I am convinced that a flexible mix between monetary and fiscal policies, plus the diversified structure of production and exports, did allow the economy to avoid contraction and build on greater external stability. With the improved environment for growth that I have just noted, I am more comfortable today than last year to talk about an economic recovery. My optimism, however, remains guarded. Because on this road to recovery, there are still many risks. Such risks, if not managed well, could undermine the sustainability of the recovery process. Let me first talk about the macroeconomy and our view for 2002. Then I will describe the challenges ahead as well as our thoughts on how to manage them. First, the economic recovery. What do the recent economic numbers tell us? In January, the economy showed signs of continued expansion despite the sluggish global conditions, thanks largely to the momentum in domestic demand. A number of indicators suggested that the economic conditions had improved somewhat from the recent months. For instance, –  Consumption and investment continued to improve in January. In particular, the Private Investment Index (PII) continued to increase. A significant expansion was seen in construction, following the spur in housing demand and construction activities. BIS Review 16/2002  1  –  It looks like this good news on the domestic demand front warrants a significant increase in the January Business Sentiment Index (BSI) and the index looking 3 months ahead.
6 On the other hand, a more developed and efficient financial system can contribute to a more effective and smooth transmission of monetary policy. 7 At the root of the problems that led to the current financial turmoil is precisely this growing segment of the financial industry. As valuations of asset-backed securities and other assets declined rapidly, and, in fact, the whole securitisation model was shaken, the outstanding amount of structured products decreased significantly. Obviously, this affects bank credit: according to the latest bank lending survey conducted in the euro area, more than 80% of banks judged that difficulties in raising funds via securitisation have had a negative impact on bank lending. 8 Overall, the financial turmoil may have affected the efficient working of the banking sector and might have an impact on the supply of credit to the non-financial sector. In light of the fact that bank lending remains strong (the annual rate of growth of loans to non-financial corporations in August 2008 was a still robust 12.6 per cent), it is too early to quantify the extent to which the turmoil may influence the provision of loans. Needless to say, the Eurosystem, and undoubtedly other central banks, will continue to closely monitor the situation. 2  See Bernanke, B. and M. Gertler (1995): “Inside the black box: the credit channel of monetary policy transmission”, Journal of Economic Perspectives 9, pp. 27-48. For the euro area, see contributions collected in Angeloni, I., A. Kashyap and B. Mojon (eds.