andrew sentance : the challenges of the “ new global economy ” speech by mr andrew sentance, external member of the monetary policy committee of the bank of england, at the jersey chamber of commerce, st helier, 25 may 2011. all speeches are available online at www. bankofengland. co. uk / publications / speeches. * * * i would like to thank adrian chiu for research assistance and i am also grateful for helpful comments from other colleagues. the views expressed are my own and do not necessarily reflect those of the bank of england or other members of the monetary policy committee. it is a great pleasure to have this opportunity to speak here today at your annual general meeting lunch and i am extremely grateful to ray shead and the jersey chamber of commerce for inviting me and helping to arrange this visit. for you here in jersey, this event is a first – as i believe it is the first major speech which a member of the bank of england monetary policy committee has given in jersey or any of the other channel islands. hopefully i am blazing a trail for my mpc colleagues to follow in the future! for me, however, it marks the close of a chapter. this is my last public speech as a member of the bank of england monetary policy committee ( mpc ), as my term in office comes to an end this month. i have spent just over four and a half years as a member of the mpc and it has been a most eventful period to be involved with economic policy - making. my period on the committee has been dominated by the global financial crisis and the major global recession it triggered in late 2008 and early 2009. however, the global recession is now behind us, even if we are still feeling some if its after - effects. since the second half of 2009, the world economy has been in a recovery phase and the uk and most other european economies have shared in this return to growth. indeed, the growth of the uk economy has tracked very closely the average performance of the european union through the recession and into the early phases of the recovery, as chart 1 shows. and current forecasts point to a continuation of this pattern this year and next. chart 1 – uk and eu output growth, 1997 – 2012 percentage change in real gdp - 1 - 2 uk ( exc. oil and gas ) * - 3 eu - 27 * - 4 - 5 - 6 * : 2011 and 2012 are imf forecasts. forecasts for the

fund bis central bankers ’ speeches chart 6 – global primary energy consumption million tonnes oil equivalent oecd non - oecd source : bp statistical review 2010 this pattern of upward pressure on energy and commodity prices has been particularly noticeable since the mid - 2000s and it has had a significant influence on inflation in many countries – particularly affecting the prices of goods. the so - called “ china effect ”, through which the shift of production to low cost countries held down the prices of global manufactures and traded goods in the late 1990s and the first half of the 2000s, has given way to a period of higher global inflation, driven by rising energy and commodity prices. chart 7 shows how this has affected the rate of inflation in goods prices in the uk, which has picked up significantly in recent years – whether measured in terms of manufactured products at the factory gate or the goods which enter into the consumer basket. chart 7 – uk goods price inflation annual percentage change in prices manufactured goods producer prices cpi goods inflation - 2 - 4 source : ons one of the key challenges facing the mpc and other monetary authorities around the world is judging how far this surge in energy and commodity prices has yet to run and how farreaching its consequences might be. the tendency so far in many countries, including the bis central bankers ’ speeches uk, has been to treat this phenomenon as a series of one - off shocks. but the driving force behind it – strong growth in asia and other emerging market economies – is proving quite persistent – as chart 8 shows. chart 8 – emerging market growth remains strong annual percentage growth rates of real gdp advanced economies * emerging & developing economies * - 2 - 4 * : 2011 and 2012 growth rates are imf forecasts. source : imf world economic outlook this raises the possibility that some key commodity markets, including the market for oil, could be in a structural position of scarcity for some time yet, leading to further significant upward price movements. for example, in its recent world economic outlook, the imf published an analysis suggesting that current trends in the oil market – with supply unable to keep up with strong demand – could lead to a further 200 % rise in oil prices from current levels over the next 20 years. 5 of course, there is great uncertainty around such predictions. but my judgement would be that this imf analysis is likely to be directionally correct, even if we can ’ t be precise about the exact timing and scale of upward price movements. this upward shift in energy and