BIS Review 99/2010  3  Chart 2: World economic growth since 2000 Annual GDP growth rate, percent 6  Average 2000-08  5 4 3 2 1 0 -1 2000  2001  2002  2003  2004  2005  2006  2007  2008  2009  2010  2011  Source: IMF World Economic Outlook, July 2010 update  Turnaround in the UK economy Alongside this improvement in the international economy, the UK economy has also turned around since last summer. Business surveys and the labour market data have been suggesting a return to growth since the second half of last year. The official estimates of GDP still show a fairly modest recovery, starting in the final quarter of 2009 – though the estimates of real GDP growth that we currently have over the recovery period are very provisional and may indeed be revised in the future. That is what happened in the early 1990s recovery, where the picture we now have of growth in the early stages of that recovery – in 1992 and 1993 – are very different from the initial estimates. One of the concerns that the MPC had a year ago when policy was being loosened was the sharp fall in measures of nominal demand – the growth of spending in money terms, before adjusting for inflation. As the recession took hold, GDP and other measures of demand not only fell in real terms, but they fell in nominal or money terms too.
5 The evidence from the Bank of England’s Agents and recent employment surveys is that the labour market in the UK has stabilised and that labour demand in the private sector may have already started to pick up. Companies also seem to have adjusted quickly to a lower level of demand and activity in the recession, and the most recent surveys do not point to an unusually large margin of spare capacity remaining within firms. For example, the latest CBI survey shows 62% of manufacturers reporting some spare capacity – which is virtually in line with the average for the decade before the financial crisis. 6 The evidence on wages and prices is also consistent with the view that spare capacity is not exerting as much downward pressure on inflation as the MPC expected last summer. In the manufacturing sector, underlying wage growth is back up to the 4–5% level already, though is more subdued in the services sector. And after quite widespread pay freezes last year, the latest pay settlements data from Income Data Services show that the most popular range for pay settlements is currently 2–3%, which is where four out of ten pay settlements are now being struck. If the recovery continues and headline inflation remains relatively high, there may be a further upward drift in pay growth in the private sector, offsetting some of the downward pressure on wage growth from the public sector.