If this is confirmed, as I think probable, the overall picture is of an economy expanding around or a little above its potential rate of growth. The combination of lower rates of productivity and labour force growth mean that potential is growing at around 1.5% about a percentage point below its pre-crisis rate. 9  Trying to make very precise forecasts of the output gap is a fool’s errand but the balance of evidence is there appears to be little slack left in the labour market and little spare capacity in firms. Unemployment is at 4.2% – pretty much the MPC’s revised estimate of the natural rate. Underemployment is low. 10  Non-price measures – for example, surveys of recruitment difficulties and measures of churn in the  labour market – have been signalling increasing labour market tightness for a number of years. 11  Whole economy regular pay growth reached 2.5% in December and has stayed above that level through the first few months of 2018 though there has been a slight slowing in the latest – April – data (from 2.9% in March to 2.8% in April). The higher frequency measure of pay growth, 3 month on 3 month growth, has been above 2.5% for 11 months between last May and March this year – the longest run of such consistent wage growth since the crisis (Chart 7).
It has also generated export growth that has help support the economy. More recently, there are signs that Brexit uncertainty is holding back investment. These impacts are incorporated into the MPC’s assessment of policy and forecast of the economy. But it is much harder, and in my view it would be mistaken, to set policy in anticipation of any particular Brexit outcome. There is a very wide range of possible outcomes and paths to those outcomes. And it is not at all clear how the evolution of demand, supply and the exchange rate would respond in different circumstances – which could mean very different implications for monetary policy. Over time, Brexit is likely to affect the supply side of the economy which has evolved and specialised over the last 45 years in the context of our EU membership. If the Brexit outcome generates the types of uncertainty about the economic model that I have been discussing, that will need to be factored into the policy approach. But for the present, my view is that the best course for the MPC on Brexit is to react to the economy as we 18  now see it conditioning our forecasts on neutral assumptions about Brexit outcomes. At the same time, we  should stand ready to respond, quickly and vigorously to any sharp impacts on supply, demand and the exchange rate that might emerge – as the Committee did immediately following the referendum.