See Michael Joyce, Ana Lasaosa, Ibrahim Stevens and Matthew Tong, “The Financial Market Impact of Quantitative Easing,” Bank of England Working Paper No.393, 2010, and Joseph Gagnon, Matthew Raskin, Julie Remache, and Brian Sack, “Large-scale Asset Purchases by the Federal Reserve: Did They Work?” Federal Reserve Bank of New York, Staff Report No.441, 2010. BIS Review 169/2010  3  Sharp fiscal consolidation and very slow growth in the periphery countries would, of course, have some adverse impact on the demand for our exports. But the more significant links are potentially through the financial system. Fortunately, UK banks have done much to improve their resilience over the past couple of years and, even under a very adverse scenario, they should be able to absorb the likely losses on their direct exposures to Greece, Ireland, Portugal and Spain without too much difficulty. There is, though, the possibility of further indirect effects arising through the interconnectedness and cross-border operations of European banks which could amplify the impact. So some adverse effect on the funding costs of UK banks and the supply of credit remains a possibility. Harder to gauge is the potential effect on household and, especially, business confidence. In the aftermath of the collapse of Lehman Brothers, this was arguably the most significant transmission channel to the real economy. An intensification of the sovereign debt problems in the euro area could therefore administer a blow to the recovery here.
In contrast, there are signs that the depreciation in sterling is having the expected effect on the market share of goods exporters. That is also reflected in the robust growth in manufacturing output and in business surveys which report buoyant export orders. So far, there is less sign that the lower level of sterling is leading to the substitution of imports by domestically produced goods and services. But it is likely that the producers of internationally tradable goods and services take time to respond to the improved opportunities associated with a lower real exchange rate, especially if investment in foreign distribution networks or the repatriation of off-shored activities is required. So, other things equal, it seems reasonable to expect the impact of the lower level of sterling on net exports to continue to build through next year. The prospects for net exports obviously depend not only on the response to the past depreciation of sterling, but also on demand in the UK’s main export markets. While global growth has been strong over the past year, much of that has been in emerging economies that presently account for a relatively small proportion of UK exports. Growth has been patchier in the developed economies. In the United States, following a series of soft indicators through the late summer and early autumn, the US Federal Reserve announced additional purchases of US treasuries.