mervyn king : rebalancing the united kingdom ’ s economy speech by mr mervyn king, deputy governor of the bank of england, to the british chambers of commerce national conference, london, 23 april 2002. * * * for a decade now, the british economy has grown at an average rate of close to 3 % a year, just above its long - run trend rate. the spare capacity created by the recession of the early 1990s has gradually been used up. unemployment has more than halved from over 10 % in early 1993 to around 5 % now, on the internationally standardised measure. and growth has been more stable than for decades. but overall this stability has concealed the contrasting fortunes of different sectors in the economy. since 1997 household spending on consumption has risen, on average, by 4 % a year in volume terms. it is most unlikely that consumer spending can continue to rise at this rate. the trade deficit has widened sharply in recent years, reaching some 3 % of gdp at the end of last year. and the increase in the trade deficit would have been even larger had it not been for an improvement in the terms of trade, the ratio of export to import prices, which rose by 8 % over the past five years. the result of the widening trade deficit, and the improvement in the terms of trade, is that domestic demand has been able to grow faster than output. over the past five years, domestic demand has risen by over 6 % more than output - slightly more than the excess of demand over output in the late 1980s. in turn, net trade has made a negative contribution to output growth for six years in succession. a continuation of that trend would be unprecedented in britain's modern economic history. the strength of consumption and the weakness of net exports have led to an imbalance between manufacturing and services. manufacturing profitability has fallen by more than half over the past five years, while in less easily traded services profitability has been broadly unchanged. we, on the mpc, understand the problems facing many of you. so, let me explain what we can and cannot do about them. the need to rebalance the british economy is clear. domestic demand is likely to be able to grow at no more than the rate of growth of total output ; indeed, if the trade position is to improve it will have to grow by less. and within that figure, we need to allow room for the growth of public services. how will this re - balancing of demand come

are necessary in order to keep inflation on track to meet the 2. 5 % target. the challenge for monetary and fiscal policy is to restore domestic demand growth to sustainable levels. this would permit the stabilisation and eventual reduction of the trade deficit, while maintaining low and stable inflation, and high and stable employment, at the same time as resources move from private consumption to the provision of better public services. it is possible, perhaps likely, that the transition to lower growth rates of consumption will occur smoothly. and lower inflation now than in the past may ease the adjustment - the future is not what it was. for the monetary policy committee the challenge is to keep inflation close to the target during a period in which a significant re - balancing of the british economy will take place. that will be a challenge, not just for the mpc, but for all of us.