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mpc: 4 the economy ­ in particular between businesses which were externally exposed and those which were not ­ would be likely to persist, and could even become more pronounced. Third, other things being equal, it would entail a larger current account deficit and accumulating external debt. 12 In the second half of 1999, output had grown at 0.8% per quarter, slightly above trend. There had been some signs in the latter part of 1999 that the sectoral split in activity was becoming somewhat more balanced. Services sector growth had fallen slightly between Q3 and Q4, and manufacturing production as a whole had been picking up. But overall industrial production and manufacturing had fallen in December, and there remained marked differences between industrial sectors. Moreover, the effects of sterling's further appreciation, which would tend to reduce growth in externally-exposed businesses, would not yet be apparent in the activity data. 13 The Committee discussed whether, or not, an accumulating current account deficit would have implications for the exchange rate. On one view, it was questionable whether it was consistent to assume both a growing external deficit and persistent sterling strength. If there had been a change in the equilibrium real exchange rate, sterling might remain high but then the trade deficit ­ and so the current account deficit ­ would be smaller than assumed. Alternatively, an accumulating external deficit would lead to a depreciation. The latter seemed, on this view, more likely: to the extent that the divergence between the growth rates of domestic demand and output persisted and widened, the greater the risk to sterling would become. On another view, there was no obvious inconsistency between the projected current account deficit and persistent sterling strength over the forecast horizon. Two reasons for this were suggested. First, in a world of highly mobile capital, there was no direct link between the current account and the exchange rate. Instead, there were links through asset markets. Second, the size of the prospective current account deficit was on this view modest, at 2%-2½% of GDP. Third, while a deficit which continued to grow would over the medium-to-long run entail a depreciation in sterling's real exchange rate, that did not imply that the real, and even less the nominal, exchange rate had to fall during the next two years or so. The UK economy could generate the required surpluses in the future without a sharp near-term nominal depreciation.

Labour market conditions

14 Labour market conditions might have tightened slightly since the Committee's November Inflation Report. The evidence since the Committee's January meeting was mixed. While claimant count unemployment had fallen by around 20,000 in December, taking the rate down 0.1 percentage point to 4.0%, the broader-based LFS measure had increased by around 12,000 in the three months from