must also be slowing. because until very recently growth of compensation per hour has been rising, albeit modestly, it follows that productivity growth must have been rising these past five years, as well. accelerating productivity is thus evident in underlying consolidated income statements of nonfinancial corporations, as well as in our more direct, though doubtless partly flawed, measures of output and input. that said, we must also understand the limits to this process of productivity - driven growth. to be sure, the recent acceleration in productivity has provided an offset to our taut labor markets by holding unit costs in check and by adding to the competitive pressures that have contained prices. but once output - per - hour growth stabilizes, even if at a higher rate, any pickup in the growth of nominal compensation per hour will translate directly into a more - rapid rate of increase in unit labor costs, heightening the pressure on firms to raise the prices of the goods and services they sell. thus, should the increments of gains in technology that have fostered productivity slow, any extant pressures in the labor market should ultimately show through to product prices. meanwhile, though, the impressive productivity growth of recent years also has had important implications for the growth of aggregate demand. if productivity is driving up real incomes and profits – and, hence, gross domestic income – then gross domestic product must mirror this rise with some combination of higher sales of motor vehicles, other consumer goods, new homes, capital equipment, and net exports. by themselves, surges in economic growth are not necessarily unsustainable – provided they do not exceed the sum of the rate of growth in the labor force and productivity for a protracted period. however, when productivity is accelerating, it is very difficult to gauge when an economy is in the process of overheating. in such circumstances, assessing conditions in the labor market can be helpful in forming those judgments. employment growth has exceeded the growth in working - age population this past year by almost ½ percentage point. while somewhat less than the spread between these growth rates over much of the past few years, this excess is still large enough to continue the further tightening of labor markets. it implies that real gdp is growing faster than its potential. to an important extent, this excess of the growth of demand over supply owes to the wealth effect as consumers increasingly perceive their capital gains in the stock and housing markets as permanent and, evidently as a consequence, spend part of them, an issue to which i shall return shortly

supervision sbp has a broad set of prudential regulations that aim to strengthen risk management, internal controls and corporate governance in banks, while providing effective guidance for promotion of development finance and consumer related matters. the regulatory framework for banks is now quite complete, although it needs constant updating and upgrading to conform to evolving international best practices. some challenges remain : ( i ) loan concentration, ( ii ) emergence of financial conglomerates and their supervision, and ( iii ) implementation of the basel ii regime. given high concentration of credit to the manufacturing sector, there is need to re - examine the regulation relating to exposures of large company / borrowers and related companies. high exposure has developed as banks and companies have been reluctant to go to seek alternate sources of financing and instead seek relaxation of sbp prudential regulations to borrow from banking system. excessive exposure poses a threat to broader financial stability, while deterring growth in nonbank finance sector. stricter limitations on bank exposures to large companies would drive those companies to raise capital from debt and / or equity markets. this would support financial sector and risk diversification and contribute to financial stability. in developing prudential regulatory framework sbp will draw on the debate between the rules versus principle based regulatory regime. the former takes a legalistic approach in attempting to codify all prudential requirements into either primary law or regulations. this approach is common in spanish speaking countries as well as the united states. while this approach provides certainty to the industry, it limits the flexibility of the supervisor to adapt to changing circumstances and experience. thus it puts a high premium on thinking through every possible practical variation and also on having near perfect legal drafting. the problem with this approach is that financial regulation is more of an art than a science. many of the rules that are introduced for prudential purposes need continuing modification and refinements based on experience. the danger of relying too heavily on detailed rule books / regulations is that the principle gets lost in the details. there is also a danger that the industry becomes unduly focused on avoiding the wording of the rules rather than the intent. the principles - based approach attempts to limit hard - coded law and regulations to broad statements of principle. for example, the law might identify the need for banks to implement sound risk management frameworks. however, rather than trying to identify every feature of such a system, the principles - based approach allows the supervisor to develop its framework and its own understanding of best practice in line