FAR from being a burden, the dramatic rise in oil prices in the past year could be a boon for the North-East economy, the Bank of England governor claimed last night.

Mervyn King said that oil-producing countries would have more wealth - and therefore more spending power - thanks to the price rises, and as a strong exporter the North-East was well-positioned to benefit from contracts in the Middle East and other oil-rich nations.

The Governor was speaking to The Northern Echo during a fact-finding mission to the region, ahead of his keynote speech at the Confederation of British Industry's (CBI) North-East dinner last night.

He said: "As consumption slows, some of the impact of higher oil prices on overall demand will be mitigated as the beneficiaries of higher oil prices - the oil-producing countries and their owners - increase their spending."

"Manufacturing companies in particular, which are producing exports, will see a shift in resource into business investment. These net exports should help to rebalance the economy.

"The North-East is quite well placed to take advantage of this, with its strong export base.

"Some firms are already taking advantage from contracts coming from oil-producing countries."

Mr King acknowledged that there had been a general slowdown in the economy in recent months, but said the Bank of England was having problems predicting how serious the downturn was.

"We are in a slightly more uncomfortable position at the moment," he said.

"Inflation has risen above the two per cent target, but on the other hand, there is a slowdown in consumer spending, and so it is difficult to see what will happen.

"We try to set interest rates to make sure things are more stable.

"But the official data is giving us such different pictures at the moment, that is why we are fact-finding.

"We are getting a different picture as to how sharp the slowdown is so we want to find out what is happening on the supply side of the economy to gauge the overall picture."

Mr King was upbeat about prospects in the North-East, saying that he was impressed with the way the economy had diversified, moving away from traditional industries.

"Consumer spending grew very rapidly from 1997 until quite recently," he said. "But that was a period in which manufacturing exports were struggling and the North-East has done well to come through that period.

"The North-East economy has diversified enormously. It has gone from having a small number of industries which went into decline, into a much broader scope of sectors.

"Once you could have summed up in just a few words what the North-East economy was, what it made, but now it is so diverse that there are all sorts of different things going on here. A broad base to the economy means there are all sorts of different opportunities, and the economy is flexible."

The region could be well-placed to benefit from future economic growth, thanks to the information revolution which was taking place across the globe, he said.

"Once you could see how the whole structure of our economy worked," he said.

"Industries sprang up where the water was, or where the coal was. But with technological advances things will change. We are in a different world and the geography will be very different.

"We could see the whole concept of rural and urban centres changing with the growth of technology and broadband - but it won't happen quickly.

"The North-East is very attractive because, for instance, in Middlesbrough you can be in an industrial complex, and then two miles away is wonderful, unspoiled countryside. You don't get that in London.

"These changes will happen in ways that none of us can predict. But we have to encourage an economy that is flexible enough to adapt to all these changes.

"The North-East has adapted in response to changes in recent years, and it is in a good position to do so again."

In his speech to the CBI last night, Mr King stressed that wage inflation needed to remain stable, despite hikes in oil prices, otherwise unemployment problems could start to be an issue.

He said companies - and individuals - should accept they had to absorb oil prices.

The benefits to consumers of cheaper shop goods in recent years due to products being made in the Far East were now being offset by the rise in oil prices because of strong demand from China, he told business leaders.

And he warned that the "great stability" of the past ten years would most likely subside, and see minor peaks and troughs in the UK economy.

But, Mr King said the UK economy was moving away from periods of boom and bust, thanks to the fact that the Bank of England now set interest rates, and said there should be no more deep recessions - except if there was to be an enormous global shock to the economy.

"There are bound to be ups and downs," he said.

"But if businesses know the economy is generally stable, with no major boom or bust periods, they can plan for the future and make long-term decisions, which in turn encourages investment and jobs."