Forecast Summary

With electoral uncertainties removed, we are forecasting four years of steady growth combined with low inflation, broad balance on the current account and a gradual reduction in unemployment. The short-term outlook is more encouraging and 1987 is expected to be an above average year. Output is forecast to rise 3–31/2 per cent, inflation is back down to 31/2 per cent by the end of the year, the current account is in surplus and unemployment falls by over 200,000.     

Forecast Summary

Even if output recovers in the second quarter (as we expect), it looks as if there will be no increase in GDP this year in comparison with 1991. This reflects the weak start to the year, in which non-oil output registered its seventh successive quarterly decline. Through the year (fourth quarter to fourth quarter), however, we expect GDP to rise 1.5 per cent, laying the basis for a stronger recovery in 1993. Even so, it is not until late next year that output returns to its previous peak Paradoxically, we have raised our forecast of domestic demand from February (on a milder stock rundown) but imports are taking a disproportionate amount of the extra demand, holding back domestic output and aggravating the current account deficit. From nearly £9bn this year, we see the deficit rising to over £14bn by the middle of the decade, equivalent to 1³/4 per cent of GDP. While this is disappointing, it should be relatively easily financed even with lower interest rates providing the pound is held at its present DM 2.95 parity. we assume no ERM realignment which underpins a further drop in inflation to 4 per cent later this year and to 3-3 1/2 per cent by the mid 1990s. The weakness of output means that unemployment continues to rise for another 12 months, peaking in the middle of 1993 at three million, and that public sector finances will move still further into deficit - we project a PSBR this year of £30bn and a peak of £34bn in 1993-4, equivalent to 5 1/4 per cent of GDP.     

Forecast Summary

The forecast illustrates the costs and benefits of joining the ERM at the relatively high central parity of DM2.95. It shows that, providing the government does keep the pound within its wide 6 per cent EMS band, retail price inflation can be brought down to the average European level of 3 per cent by the mid 1990s. But there is a cost in terms of lower output and rising unemployment. GDP growth is expected to slow to about 1 1/2per cent this year and next and to average 2 per cent or slightly more from 1992 onwards. This is less than the rate of growth of productive potential and implies a weak labour market with unemployment rising steadily bock above 2 million. The forecast assumes a $25 oil price; in an alternative we sketch out the implications of a rise in the price to $45 for a limited period.     

Forecast Summary

Although hard evidence of recovery is still elusive, our forecast indicates that the trough of the recession occurred in the second quarter and that output fell 4 per cent peak-to-trough. We estimate that GDP rose 112 per cent in the third quarter - though only because of a rebound in North Sea oil production - and that for 1991 CIS a whole it will be 2 per cent down on 1990 levels. Next year GDP is forecast to rise 2 per cent but it is not until 1993 that the 1990 output peak is passed. Unemployment therefore still has a considerable way to rise - to a peak of 2.8 million in 1993. In the first year of full EMS membership, the economy has made an accelerated transition to European levels of inflation. Against a background of modest growth, it should be possible to consolidate this progress and we expect retail price inflation to average little more than 3 per cent over the next four years. Similar rapid progress has been achieved on the balance of payments where there is a trade surplus on manufactured goods for the first time since 1982. Here, however, we are less confident that the reduction in the trade gap can be sustained. In the recovery phase we expect imports to rise more rapidly than exports with the result that the current account deficit rises from £6bn this year to £8bn in 1992 and £10bn-£12bn in 1993-5.     

Forecast Summary

The outlook is conditioned by our assumption that sterling enters the ERM, probably in the autumn, at a central DM parity not very different from the current rate and that this exchange rate is held over the medium term. Fiscal and monetary policy have to be made consistent with a stable pound, which rules out tax cuts and restricts the fall in base rates to 12 per cent. The benefits of the ERM are to be seen in a reduction in the underlying rate of inflation to below 5 per cent by 1992. But ERM participation is not costless. The downside is four years of output growth averaging below 2 per cent and higher unemployment. The ERM offers the possibility of low inflation and steady growth in the second half of the 1990s: it is not a 'quick fix' for the current problems facing the UK economy.     

Forecast Summary

The lower exchange rate offers UK industry a remarkable competitive advantage in world markets which, we believe, will be expanding rapidly over the next two years. As domestic demand is also likely to be strong in the run-up to the General Election, output is forecast to rise 3 per cent both next year and in 1988. But, even so, the short-term supply response is not expected to be sufficient to prevent the current account from recording a large deficit next year. Excess demand pressures also point to a higher rate of inflation from now on. We forecast a steady increase in inflation to 3¾ Aper cent by the end of next year and a peak of 4½ per cent in late 1988.     

Forecast Summary

The recovery that we forecast in February remains intact, though its composition is shifting between external and domestic demand. As we reported in International Economic Outlook earlier this month, the recession in Europe is intensifying so that, even with the devaluation-induced improvement in competitiveness, exports are being held back The weaker world outlook is the main factor behind a lower growth forecast next year. For 1993, however, we are continuing to forecast growth of 11/2 per cent, principally on the basis of more buoyant consumer spending. But the boost from consumption, while welcome in the first stage of recovery, is short-lived since the higher taxes already announced for next year hold back the growth of disposable incomes. Again this is desirable for the share of consumption, private and public, in GDP has been rising steadily and needs to be reversed in order to devote resources to reducing the two deficits: the PSBR and the trade gap. Over the forecast as a whole it is exports and investment which drive demand, not consumption. Underlying inflation has fallen below 3 per cent for the first time in twenty years, but it is now at its cyclical low point. We expect some increase in inflation from now on, though the Government's 1–4 per cent target is not likely to be breached this year. Next year and beyond, however, without more action on the budget deficit or a sharper increase in interest rates than we are assuming, inflation is forecast to settle in the 4–5 per cent range. Unemployment has fallen in recent months but the underlying trend remains upwards. We expect the three million level to be reached in the second half of the year.     

