growth – including demand for services – continued to accelerate through 1997, and that was the background to the tightening of monetary policy in 1997. we could not avoid that tightening, despite the uncomfortable sectoral imbalance within the economy. to have done so would, as i have said elsewhere, have put the whole of the economy – including the internationally exposed sectors we would have been trying to shelter – at risk of accelerating inflation, so it would not have helped even those sectors in anything other than the short term. meanwhile, in the euro - zone things were very different. demand and output growth in the major continental economies remained generally fairly sluggish for much of the period, only really starting to pick up towards the end – helped by relatively weak exchange rates. unemployment, which is much the most urgent and important issue confronting europe, actually increased ; and, despite some improvement over the past year or so, it remains at or close to double digit rates in all the largest euro - zone countries. inflation against this background remained low, tending lower – as did interest rates. the position is complicated in the euro - zone by a reviving political debate about just how much of the unemployment reflects supply - side weaknesses requiring structural reforms, and how much it reflects inadequate overall demand. the outcome of that debate will be crucial to the future evolution of the euro - zone. but in the immediate situation there was no reason to suppose that continued growth of demand and output was inconsistent with effective price stability in the zone as a whole. so much for our different starting points. but over the past year, the world – and i mean the world – has changed quite dramatically for both of us in that we have both been affected by the international economic slowdown. this started, in fact, with the financial disturbances in asia in the latter half of 1997, but even as late as the beginning of last summer it seemed as if it might have only limited impact on the overall world economy. the imf, for example, was still then projecting 3 – 3¾ % world growth in 1998 and 1999 respectively – which was certainly a setback compared with their forecast of over 4 % just six months before – but it was hardly catastrophic. since last summer it has become increasingly clear that things are likely to be significantly worse than that. the financial collapse in russia, deepening recession in japan, the long battle – then sudden defeat last week – in brazil ’ s attempt to hold its exchange rate, and fluctuating fears of possible

relief, because many of them recognised that our different economic situation would have complicated european monetary management had we joined from the outset, as it would have complicated monetary management in this country. in our case, the uk economy has grown at an average annual rate of around 3 % now for the past six and a half years ( to the third quarter of last year ). that is well above any plausible estimate of the underlying rate of growth of capacity in the economy as a whole – which is typically estimated at some 2 – 2½ %. so what we were in fact doing over this period was steadily reabsorbing the economic slack created by the recession of the early 1990s. in the labour market this was reflected in a rise in employment of some 1. 65 million to an all - time high on the latest figures ( for the three months to last november ) of 26. 6 million. it was reflected, too, in a fall in the rate of unemployment from a peak of 10. 6 % ( on lfs figures ) to the current rate of 6. 1 %, which is the lowest rate for almost 20 years. as far as the regional impact is concerned, i would note that over this period unemployment in scotland – though still higher than in the uk as a whole – has also declined – to 7. 6 % on the latest lfs data, compared with a peak of 10. 8 % ; and on a claimant count basis it, too, is currently lower than for 22 years. these developments in the labour market produced only a fairly gradual pick up in pay settlements and earnings growth compared with past periods of labour market tightening – though we have, of course, been unsighted on what has happened to earnings growth more recently. and underlying retail price inflation – on the government ’ s inflation target measure ( rpix ) – averaged some 2¾ % a year through the expansion, and is currently exactly on target at 2½ %. by the time of your last dinner it was already becoming clear that overall output growth needed to moderate if we were not to run into overall capacity constraints and a pick - up in inflation. the – 3 – exaggeratedly strong exchange rate against the core european currencies – reflecting inter alia market misperceptions about the prospective strength, or rather weakness, of the euro – was itself moderating external demand, especially for manufacturing output, while at the same time exerting a restraining price effect on domestic inflation. but domestic demand