In the UK, relatively strong business investment growth in the past few years has only restored it to a level still shy of its pre-crisis share of GDP (Chart 12), and it is tracking below past cycles (Chart 13). 13  A fall in expected growth rates will tend to push down on expected future earnings, lowering equity prices and increasing the equity yield. At the same time, a fall in growth expectations will tend to be reflected in a lower expected path of risk-free rates, pushing down on bond yields. So a decline in growth expectations will tend to widen the spread between equity and bond yields. Since equity prices depend on earnings expectations at all future horizons, the equity yield (and hence the equity-bond yield spread) will be particularly sensitive to expectations about growth rates at long horizons  BIS central bankers’ speeches  7  Chart 9 Consistent downward revisions to GDP growth forecasts Actual GDP growth 2012 2014 2016  2011 2013 2015 2016  Per cent 8.0 Dotted lines = Emerging economies Solid lines = Advanced economies 6.0  4.0  2.0  0.0 2010  2011  2012  2013  2014  2015  2016  Source: IMF World Economic Outlook. Each line shows how forecasts for a particular calendar year have evolved over time. The diamond shows the eventual outturn.
4. Conclusion  Above the central arch of this Court Room is a weather vane. Originally installed in 1805, it played a central role in the Bank’s management of a different type of uncertainty – meteorological. When the wind blew from the east, ships would be able to travel up the Thames, meaning London’s merchants would need credit to purchase the cargo. When it blew from the west, credit would need to be withdrawn. This Regency forecasting model helped the Bank of England to provide an anchor of stability. Today, while the economy is more complex and our models less reliable, the Bank has identified the clouds on the horizon and can see that the wind has now changed direction. 12  BIS central bankers’ speeches  Over the past few months, working closely with the Chancellor and with HM Treasury, we put in place contingency plans for the initial market shocks. They are working well. Over the coming weeks, the Bank will consider a host of other measures and policies to promote monetary and financial stability. In short, the Bank of England has a plan to achieve our objectives, and by doing so support growth, jobs and wages during a time of considerable uncertainty. Part of that plan is ruthless truth telling. And one uncomfortable truth is that there are limits to what the Bank of England can do. In particular, monetary policy cannot immediately or fully offset the economic implications of a large, negative shock.