This review aims to provide a framework within which to assess the relationship between economic trends and monetary developments.
- The decline in output has slowed down this year, and industrial production has levelled out. Reflecting these developments, unemployment is growing more slowly.
- Consumer spending has lost its buoyancy, fixed investment shows underlying weakness, and stocks continued to fall in the second quarter. Companies' financial position improved in the six months to March, though profitability remained very low.
- Economic activity abroad appears to have weakened in recent months.
- The fall in the exchange rate has brought a gain in competitiveness but higher prices for fuel and raw materials. Retail prices, however, have not grown faster, partly because the rise in wage costs per unit of output, unlike last year, has recently been very small.
- The Civil Service pay dispute caused a substantial temporary increase in government borrowing, which the authorities did not seek to fund fully. The dispute made companies more liquid, but the personal sector continued to borrow heavily from the banks. The underlying rate of growth of sterling M3 has become increasingly difficult to assess.
- The authorities considered some ,uise in interest rates to be appropriate when sterling weakened sharply in July; more recently they have aimed to avoid further increases in very short rates, while leaving the structure of interest rates to be determined by the market.