Since August, inflation has fallen back to target (for the first time in 5 years) and unemployment has fallen rapidly towards 7%, so what have we learned on the journey towards our threshold? With the wisdom of hindsight, there have been three main drivers of the recovery thus far: a marked reduction in extreme uncertainty, the repair of the core of the financial system and significant deleveraging by households. These have driven a recovery in consumer spending and housing investment, which together have accounted for almost all the GDP growth in the year to Q3. As my colleague Ian McCafferty outlined earlier this week, there are also early signs of a recovery in business investment. The less good news is that the recovery has not – as measured at least – been accompanied by meaningful productivity growth. Given the continued openness of the economy and the credibility of macro policy, it is hard to think of any reason why there should have been a persistent deterioration the UK’s  1  My MPC colleague Ben Broadbent discussed these issues extensively in September 2013 in a speech at the London Business School, “Conditional guidance as a response to supply uncertainty”. 4  BIS central bankers’ speeches  productivity performance. In fact there are several reasons to expect productivity growth to pick up as the recovery proceeds. For example, until recently, the fragility of the banking system limited the reallocation of capital and labour from less to more productive activities.
John Gieve: Learning from the financial crisis Speech by Sir John Gieve, Deputy Governor of the Bank of England, 2008 Europe in the World Lecture Panel Discussion, at the European Business School, London, 19 November 2008. *  *  *  The years after sterling left the ERM were the most successful and stable in my lifetime. In early 2007, for example, inflation had not moved by more than a single percentage point away from target in the previous 10 years, the output of the economy had grown in every quarter since 1992 Q3 (Chart 1), unemployment had fallen by 5 percentage points from its peak in the early 1990s and living standards had steadily increased. Interest rates had been low and stable. However as we know now, that was the end of “the Great Stability”. The summer ushered in a period of extraordinary turmoil in Western financial markets which we are still trying to calm. And this year has seen the onset of recession not just in Europe but throughout the advanced economies. Despite the dramatic policy measures of the last months, the outlook for 2009 is bleak and the prospects beyond are uncertain. That move – in the space of only 12 months – from the policy maker’s dream of steady noninflationary growth to the biggest banking crisis since the outbreak of World War I and the onset of recession sets the questions for this evening. First, how did we get into this position? Second, what are the immediate challenges for policy?