Have they been transformed into new puzzles and uncertainties? And what does it all mean for policy going forward? The good news is that the recovery has remained strong. Indeed, after the revisions to the past data in this year’s blue book we now know the economy passed its pre-crisis size in the third quarter of 2013. We can talk now of an expansion rather than a recovery. On the latest data, growth in the four quarters to September now stands at 3% – a little stronger than expected back last November. Growth was particularly strong in the first half of the year and the business surveys suggest that may well be revised upwards. In the latest quarter of this year, growth is reported to have fallen back to 0.7%. The burst of pent up demand that propelled the initial recovery was a little stronger and lasted a little longer than we had been expecting last November. But it does now seem to be fading. Moreover, growth has become more broadly based due to the marked pick up in business investment. The shift of the balance of growth towards business investment that the surveys were pointing to last November, has I am pleased to say come through more strongly than expected. Business investment now looks to have driven around a third of the increase in GDP we have seen over the past year. That has made the recovery more broadly based and more sustainable.
Even adjusting for that effect though, unit labour costs look broadly flat – much below the 2% rate of increase we need to meet the inflation target in the medium term. The big surprise, therefore, for the MPC – and it is a positive, if puzzling, development – has been the extent to which employment has been able to grow without generating clear inflationary pressure. Understanding why that has happened and how long it will persist is, in my view, now key to deciding policy. One possible explanation is simply a longer-than-usual lag between falls in unemployment and pay pressure emerging. Once you take into account productivity, the unexplained weakness in wages only really materialised over the last three quarters, a period over which unemployment was falling very rapidly. Some survey measures suggest the pay of newly hired employees is growing at a much faster rate, of between 2% and 6%, rather than the 1% rate seen across employees as a whole in the official data. On this view, a rapid pick up in average pay levels is in prospect, once more and more workers start to shift jobs and as pay of existing employees is adjusted in annual pay rounds. The parable of the rock pulled by the elastic band is a very relevant one in economic policy making: the rock may not move for a long time, but eventually it will. And the longer it takes to move the faster the move is likely to be.