Although output is estimated to have contracted in the third quarter of this year, there is a range of evidence from business surveys, from the Bank’s regional Agents, and from recent indicators that the economy has begun to stabilise and that we are likely to be moving into a period of renewed expansion. Whenever an economy is in recession, especially a recession as deep as this one, it can be hard to see where growth will eventually come from. However, as I have discussed, the easing in monetary and fiscal policy is providing considerable support to the emerging recovery. That stimulus is reinforced by the substantial depreciation of sterling. Sterling is around a quarter below its mid-2007 level and – as many of you here today will know from your own experiences – this has helped to improve the ability of UK companies to compete in both overseas and domestic markets. Output will also receive a further fillip as the adjustment of inventories by companies runs it course. However, the on-going structural adjustments that I mentioned are likely to give rise to a number of economic headwinds that may impede the recovery. Credit conditions are likely to remain tight for some time as banks repair their balance sheets. And the need for public and household finances to adjust to the changed economic environment will weigh on spending. Balancing these factors, my view of the outlook for GDP growth is in line with the projections contained in the Bank’s Inflation Report published last month.
A similar effect has operated for households: borrowers with floating rate mortgages in particular have seen their monthly repayments fall sharply. More generally, by reducing the returns on saving, the fall in interest rates has encouraged households and businesses to spend. The MPC’s programme of asset purchases has further stimulated demand by injecting additional money directly into the economy. The Bank’s purchases of government bonds encourage investors to diversify into alternative assets, such as corporate bonds and equities. The Bank is also operating directly in commercial paper and corporate bond markets to improve the functioning of those markets. Both actions have helped to boost the prices of corporate assets, reducing yields and lowering the cost to companies of raising funds in capital markets. This in turn should help to stimulate increased spending. The dramatic easing in monetary policy occurred alongside a range of Government policies. Most importantly, the Government’s actions to provide both capital and liquidity were  1  2  See Eichengreen and O’Rourke (2009). Romer (2009) makes a similar point. BIS Review 159/2009  instrumental in stabilising the banking system. The temporary reduction in VAT and the car scrappage scheme have boosted household spending and provided short-term support to retailers and the car industry. And the Government’s Business Payment Support Service has reportedly enabled almost a quarter of a million small and medium-sized firms to delay tax payments.