Among the industrial countries, Japan made stronger efforts to bring its long recession to an end – through macro-economic stimulus and by strengthening its domestic banking system – and there are now signs that those efforts are beginning to be rewarded. Meanwhile the world economy has been effectively underpinned by continuing abnormally strong domestic demand growth in the United States. But despite these developments we still have a long way to go. If the immediate danger of global financial instability has receded, we are still stuck with slow growth in the world economy, currently at around 2½%, which is not much more than half the estimated trend growth rate. And we are stuck, too, with massive international imbalances, both between the emerging and industrial countries, on the one hand, and among the major industrial countries, on the other. Without a stronger resumption of capital inflows to the emerging markets, the industrial countries will need to accommodate an export-led recovery in those markets. That implies stronger domestic demand, and hence import, growth in the G7 countries, if the world economy as a whole is to get back on trend in the reasonably near term. And the immediate challenge in this situation is to try to ensure that, as domestic demand growth in the United States slows – as it probably must, by one means or another – demand picks up sufficiently elsewhere, especially in Europe and Japan, to take up the running.
Mr. George gives an address on recent changes in the international financial and economic environment Speech given by Mr E A J George, Governor of the Bank of England, at a Dinner with the Lord Mayor for Bankers and Merchants of the City of London on 10 June 1999. My Lord Mayor, Mr Chancellor, My Lords, Aldermen, Mr Recorder, Sheriffs, Ladies and Gentlemen. When we were last here for this splendid occasion I suggested that we were living in a dangerous international financial and economic environment. These were strong words for a central banker – but perhaps not strong enough. That environment rapidly became worse through the autumn, so that by around the time of the IMF Annual Meetings in October there was a good deal of talk about global financial meltdown and impending world recession – which was not simply journalistic hyperbole. Since that low point things have certainly improved. The hectic scramble for financial asset quality and liquidity following Russia’s default and the near collapse of LTCM – an exceptionally highly geared hedge fund – failed to uncover fatal weaknesses elsewhere in the financial system, and lenders and investors have gradually regained some of their appetite for risk. Fears of a general credit crunch in major industrial countries quickly receded; and sentiment towards the emerging markets has improved, with growing evidence of recovery in the original Asian crisis countries and a better than expected outcome in Brazil.