the rt hon sir edward george gbe : new economy - same old problems speech by the rt hon sir edward george gbe, governor of the bank of england, at the cbi national conference, held in birmingham, on 7 november 2000. * * * thank you, mr president. i ’ m honoured to have been invited back to address your annual conference. i remember very vividly my earlier visit to your conference in 1996. i remember reporting to you that the british economy was then into its fifth consecutive year - its nineteenth consecutive quarter - of relatively steady growth at an annual average rate of 2. 6 % ; that unemployment had fallen, pretty well month by month for most of that time, to below 7½ % ; and that inflation had averaged 2¾ % over the previous four years - compared with over 10 % on average in the preceding two decades. the question then was could we keep up - or even improve upon - that performance. and my answer was a cautious yes - provided we met three conditions : a continuing firm grip on inflation ; continuing prudent and sustainable fiscal policy ; and continuing structural, supply - side flexibility. well, that cautious optimism was amply justified. today, we are well into our ninth consecutive year our thirty - third consecutive quarter of relatively steady growth ( despite having to absorb the global emerging markets financial shock of a couple of years ago ) at an annual average rate of 2. 8 % ; the number of people in employment has risen to an all - time high ; the rate of unemployment, on a claimant count basis, has fallen to 3. 6 %, which is the lowest rate for 25 years for the uk as a whole and the lowest rate for 20 years in every individual region of the uk ; and retail price inflation on the target rpix measure has now averaged 2. 7 % over the past eight years, and on the standardised hicp measure is currently the lowest rate in europe. and if you ask me today the same question - can we keep up that performance, my answer is still a cautious yes - on the same three conditions - low and stable inflation, fiscal prudence and supply - side flexibility. now i am very well aware that some of you - perhaps many of you - thinking of your own businesses may conclude that i ’ m living on a different planet. beneath the surface of these encouraging macroeconomic data, there is - and has been for some time a serious imbalance, with some parts of the economy

doing very well ( including many of the services sectors and some manufacturing activity ) while other parts of the economy ( including much of agriculture, many manufacturing businesses and even other services sectors such as inward tourism ) face the toughest business conditions that many of them can remember. to take just manufacturing, total output has risen by only 2 % over the past two years, and it has actually fallen by 0. 9 % if you exclude the so - called “ high tech ” sectors ( ie computers, office and telecommunications equipment and electronic components ). total employment in manufacturing has fallen over that period by some 230, 000, of which 200, 000 were outside the “ high tech ” sectors. for what it ’ s worth there is a similar imbalance in the us, where total manufacturing has increased by 10½ % over the past two years, but by only about 1½ % similarly excluding the hi - tech sectors ; total employment in us manufacturing has fallen by some 435, 000, but by nearly 600, 000, outside the “ high tech ” sectors. there is no single explanation for these developments. they result partly from continuing and unavoidable long - term structural adjustment of capacity to market demand ; it results also partly from the effect of increasing global economic integration, inducing the relocation of manufacturing capacity in response to shifts in comparative productive advantage. but there is no doubt that some of these effects have been aggravated by exaggerated changes in foreign exchange rates - including the progressive weakening of the euro. that is a particular problem for the uk because of the relatively large proportion of our economy exposed to competition from the euro zone ( both in terms of our bilateral trade and competition in third countries ). even as a central banker i can understand why many euro - exposed businesses feel hard done by in present circumstances. and i can understand why they in particular might urge the monetary policy committee to signal that uk short - term interest rates have peaked. they make a seductive case. but in fact it ’ s not as straightforward as it sounds. if the intention is that by signalling that our interest rates have peaked we might weaken sterling against the euro, it is not at all obvious that it would in fact have that effect. today ’ s exchange markets between the major currencies are apparently being driven primarily by massive longer - term capital flows - direct and portfolio investments - which, for the time being, are overriding more conventional “ fundamentals ”. those longer - term capital flows in turn appear to be driven more by investors