This commentary summarises recent developments in the economy as the background to monetary policy. From this point of view, the most important developments concern prices and company finances.
The earlier decline in output was chiefly associated with the large run-down in stocks. Since stocks began to be reduced more slowly in the second half of last year, there has been a hesitant recovery.
Other influences on demand in the second half of last year were less important. Consumers' spending was broadly maintained during the year despite some fall in real personal disposable income . Industrial fixed investment was also virtually unchanged; within the total, the fall in manufacturing investment came to an end. Bank lending to the private sector grew strongly. Exports were surprisingly strong, but imports grew even more rapidly; though the timing through the year, and thus the most recent trend, are uncertain.
The remarkable improvement in productivity in manufacturing industry continued - so that, with moderate pay increases, wage costs in UK industry rose little last year. With the exchange rate declining until the autumn, industrial competitiveness improved during the year.
Price inflation, which accelerated slightly in the autumn, partly as a result of the earlier fall in the exchange rate, has slowed down again.
There has been some improvement in company profitability from a very low level. But companies' financial position, having benefited earlier from sharp reductions in stocks, weakened in the six months to September, and there are indications that their liquidity worsened in the fourth quarter when they made delayed tax payments.