The private sector and a business recovery supported the growth of the UK economy following the early 1990s recession. And economic conditions we currently face are not that dissimilar from the world of the mid-1990s. If anything, the external stimulus to growth is stronger – the global economy has bounced back more strongly from the recent downturn and the sterling exchange has depreciated more sharply and at an earlier stage of the cycle than in the early 1990s. There is a worry that domestic demand could be held back by the legacy of the financial crisis and public sector deficit reduction. But that does not appear to be reflected in the most recent data for domestic demand and from the evidence on business investment intentions. And while we should expect a relatively muted recovery in consumer spending, the impact of high household debt levels should not be overstated. This was a  10  Public sector net borrowing was 7.7% of GDP in 1993/4, moving towards a surplus of 0.5% in 1998/9, a swing of 8.2% in the public sector financial balance as a share of GDP. The Budget plans show a 9 percentage point swing – from borrowing of 10.1% in the current financial year to 1.1% in 2015/6. 8  BIS Review 158/2010  major concern in the early 1990s too, when repossessions and mortgage arrears were higher than we have seen through this recession.
Indeed, it is worth noting that in 1994,  12  This lack of spare capacity in firms is hard to reconcile with the relatively sharp drop in GDP in the recession and the resilience of employment. However, it is possible that future data revisions may change the profile of GDP during the recession. It is also possible that underlying productivity growth trends were overestimated during the long expansion of the 1990s and 2000s, and that the economy was further above capacity in 2006/7 than was appreciated at the time. 10  BIS Review 158/2010  when the early 90s fiscal consolidation began, the UK economy grew by over 4%, which is still the strongest rate of GDP growth we have seen in any calendar year since the late 1980s. The strength of growth surprised forecasters, who had greatly underestimated the momentum of growth which would be generated by a rebound in private sector demand, a strong world economy and a competitive exchange rate. 13 There is a risk that we are making the same mistake again because of the preoccupation with downside risks following the financial crisis. The second key argument is that higher interest rates should help to exert a brake on abovetarget inflation and keep inflation expectations anchored around the 2% target. There are significant upside risks to the forecast recently published in the Bank’s Inflation Report which could sustain the period of above-target inflation into 2012 and 2013.