(I'm delighted to note, however, that manufacturing output picked up modestly in February - the first monthly increased since August.) For what it's worth, we were not alone in experiencing the earlier decline. Comparable figures show that manufacturing output fell by over 11% in Japan, and by close to 5% in both the US and Germany, while manufacturing employment fell by 6½% in Japan and 7½% in the US - that's to say by more than in this country although it fell by less than 2% in Germany. The frustrating thing is that, with the best will in the world, there was not much that either we at the Bank, or the UK Government, could have done to ward off the pressures on UK manufacturing, which had their origins abroad. That's fairly obvious where we are talking about the global slowdown - with negative overall growth last year of about 2% in Japan (fourth quarter on a year earlier) and close to zero growth in the US and Germany. This compared with growth of just over 1½% in this country - by some margin the highest in G7. We can go to international meetings and encourage the respective authorities there to stimulate their economies, but there is nothing that we can do about it directly ourselves. What we were able to do - given that inflation was marginally below target - was to try to compensate for that external weakness by stimulating domestic demand here in the UK.
The problem - for businesses trading or competing with firms in the eurozone, our largest trading partner, was the persistent and puzzling weakness of the euro. Now many people think that we could have caused the pound to fall against the euro simply by cutting our interest rate somewhat further relative to the interest rate in the eurozone. 4  BIS Review 23/2002  But it really isn't as simple as that. The US has reduced its interest rate far more aggressively than the ECB over the past year or so, and to well below the ECB's rate (to 1.75% as against 3.25%) but the dollar is actually stronger today against the euro than it was at the start of last year. And the same is true, though to a lesser degree of ourselves: UK interest rates were reduced by 2% from the beginning of 2001 compared with a fall of 1½% in the eurozone, yet sterling is stronger against the euro (though weaker against the dollar) than it was to begin with. I don't think I can offer you a wholly convincing explanation for the euro's weakness since its introduction. It seems to have been driven by capital flows reflecting expected medium- and longerterm future corporate earnings growth rather than short-term interest rate differentials, and it is often suggested that these expectations reflect perceived supply-side rigidities within the eurozone.