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.
The outcome is obviously the major uncertainty affecting us all. The other major external influence on the economic situation in this country is the development of the exchange rate. Depending on who you speak to sterling is variously described as dangerously weak, at a 15-year low, against the dollar, or as unsustainably strong, close to its peak, against the euro. The truth is that sterling's effective exchange rate has been relatively stable for most of the past 2 ½ years – at about 105 on the standard index, plus or minus 5%. The bilateral rates that are frequently quoted in fact tell us very little about sterling: they are essentially a reflection of the persistent general strength of the dollar on the one hand and the persistent general weakness of the euro on the other, resulting from sustained capital inflows to the United States in large part from the Eurozone. It was widely expected that, with the slowdown in the US economy, and associated weakening of US earnings expectations and stock prices, these capital flows would moderate, causing the dollar to weaken and a corresponding recovery in the euro. That clearly has not, yet, occurred, although – given the size of the US external imbalance – it is difficult to see how an exchange rate adjustment can ultimately be avoided. In the meantime, the stronger dollar – and higher oil prices – have added to inflationary pressures elsewhere.