Simple theory suggests there should be an inverse relationship between the depth of the downturn and its duration. Seen this way, the severity of the drop in consumption last spring was in some ways the counterpart to its brevity. The second thing I want to touch on today is what such expenditure-switching does to the supply side and average costs in the economy. The answer for relatively moderate shifts is probably “not much”. The composition of what we buy changes all the time, as do relative prices, and we can usually safely ignore this when thinking about the economy as a whole. Nor should such shifts in the composition of spending matter much in the longer term, even if they’re sizeable. That’s because, over time, economic resources – people, capital and general know-how – can move in response. The economy adapts. But for a short time, at least, significant shifts in demand may be harder to absorb. They result in excess capacity in some areas and too little in others. Until they’re able to respond to the shift, resources are therefore misallocated. As I’ll explain later on, this can have negative effects on productivity, and positive effects on average costs, even for a given level of aggregate demand. The consequences for cost pressures over the medium term – and therefore for monetary policy – are probably limited.
For example, the leading global fund managers recently indicated that they consider sustainability to be a core criterion for investment selection, given that sustainable portfolios could offer higher risk-adjusted returns and that companies that follow sustainable criteria may have greater potential for success in the medium term. Let me finish my address by highlighting that there is still some considerable distance between expectations and the reality of the data at hand, but also that the pace of change is very brisk. Standards are and will always be imperfect, but this is no excuse for us not to try to move forward. Thank you. 4