When we make forecasts for the labour market, we also have to take into account the fact that the labour supply will increase when economic activity strengthens. This is a normal pattern. The Government’s policy will probably also mean that the number of persons in the labour force increases slightly more than has been usual in previous economic upturns. The fact that the labour supply increases will mean that unemployment will fall at a slower rate than employment rises. With regard to inflation, we expect it will fall over the coming six months. It is the large fluctuations in energy prices that make an impact on inflation in the short term. We cannot – and should not – do much about this type of short-term fluctuation in inflation. In the longer term we are expecting inflation to rise and be close to 2 per cent two years ahead. One might wonder, if inflation is now expected to fall in the short term, what reason do we have to believe that it will rise to 2 per cent in the longer term? One important reason for this forecast is that productivity growth should be more modest in future. Over the past two years we have been able to note that productivity growth has slowed down compared with the years before that. This indicates that productivity growth is about to slacken to a more normal level, seen from a long-term perspective.
These challenges have been compounded by deeper forces that have radically altered the balance of saving and investment in the global economy.4 In the process, these have moved equilibrium interest rates into regions that monetary policy finds difficult to reach. Whether called “secular stagnation” or a “global liquidity trap”, the drag on jobs, wages and growth is real. Chart 1 Geopolitical risk doubled, on average, after 9/11  Source: Bank calculations and Caldara and Iacoviello (2016), ibid. Less visible, but more fundamental drivers of economic uncertainty are the powerful forces arising from technology and globalisation. The integration of 40% of humanity into the global economy has re-orientated production, eliminated jobs and may have depressed wages. These dynamics have been accompanied by the implications of technology for the  2  These are distinct from other types of uncertainty familiar to economists, including model uncertainty (uncertainty about the empirical properties of models as descriptions of the world), or to policymakers, such as the long and variable lags involved in the effects of monetary policy. 3  Economists have recently attempted its measurement by examining the frequency of newspaper articles containing terms like “geopolitical tensions”, “terrorist threats”, and “war risks” in a sample of global newspapers. See Caldara, D and Iacoviello, M (2016), “Measuring geopolitical risk”, Federal Reserve Board, mimeo. Political scientists have also constructed similar measures though, it seems, at lower frequency. For an application see for example Berkman, H., B. Jacobsen, and J.