If the downward revision to income expectations proves to have been justified then the level of output is unlikely to return to its previous path. We don’t know yet – it will depend in part on how persistent these shocks turn out to be – but this is clearly important to the longer-term outlook for both growth and inflation. In the near term, whatever the source of the changes in perceptions of permanent income, it is likely that growth will continue to be below the previous trend until more of the real adjustments to balance sheets across the economy have been made. That includes households, the public sector, banks and other businesses. In my view we are maybe two thirds to three quarters of the way through in each case, varying both across and within sectors. There is nothing scientific or “official” in that assessment! It’s just a personal best guess on the back of how the economy is behaving plus some direct knowledge of the progress of the banks with their deleveraging plans. To be clear, we do not need to be 100% finished before growth strengthens at all, and we may be beginning to see some signs of a pick-up. And I think this prognosis is consistent with our Inflation Report central projection of  BIS central bankers’ speeches  3  a gentle, albeit sustained, recovery over the next three years. That is a somewhat sobering, but not calamitous, outlook for real growth.
We have already seen positive benefits just from the supervisors working more closely with the Bank over the past couple of years. And last summer, when the Bank and HMT launched the Funding for Lending Scheme (the FLS) it received policy support not just from the MPC, but from the FPC, the FSA and the DMO. I think it may have been a world first for such a wide group of policy acronyms to be working together to implement a single initiative! I should also mention the creation of the Financial Conduct Authority, a new institution formed out of the old Financial Services Authority (and not part of the Bank), which will be responsible for ensuring that relevant markets function well. In doing so, it will aim to advance the protection of consumers, the integrity of the UK financial system and promote effective competition. It will be responsible for the conduct regulation of all financial services firms, and the microprudential regulation of those financial services firms not supervised by the PRA, for example, asset managers, hedge funds, many broker-dealers and independent financial advisers. Developments in the real economy Whereas those institutional arrangements are new and exciting, the economic data have been disappointing for some time, notwithstanding some improvement in the most recent indicators. Since the trough in output in mid-2009, GDP has averaged just 0.3% per quarter.