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

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 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

Economic recovery is under way fuelled by a sustained rise in consumer spending. We expect. output to grow by 2% per cent this year, slightly faster in 1984. Although prices will rise more rapidly from now on than in recent months, the inflation rate is unlikely to rise signijkantly above 6 per cent over the next two years.     

Forecast Summary

We have assumed a Conservative victory in an autumn General Election and the continuation of policies aimed at a gradual reduction of inflation in the medium term. The outlook for 1987 is for a more broadly-based expansion of demand and output growth in excess of 3 per cent. This is combined with a large current account deficit and an increase in inflation. But signs are emerging that UK industry is now responding to last year's improvement in competitiveness and the forecast suggests that, over the next four years, the economy should combine non-oil output growth of 3 per cent with inflation of a similar order of magnitude.     

Forecast Summary

Nearly two years after the I990peak in output, the economy continues to 'bump along the bottom' of an L-shaped recession, which has turned into as severe a downturn as its predecessors in 1974-5 and 1980-1. The origins of the recession lie in the weakness of domestic demand, which has failed to respond to the 4.5per cent cut in interest rates that has taken place since we joined the ERM. It is now the turn of fiscalpolicy: public spending was raised in the Autumn Statement and, as the General Election approaches, the odds are on tax cuts in next month's Budget. This relaxation of monetary and fiscal policy should produce recovery and we see output moving ahead from the second quarter onwards. Nevertheless, the outlook for I992 is weaker than before: we forecast a rise in GDP of a little over I per cent, rather less for manufacturing industry. In 1993 and beyond n growth rate of around 2112per cent should be possible but it is the second half of next year before output passes its previous peak. This suggests that unemployment will rise for at least another year - to a peak in the summer of I993 of 2.8 million. The combination of a stable exchange rate inside the ERM and protracted recession has produced a rapid reduction in inflation and the current account deficit. As long as the pound maintains its present parity, inflation should moderate further, to the 3–4 per cent range by the end of the year and beyond. On the trade side, in contrast, imports have already bottomed out and exports are struggling in a weak world economy. This suggests that, as the recovery gets under way, the deficit on current account will widen from last year's £6bn to £8bn this year and £10bn by I995.     

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

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

Output is expected lo grow steadily for the next four years, continuing the recovery which has been in progress since I981. The underlying rate of growth is forecast to slow down next year as the world economy also slows, though because of the miners' strike actual recorded growth next year will be higher than this. However, throughout the period output grows more rapidly than its historical trend. This growth is accompanied by steady increases in labour productivity, and unemployment is forecast to rise. With fiscal and monetary policy following the guidelines set by the Medium-Term Financial Strategy, inflation stays at about its current level or falls slightly.     

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

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 economy is now in the middle of a sustained cyclical upswing in demand, but because of interruptions to supply caused by the miners' strike we expect output growth of only 21/4per cent this year, accelerating to 2% next year. (This assumes that the strike does not affect output significantly in the second half of this year.) The relatively rapid growth of output over the past two years has caused some acceleration of inflation from the low point last June, but we see these pressures subsiding, with consumer prices growing at 5% per cent this year and 5 per cent or less thereafter. Over the medium term, on the usual assumption that the economy is not subjected to any severe shocks, we expect output growth to settle at a sustainable 2 per cent p.a. against a background of slowly declining price inflation.     

Forecast Summary

A pause in world activity held back UK industry in the first quarter of the year and, even though we expect faster growth from now on, we forecast total output growth of only 2 per cent this year. But next year a stronger world economy and pre-election tax cuts lift growth to 3 1/4per cent. Lower oil prices and falling interest rates help keep inflation at its current level both this year and, as long as wages respond, next. In the medium term we expect the growth rate to fall back but, assuming that a fairly tight fiscal policy is pursued by whichever government is in power, we predict that inflation stays below 3 per cent     

Forecast Summary

The January crisis, which occurred despite (or perhaps because of) signs of accelerating recovery, will not, we believe, prevent output from rising by over 3 1/2 per cent this year and by over 2 per cent p.a. over the medium term. Although the recent fall in sterling will put up prices - especially of traded manufactures - we expect retail price inflation to fall below 5 per cent after reaching almost 6 per cent this spring.     

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

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.