concern about the prospects for the global economy. the major uncertainty relates to the situation in the united states which has experienced a period of exceptionally strong economic growth with relatively low inflation until quite recently. briefly – and no doubt oversimply – this very strong performance is widely seen as driven largely by exceptional productivity gains, as the application of new information and communications technologies spread through the economy. this development promised a higher sustainable rate of growth in the us economy and higher corporate earnings growth. that expectation contributed to a rapid rise in equity prices, especially in the " high tech " sectors, which in turn helped stimulate both business investment in the us and consumer demand causing the private sector to move into financial deficit. it also attracted massive direct and portfolio investment inflows from abroad which over - financed an increasing current account deficit in the us and caused the dollar to strengthen against other currencies. by the first half of last year the us economy was expanding at a rate of over 5 %, which even on the most optimistic view of underlying productivity growth was clearly unsustainable. the pace of demand growth in the us needed to slowdown – as of course it has. the big questions now are about the extent of the slowdown and how long it will last. and the reality is that no one can be confident that they know the answers. what we do know is that the us data on the whole have not so far been as weak as many commentators predicted. consumer spending in particular has held up reasonably well, though there has been a fall - off in investment growth, as well as a sharp downwards stocks adjustment and an associated decline in us imports. on an optimistic view, if consumption continues to hold up, and assuming that the recent underlying productivity gains can be maintained, investment spending will recover as the spread of ict through the economy resumes, and the downward stock adjustment will come to an end. on this view we can look forward to a pick up in us activity as we move, say, into next year. but the pessimist is inclined to point to the weakness of private sector saving, which could induce more cautious consumer behaviour especially if unemployment continues to rise ; he points to a possible overhang of past investment excesses ; and he points to the us external deficit which will at some point need to be corrected. these adjustments might take place gradually over time, in which case the us might face a more protracted period of relatively slow growth ; or, if you are really pessi

that has been with us for some time now is the sectoral ( and associated regional ) imbalance within our overall economy. the domestically - oriented sectors have, for the most part, been doing relatively well, whereas those sectors that are exposed to competition within or from the euro area have been under considerable pressure. domestic demand growth has remained relatively robust into this year, but we too are affected by the us slowdown and by the associated weakening of equity prices. and we have had a new problem of our own in the form of foot and mouth disease, the effects of which have gone a good deal wider than just the agricultural sector. these new developments were likely to have a dampening effect on demand pressure within the overall economy, both through their direct impact and through possible damaging effects on confidence. given the fact that we started from a position in which inflation was below target ( and expected to remain so for some period ahead ) ; and given only modest upward pressure – at least so far – on wages and earnings growth, despite the continuing tightness in the labour market ; we judged that we needed to reduce interest rates – by ½ % – earlier this year in order to meet the inflation target further ahead. and we have made it clear that we will continue to monitor the downside risks very closely, in the context of course of all the other developments affecting our economy. mr chairman, i have discussed the current international conjuncture at some length to illustrate that even though we all have broadly common economic objectives, that does not make them easy to achieve. we all face our own domestic uncertainties and are exposed to the international repercussions of developments elsewhere. financial stability one of the greatest difficulties we face is the problem of how to cope with movements in financial asset prices, including exchange rates. that problem has become an increasing preoccupation with increasing financial wealth in our economies and with global financial integration. in the context of macro - economic stabilisation we can, and of course do, take account of asset prices as best we can in both our projections and our policy decisions. the strength and subsequent weakening of stock markets in all our economies, for example, will have been one of the factors influencing both investment and consumer demand to varying degrees for all of us ; and the behaviour of exchange rates is clearly a factor influencing inflationary pressures in our respective economies, both through its direct effect on prices and indirectly through its impact on net external demand. but while we can try to make allowance