any means necessary, is the better course. actively choosing the very thing that businesses seem to fear the most is more likely to mean that investment projects that have so far been postponed will instead be cancelled for good. the point, rather, is that for a given duration of uncertainty, it ’ s better that people are aware of it from the start, rather than being repeatedly surprised at how long the process takes. all speeches are available online at www. bankofengland. co. uk / publications / pages / speeches / default. aspx one way of thinking about this situation is that periods of uncertainty – especially those with acute downside risks and that are expected to last only a short period of time – raise the required rate of return on new investments. they therefore have similar effects as a standard increase in the cost of finance : they incentivise firms to meet new demand with labour rather than capital. in the last section i ’ ll go through some crude arithmetic to get some idea of the scale of such effects and, in that context, comment on the recent strength of employment and, more generally, on the weakness of productivity growth since the financial crisis. the value of waiting for news in economic theory, the negative impact of uncertainty on investment depends centrally on the assumption that capital spending is costly to reverse. a warehouse cannot easily or cheaply be turned into an office building ; if a manufacturing company installs an extra production line, and demand for its product subsequently weakens, it can ’ t then choose to lease the line to another firm ; the same is true of specialised software for a bank or insurance company. clearly, this “ sunk - cost ” property of investment spending may in practice apply to some types of capital more than others. what we do know is that, without it, economic theory would have a hard time explaining why greater uncertainty depresses investment to the degree it does – or even at all. 3 conversely, once you do take it into account, the predicted effects can be quite powerful. investment projects that would otherwise make a great deal of sense – because the income they ’ re expected to generate easily exceeds the costs of financing them – will be avoided, or at least postponed, if the reversal costs are high enough and the uncertainty about those returns sufficiently acute. instead, it often makes sense to wait until the expected value of the project is sufficiently high that it covers not just the direct cost of the project but an extra margin of safety on top, something

- income ratio higher than ever before. at the same time, saving is declining. this means that in addition to fully financing their housing investments through mortgages, households are also raising loans to finance current consumption. higher interest rates and falling house prices may lead to slower consumption growth and a gradual increase in saving. growth outlook and the orientation of fiscal and monetary policy i would like to conclude by commenting on the outlook for growth. global economic developments are important for economic developments in norway, and changes in the growth prospects for the world economy may influence our forecasts. growth in the us economy has slackened. the us housing market has weakened and employment is rising at a slower pace than earlier this year. there are also signs of somewhat slower growth in western europe. economic growth in emerging economies remains strong, particularly in china. developments in these countries are of growing importance for the world economy and for our own economy. china, india and russia have accounted for close to half of overall global growth over the past year. in spite of weaker prospects for the us and western europe, oil prices have increased since the october monetary policy report and prices for other commodities remain high, partly owing to continued strong growth in demand from asia. uncertainty surrounding developments in the world economy has heightened as a result of the turbulence in financial markets this autumn. the turbulence was triggered by problems in some segments of the us housing market. many borrowers were granted mortgages they cannot service now that the interest rate has risen. there were losses, particularly on loans in the bond market and in complex loan products owned by separate companies that had relied on very short - term financing. these companies are linked to the large international banks, and the banks have had to transfer loans onto their own balance sheets. combined with higher losses, this limits banks ’ capacity to extend new loans to the housing market and other sectors, and will thereby have a dampening impact on economic growth. to prevent interbank lending rates from rising too much, a number of central banks have increased their short - term lending to banks. in addition, the federal reserve has lowered its key rate by 0. 75 percentage point in recent months. a further cut in the key rate in the us is now expected, and the interest rate is also expected to fall in the uk. in the euro area, market participants expect a more stable key rate ahead. but developments are not the same everywhere. the central banks in sweden, switzerland, canada, new zealand and china have raised their key