Analysis and the Bank of England- (07.04.02)

Mervyn King, Deputy Director at the Bank of England had a speech reported in the Bank of England Quarterly Bulletin. In it he outlined his reasoning behing the current world economic slowdown and why he believes this slowdown is merely temporary. The context against which he made his reasons was that stability in the UK economy has been achieved despite wild swings in the world economy.

The reasoning for the current slowdown seems sound, that it reflects a downturn in business investment, particularly in IT, that has a knock on impact to the levels of world trade. However, he went on to state that such investment downturns tend to be temporary and are often stock market driven. Obsolescence, particulaly in information technology, removes excess capacity from the market. Again this would seem to have a sound basis in industrial economics.

The risk to this sort of investment boom would be rapidly rising interest rates due to too lax monetary policy with the difference between consumer and manufacturing expectations. The Bank of England clearly recognise this risk and from's statistics would seem currently to have the balance about right.

This does not mean that a recession in the UK economy has been avoided for certain. King recognised that there is variation in prospects between sectors of the economy, but made the valid point that the difference between small growth and a recession is statistically insignificant, dramatic growth or decline being the main points of concern for monetary policy. This does not hold any great hope of a UK manufacturing sector boom, where the long term trend of decline in volume being matched by productivity gains is certain to continue given the context of an investment led world economy and the traditionally poor record on investment of UK business.