate governance and accounting failures. the outcome in the us, of course, is fundamentally important to the prospects elsewhere. but on the reasonably optimistic consensus view for the us, the outlook is for recovery to around trend growth in the eurozone and for modest positive growth even in japan. and there are encouraging signs of stronger growth elsewhere in asia - though parts of south america have problems of their own. if global economic recovery seems likely to provide a more hospitable international environment for our own economy, so, too, do recent developments in foreign exchange markets. last year i pointed out that sterling ’ s exchange rate was at a 15 year low against the dollar, but close to its peak against the euro. in overall terms sterling ’ s effective exchange rate index against currencies generally had been relatively stable - at around 105 plus or minus 5 % - for most of the past 2 - 3 years. that pattern of exchange rates made life particularly difficult for the euro - exposed sectors or our economy, and, given that the eurozone represents over 50 % of our external trade, contributed significantly to the imbalance within our economy. happily, from our point of view, and indeed in the context of the global external imbalance,