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.     

Focus: Productivity in UK Manufacturing Industry

Manufacturing industry has been the major casualty of the recession, recording a total fall in output of about 20 per cent. It is unusual for productivity to rise when output is falling, yet in the last two years output per person employed in manufacturing has risen by 15 per cent. As a result, and in spite of earnings growth of over 25 per cent between 1980 and 1982, the increase in unit labour costs was held to under 15 per cent in the same two-year period. In this Focus we examine how and why these developments have taken place. Our general conclusion is that, with a recovery now under way, normal pro-cyclical productivity gains are reinforcing the abnormal achievements of the last two years and that, in consequence, industrial costs and profits are improving sharply.     

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

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

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

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

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

Half way through 1991, there is still no firm evidence that a recovery is under way, though equally the recession does not appear to be worsening. This suggests that the economy is close to a turning point, bumping along the bottom, and that a recovery should begin in the second half. For the year as a whole we expect GDP to fall 2 percent followed by only a modest 1.5 per cent growth in 1992. Unemployment is likely to rise for at least another 12 months, reaching a peak of 2.8 million. The reduction in inflation and the trade deficit are continuing. By the end of the year retail price inflation is likely to be below 4 per cent and for 1991 as a whole the current account deficit should be around 1 per cent of GDP, well down from the 1989 peak of 4 per cent.     

Forecast Summary

In themselves the drop in interest rates and the fall in the exchange rate following the ERM débâcle of "Black Wednesday" will have an expansionary effect on demand in the UK economy. But because of the way in which the policy shift was handled, any positive impact is likely to be offset by lower business and consumer confidence with the result in our forecast that recession continues well into next year. It is another six months before output stops falling and a rise of as little as 0.9per cent is in prospect for 1993 as a whole. Such a weak recovery will, however, limit the inflationary impact of a lower pound and, helped by lower mortgage interest rates, retail price inflation is forecast to be almost unchanged over the next 12 months. In 1994 and beyond, the inflationary effects of devaluation are more evident and we assume that the Government will tighten its monetary stance, raising interest rates back above 10 per cent to stabilise the pound, possibly re-entering the ERM at a new central parity of DM2.40. On this policy stance, output rises 3 per cent in 1994 but slows thereafter and the peak in inflation is held to 6 per cent late in 1994. The J-curve effects of devaluation enlarge the current account deficit to f20bn next year- The weakness of output over the next 12 months is the main factor behind a rise in unemployment to 3.2 million and a steady increase in the PSBR, which reaches a high of f43bn in 1995-6, equivalent to 6per cent of nominal GDP.     

Forecast Summary

Little has happened in the three months since our post-election forecast to undermine the view that the economy has entered a period of sustainable recovery. We expect output to grow by 21/4 per cent (at 1975 prices - faster on a 1980 price basis) this year and in the 2–21/2 per cent range in both 1984 and 1985. We expect inflation to rise from its recent low point as special factors unwind, but to settle at around 6 per cent in 1984 and 1985.     

Forecast Summary

Output fell in the first quarter of the year but we attribute the fall largely to the severe winter and expect the recovery of output, which began twelve months ago, to resume in the second quarter. We now expect output to grow by 1 per cent this year with more rapid growth in 1983 and beyond. We expect consumer price inflation to fall as low as 7 per cent during the next year and to rise thereafter, reaching double figures by the end of 1984.     

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.     

THE HOUSING MARKET AND THE RECOVERY

In the run up to the key Christmas period the talk is again of renewed weakness in consumer spending. Last month saw the volume of retail sales rise by only 0.1 per cent, and the annual rate of growth has now slowed to a shade over 3 per cent, down from its peak of 4.4 per cent back in July this summer. This weakness in consumer demand is also clearly being reflected in retail prices; with retailers discounting their prices to boost sales, headline inflation fell to 1.4per cent in October, while the underlying rate dropped to its lowest level for 25 years. This forecast release looks at the wider determinants of consumer spending, especially developments in the housing market. We argue that the slowdown in high street sales is a forbear of sluggish growth to come and that lower interest rates, if they materialise, are unlikely to have much of an impact. While consumer spending has been the driving force out of recession, for the recovery to be sustained, requires that exports and investment spending now take up the running.     

