But I think, too, of our relatively stable overall economic performance – despite the devastating effect on many farmers, and on rural communities more generally, of foot and mouth disease; despite the weather and the floods; despite the disruption on the railways; and despite, above all, the pressures on the internationally-exposed sectors of our economy as a result of developments abroad. In this last context, my Lord Mayor, I was struck by a recent newspaper comment to the effect that if we were living on an island we'd be in reasonably good shape. Now I have to confess that I'd always been under the impression that we were living on an island, but I let that pass. What I think the writer was drawing attention to is the fact that despite the recent global economic slowdown – notably in the United States, despite the continuing weakness of the euro, and despite the sharp rise in crude oil prices over the past year, we have in fact, in terms of our own overall economy, enjoyed another year of steady progress. GDP growth in the year to the first quarter – at 2.6% – remained above our longer term trend rate, and was above the rate of inflation, whether measured by the GDP deflator or our target measure of retail price inflation (RPIX), for the sixth time in the past eight years.
According to studies carried out at the Banque de France 1 , the disinflationary impact of imports appears to be relatively independent of import volumes: the mere existence of potential competition renders the markets, in the words of experts, more “contestable” and influences behavioural patterns. These disinflationary forces are still present. However, there are now other more powerful forces that have the opposite effect. The growth of emerging market economies and the rise in the living standards of their populations are leading to a surge in the demand for natural resources, food and energy, which logically has a strong and permanent impact on inflation. Furthermore, by strengthening the magnitude of global shocks in relation to more specifically domestic shocks and favouring the international transmission of the latter, globalisation introduces a much greater synchronisation of inflationary cycles between countries, with the ensuing risks of amplification. Overall, the effects of globalisation have ceased – probably in the long term – to be spontaneously disinflationary. The second topic that I wish to discuss concerns globalisation and financial innovation. There is, in my mind, no doubt about the long-term benefits of the financial innovation process that we have been witnessing over the past twenty years. However, we can also see that it may be accompanied by cyclical developments and structural changes that could potentially prove to be disruptive for monetary policy. Monetary and financial conditions are simultaneously influenced by central bank decisions, but are also increasingly affected by sometimes exogenous trends in asset prices and the pricing of risk.