But the similarities are more noticeable than the differences

But the similarities are more noticeable than the differences. And at the end of last year there was no significant difference at all: 40 per cent of manufacturing firms were at full capacity, while 38 per cent of service firms were. This latter figure is the highest since 1989.The Chambers of Commerce data does not go back before 1989, so it is hard to compare the situation now with that at the height of the last boom in 1987 and 1988. If service industry was really much more flexible than manufacturing you would expect fewer companies to report that they were at full capacity: you would expect more of them to be able to find ways of upping their output Yet the two lines move pretty much together. The most useful work here is being done by the British Chambers of Commerce, which carries out a quarterly survey of capacity utilisation in manufacturing and in service industries. Since 1989 it has been asking both types of company whether they are operating at full capacity, and recording the percentage that say they are The results are shown in the graph.You can see the problem. It is more a question of investing in training, or in computer software, or in management, rather than in investing in plant.If there is a shortage of trained staff because of over-rapid expansion you would expect that to show up in rising wage rates; if the shortage is in computer software, rising prices for software packages or (again) wage rates for experts; if in management, well, the way round that is to out-source management by bringing in consultants – something that is clearly taking place, but so far without evident signs of strain.The trouble is that what ought intuitively to be happening is not showing up in the figures.

The way that employment has responded more quickly to increased demand this cycle would support this point.Besides, investment in a service industry is not just proportionately smaller; it is also qualitatively different from that of a manufacturing one. The OECD calculates that the latter has come down at least a couple of percentage points: unemployment is now below 8 per cent and there is virtually no sign of a resumption of wage-generated inflation, in contrast to the situation in the late 1980s. The trouble is that when one looks at the growth of capacity it is very hard to demonstrate statistically that anything has changed at all.Intuitively it would be reasonable to expect that a predominantly service economy would respond more quickly to changes in demand than a predominantly manufacturing one Manufacturing plants take months, maybe years, to equip. Service industries do not in general have large plants with long lead times, and so can increase their output quite quickly by taking on more staff. But at the time the relaxed policy stance was justified, in part at least, by the argument that thanks to the structural changes of the 1980s, the economy had a capacity for faster growth.

In short, exactly the same arguments were used then as are being used now.Yet there ought to be some truth in it. If one looks not at the possible rise in the natural rate of growth but at the possible fall in the natural (or non-inflationary) rate of unemployment, it is clear that there have been an improvement. Eddie George was talking yesterday about the catastrophe of economic policy in the late 1980s when sterling shadowed the mark, leading to too loose a monetary policy and an unsustainable boom. The second is the extent to which the UK natural rate of growth may have risen as a result of the structural changes which have taken place during the last few years.

If this natural rate of growth has risen, it is argued, it should be possible to run the economy closer to capacity without running into capacity constraints. So the present easy money policy is less dangerous than it might appear.
The second argument is a tantalising one because it is impossible to prove until after the event, in which case it may be too late. The final dividend is 8.35p, lifting the total payout from 12.25p to 12.75p.. The Governor of the Bank of England may feel that the appropriate stance for the central bank should be to err on the side of caution – as he said in Sweden yesterday – but that would not be the market view of current UK monetary policy. There are two main arguments for erring on the other side, the first of which has received a great deal of attention, the second of which has not. The first is that within Europe the principal danger remains one of deflation, not inflation, and the UK economy is sufficiently closely integrated with the Continental one that some overspill of this deflation is bound to take place.