Until the early 2000s, energy consumption in the advanced OECD economies and in the non-OECD developing and emerging market economies rose at a similar rate, with the OECD economies accounting for the majority of demand. In the wake of the strong growth in the 2000s, this position has been reversed with the non-OECD now the dominant contributor to world energy demand. For example, China’s share of global oil consumption has risen from 6% to 11% in the past decade alone.4  4  6  International Monetary Fund (2011)  BIS central bankers’ speeches  Chart 6 – Global primary energy consumption Million tonnes oil equivalent 6500 OECD  6000  Non-OECD 5500 5000 4500 4000 3500 3000 2500 2000 1980  1983  1986  1989  1992  1995  1998  2001  2004  2007  Source: BP Statistical Review 2010 This pattern of upward pressure on energy and commodity prices has been particularly noticeable since the mid-2000s and it has had a significant influence on inflation in many countries – particularly affecting the prices of goods. The so-called “China effect”, through which the shift of production to low cost countries held down the prices of global manufactures and traded goods in the late 1990s and the first half of the 2000s, has given way to a period of higher global inflation, driven by rising energy and commodity prices.
As a result, economies which are very open to international trade and business like the UK are likely to have to live with more economic volatility than we would ideally like.6 Implications for monetary policy So, let me sum up my analysis so far. I have identified three potential challenges arising from the “New Global Economy” which is shaping the world of modern business and having such a powerful influence on open international economies like the UK and Jersey. The first is a shift in the centre of economic gravity in the world economy towards Asia – which is likely to become the dominant region in the world economy in the first half of this century. That creates market opportunities for other economies as well as competitive threats, and is likely to result in further structural change as businesses adjust to changing patterns of demand and supply. Supply-side policies – focussing on skills, enterprise and innovation – are the key to maintaining growth and employment in the face of these structural adjustments. The two other challenges I have identified – a prolonged period of upward pressure on energy and commodity prices climate and an increase in global economic volatility more generally – have more significant implications for monetary policy in an open internationally focussed economy like the UK. So how should monetary policy respond? 6  See Sentance (2009a) and Sentance (2009b) for a more detailed discussion.