The domestic economy

• Output fell in the third quarter of last year, and weakness is expected to continue into this year; a number of the factors that underlay the recession in the early 1980s are less acute, or not present, this time.
• On this occasion, however, an additional uncertainty arises from the balance sheet positions of the personal, corporate and banking sectors, which are all less robust.
• Adjustment to a more sustainable level of demand is now clearly under way: the personal sector is saving more and spending less, while companies are trying to cut spending, although they are not yet significantly reducing their financial deficit because income is also falling.
• Whether or not flexibility in the labour market has really improved is now coming under test: if further sharp rises in unemployment are to be avoided, greater wage flexibility must be demonstrated.
• The rise in underlying inflation between mid-1989 and mid-1990, and divergence from our major EC partners, may have been halted.

The domestic economy