THE OUTLOOK FOR 1988

We have updated our October forecast to take into account recent events in equity and foreign exchange markets as well as the Autumn Statement. As far as the prospects for the world economy are concerned, we have taken a gloomier view than the Treasury. On this basis we also obtain slower growth in the UK next year: output is forecast to rise 2.2 per cent compared with 2.8 per cent in October and 2.7 per cent in the official forecast. Inflation and the balance of payments are little changed from October. For next year's Budget we continue to assume a cut in the standard rate of income tax to 25 per cent though, on our calculations, this requires a PSBR it 1988–9 of newly £2bn whereas the Autumn Statement forecast assumed a constant PSBR of £1bn     

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.     

Een prijsindex van nieuwe personenauto's, 1950–1965*

Summary In constructing a price index of new motorcars the main problem is how to deal with the introduction of new models and with quality variation generally. The first difficulty is turned by compiling year-to-year indices based on models that each account for 2 per cent or more of total sales in either year. The shifting basis of these indices comprises from 7 to 15 models which together account for 45 to 70 per cent of total registrations. All models are subject to minor improvements; this quality variation is taken into account by representing increases in horse power and overall length by equivalent price reductions. The elasticity coefficients involved in this translation are derived from a cross section analysis of prices and technical characteristics of some fifty widely ranging models in 1964. A price index for the period from 1950 to 1965 is then obtained by linking successive year-to-year indices. Over the whole period list prices have risen by a third, to a large extent as the result of changes in purchase tax; this price rise is just about offset by imporvements in quality of some 2 per cent per annum.     

The London Business School with Gover Publishing

The world economy is in poor shape. OECD industrial production fell 0.5per cent in both 1991 and 1992 arid though it may now have stopped falling it is still, on our estimates, below year-earlier levels. The US recovery continues to disappoint; recession persists in Japan and Europe; inflationary pressures, already weak, are waning. Next month's UK forecast would normally be based on the world forecast published in June's International Economic Outlook, when we were looking for G7 output to rise 1.2 per cent this year, 2.5 per cent next. But this now looks on the high side and although a detailed revision to the world forecast mist wait until the December IEO, as at1 input to the UK forecast we are shading our G7 growth forecasts - to I per cent this year and 2.25 per cent in 1994. Similar downward revisions are also in train at the OECD arid IMF, according to recent press reports. The more sluggish output performance is already having mi impact on the oil price, which has fallen below £16 a barrel. Together, these developments imply lower world inflation and, particularly in post-ERM Europe, a faster easing of monetary policy than we had allowed for in June.     

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.     

France

The government of Mr. Chirac, which was elected in March, is establishing a liberalising, market-oriented stance on economic policy. Controls on prices and foreign exchange have been relaxed, credit controls are being dismantled and, in spite of opposition from President Mitterrand, a large-scale privatisation programme is planned. The draft 1987 budget proposes to cut public expenditure in real terms for the first time in 28 years and to use the savings to reduce both taxes and the budget deficit. The projected tightening of the fiscal stance is not expected to hold back output which the government forecasts will rise 2 1/2 per cent this year and 3 per cent in 1987. Inflation is also forecast to improve steadily and the current account is moving into surplus. Unemployment, currently at a postwar peak of 10.7 per cent, is expected to fall towards the end of the year.     

The Recession of 1980 and its Causes*

During 1980 total output fell by 5% per cent and manufacturing output by 16 per cent. By May 1981 manufacturing output was 20 per cent below its 1979 peak level. in this Briefing Paper we use the London Business School model to explain the current recession. We conclude that the main identifiable came was the rise in the price of oil. but output was also affected by the increase in VAT and the reductions in public investment. Those cawes directly explain a reduction in output of about 3 per cent in 1980 compared with what might otherwise have happened. We suggest that additional links (not fully incorporated into the model) increased the impact of those shocks and led to the severe fall below potential output. The first part of the paper describes briefly the events of I979 and 1980. in the second part we ask how far the economic developments were predictable and in the third part we set out our explanations.