Forecast Summary

Backed by the lowest interest rates in fifteen years and a competitive exchange rate, we see the economy moving off the corrugated bottom of last year and recovery gathering pace as this year progresses. We expect output to rise 1.4 per cent this year, 0.5 per cent more than we forecast in October when we were expecting a far more cautious approach on interest rates, and 3 per cent in 1994. Here we have factored in another 1 per cent cut in base rates to coincide with the Budget on 16 March but this may prove to be the floor, especially if, as is rumoured, the Prime Minister has vetoed tax increases in the Budget for fear of derailing a fragile recovery. By the end of the year, however, we expect the trend in interest rates to be upwards to halt a sliding exchange rate and to cap the devaluation-induced price increases that will be feeding into domestic prices by then. On this basis we believe that inflation can be contained at 4 per cent underlying this year, 5 per cent in 1994 - outside the Chancellor's target range. While we are more sanguine than before on the outlook for output and inflation, major problems remain on the PSBR and the balance of payments. Beginning in the December Budget, the Government will have to raise taxes to avoid a debt spiral on the budget deficit and channel resources into net exports. Even on the basis of a £4bn tax hike in the first of the unified Budgets, we expect the PSBR to run along close to £50bn and the current account deficit in the £15bn-20bn range.     

Forecast Summary

The economy is in the throes of its biggest downturn in ten years. Output has been falling and unemployment rising for nearly a year and business confidence indicators suggest no early letup. In the last 12 months total output has fallen 2 per cent with manufacturing 5 per cent lower. This, we believe, is the trough of the recession and we expect signs of recovery to be evident in the late spring. Even so, output is likely to fall by nearly 1 per cent this year and unemployment should rise well above 2 million. The benefits of recession have been slow to appear, though the trade gap is narrowing sharply. The downward pressure on prices from falling demand is balanced by rising costs as industry struggles to pass on high unit labour and interest costs. Helped by some reduction in mortgage rates and a severe squeeze on profits, we expect retail price inflation to fall to Sper cent by the end of the year and to 3–4 per cent over the medium term.     

Forecast Summary

As the Chancellor recognised in his Mansion House speech, sterling M3 is once again proving to be a wayward indicator, and it is the exchange rate which is currently the principal instrument of the government's policy to reduce inflation. The strength of sterling, reinforced by the Group of Five commitment to a lower dollar, is the main factor behind decelerating retail prices and we endorse the Chancellor's forecast that inflation will fall to under 4 per cent in the middle of next year. A strong exchange rate, however, hits UK competitiveness and results in a slower rate of growth in output next year. Output growth, over 3% per cent this year including the post-strike rebound, remains at 2% per cent in 1986 and comes down to an underlying 2 per cent in the medium term.     

Forecast Summary

The recovery in demand, which began in the second half of 1982, produced output growth of about 23/4 per cent in 1983. We expect this growth rate to be maintained, if not bettered, in 1984. The long-standing reduction in inflation has now come to an end but we do not expect prices to accelerate. Over the next four years a stable inflation rate of 5–6 per cent is forecast.     

Forecast Summary

Short-term economic prospects for the UK will depend critically on what happens to oil prices and on the government's response to any changes. Our central case assumes that North Sea oil averages £20 a barrel for the remainder of the year and that the government holds the sterling index at about 74. In the Focus we also examine the sensitivity of the forecast to changes in oil prices. The willingness of the government to let the exchange rate fall in response to the fall in oil prices means that we still expect GDP to grow by about 21/2. per cent in 1986 and we expect inflation to fall below 4 per cent by the middle of the year. Lower oil prices generate a faster growth of world output; the UK benefits from this and we are forecasting growth of nearly 3 per cent in 1987 with inflation falling further.     

Forecast Summary

There is one overriding question which this issue of Economic Outlook seeks to address: to what extent will the tight monetary policy now in place produce a slowdown in consumer spending and take the savings ratio back up from last year's record lows? The answer, provided by the forecast, is that the savings ratio will rebound this year and our Macroeconomic Viewpoint argues that this will be sufficient, in combination with a rising budget surplus, to effect a reduction in inflation and the current account deficit over the medium term. But it does not achieve the government's target, set out in the MTFS, of a balanced budget - the public sector remains in chronic surplus. This objective requires national savings to be privatized and, in a special Microeconomic Viewpoint, we put the case for tax incentives to boost personal saving and enable the budget surplus to be reduced in a way which does not add to demand.     

Forecast Summary

Led by manufacturing industry, output has accelerated and GDP growth approaching 4 per cent is likely this year. But strains are emerging and we expect slower growth from now on. Over the medium term GDP is forecast to rise at a sustain- able 3 per cent rate, nearly 31/2 per cent for non-oil output. This should enable the reduction in un- employment to continue, though at a slower pace than in the last year. Against a background of rising activity, we expect inflation to remain at its present underlying rate of about 4 per cent and the current account deficit to settle at about £2bn p.a. We show in the Focus how this forecast might change if the stock market fails to recover from its mid-October crash     

Forecast Summary

Monetary policy was tightened to defend the exchange rate earlier this year. Any adverse effects on activity have since been balanced by growing business confidence, restored by the successful rescue of sterling, falling interest rates and above all by the end of the miners' strike. We therefore still expect output to rise this year by 31/4–31/2 per cent and by over 2 per cent p.a. in the next three years. The recent acceleration in prices, the underlying reason for a tighter policy stance, is not expected to continue. We forecast a fall in inflation to 6 per cent or below by the end of the year and to under 5 per cent during 1986.