Private investment and consumption are expected to continue growing at a sustained pace, whereas the impact of slower world economic growth is expected to weigh on exports, with also a transitory impact on inventories. Indeed, economic activity in the euro area is largely determined by domestic factors such as long-term financing costs and disposable income developments, which have remained favourable. Furthermore, the still high rates of capacity utilisation in the manufacturing sector, the ongoing growth in employment and continued declines in unemployment should help maintain positive growth in private investment and consumption. Employment in the euro area is estimated to have increased by 0.6% in the first quarter of 2001, compared with the previous quarter, confirming continued solid job growth creation over the recent months. Notwithstanding sustained reductions in the aggregate unemployment rate and relatively rapid employment growth, wage increases in the euro area have so far remained moderate. Per capita nominal compensation of employees grew by 2.0% in 1999 and by 2.4% in 2000, while unit labour costs increased by 1.3% and 0.9%, respectively. There are a number of factors that help to explain why the increases in oil prices and their impact on inflation have not influenced wage developments in a period of falling unemployment. They include the employers and the general public’s confidence in the capacity of the ECB to ensure price stability. It is crucial that social partners continue the process of wage moderation seen in the past.
Monetary policy cannot simply wait until we have a clearer understanding of whether we are correctly measuring employment, whether the Phillips curve has shifted down, tilted or both – or whether there is a better framework for understanding the relationship between supply, demand and inflation. 13  All speeches are available online at www.bankofengland.co.uk/speeches  13  But we are almost certainly going through a period of heightened change at present. The current level of uncertainty around the key assumptions on which we model and understand the economy is, in my view, different in kind to uncertainties about the data or signals we receive which are always mixed. Some of the relationships between economic variables that we depended on in the past appear to have gone on a longish leave of absence, but we are not sure why, or whether this is a temporary or more persistent departure. Against that background – and although it makes forward looking monetary policy more difficult – I tend to put more weight on the evidence we can or cannot see in the data and a little less on the un-observables and on how we think the economy works. In any event, monetary policy makers have a personal reason to be careful of complaining too much about the burden of uncertainty. It is not just that it is one of the things that makes the job challenging and worth doing. It is also why it cannot be done by a rule – or, at least as yet, by a robot.