The Medium term Outlook

In this Forecast Release we consider the prospects for the economy after the present phase of cyclical recovery. Our central forecast, which we regard as the best medium-term planning assumption, is that the economy slows down to a sustainable growth rate of around 1% per cent. This is in line with the underlying growth of productive capacity but not sufficient to cure unemployment. We recognise that in practice the economy may be pushed away from the underlying growth trajectory by random shocks, and we look at three major risks surrounding the present forecast: a rise in the savings ratio; a slower world recovery; and a cut in investment. We contend that the most serious of these risks is to investment, since the company sector will face a major increase in its tax bill from 1985-6 onwards. A growth recession is thus distinctly possible in 1986, which could, for economic and electoral reasons, be the low point of the present cycle.     

Effects of rising energy prices on urban space

In this paper we review and analyze several well-known urban models that are presently being used to evaluate the impact of a decreasing energy supply on the spatial structure of our metropolitan areas. Certain models which demonstrate that rising energy prices reinforce a tendency for decentralization are shown to be extremely sensitive to modifications of certain desirable assumptions and, consequently, they may have restrictive applicability in urban policy formation. Acknowledging this possibility, we use a production function approach to derive, independently of the previously discussed models, results that indicate a rise in energy prices will generate centralizing urban adjustments.     

Capital flows and stock price volatility: Evidence from Hong Kong

This paper investigates both the short-run dynamics and the long-run co-movement of stock prices, capital flows and the real interest rates in Hong Kong. By using the Johansen multivariate cointegration technique, this paper finds that there are two cointegration vectors among the variables. In other words, the results show that the three variables in Hong Kong are moving together. This long-run relationship implies that even the stock market is efficient in the short-run. Its long-run movement can, however, be predicted by the activities of the capital market.This paper benefited greatly from the comments of anonymous referees. All remaining errors are ours alone.     

Industrial relations of recession

With unemployment reaching record levels and the economy showing signs of long run recession, attention is focused on the implications of this for the future of British industrial relations[1]. The authors examine key issues both nationally and in their local region, the North.     

HOW LARGE A COAL INDUSTRY?

In a dispute which has so far lasted nine months, neither side has attempted to advance its cause by reasoned argument. "Negotiations" have made little head way against a starting position of non-negotiable demands, so that the dispute has settled into a trial of strength. In October's Economic we described the back ground to the dispute; here we attempt to go a stage further by presenting estimates of the number of people who can profitably be employed in the industry. We show that the number is crucially dependent on the price of coal and the costs of producing it. It also depends on which definition of 'uneconomic pits' is used, and what definition of marginal (avoidable) costs. We recommend using a strict definition of 'uneconomic' but a generous interpretation of avoidable cost, and suggest that on this basis the current level of profitable employment in the industry is some 160,000. However, future employment prospects depend on how coal prices move in relation to costs of extraction.     

The impact of the euro on risk exposure of the world’s major banking industries

In this paper, we examine if the introduction of the euro impacted the risk exposures, risk premiums and, hence, the cost of equity of the banking industry of 11 Eurozone countries, five non-Eurozone European countries, and three non-European countries. Using a multi-factor asset-pricing model that allows time variation in the risk exposures, we find a statistically significant and economically large decline in the cost of equity of the banking industry across the three groups of countries following the introduction of the euro. Though we find an increase in the market and currency exposures after the euro, consistent with increased competition among banks, the fall in the cost of equity arises from an economically large decline in the currency premium. As expected, the Eurozone banking industry experienced the largest decrease. Our results are inconsistent with the argument that increased banking competition arising from the legislative changes accompanying the introduction of the euro would result in an increase in the overall risk premium of the banking sector.     

The Underpricing of Venture and Nonventure Capital IPOs: An Empirical Investigation

In this paper, we examine the premarket underpricing phenomenon within a group of venture-backed and a group of non-venture-backed initial public offerings (IPOs), using a stochastic frontier approach. Consistent with previous research, we find that venture-backed IPOs are managed by more reputable underwriters and generally are associated with less underwriter compensation. However, unlike other papers in the literature, we find that the initial-day returns of venture-backed IPOs on average, are, higher than the non-venture-backed group. We observe a significantly higher degree of premarket pricing inefficiency in the initial offer price of venture-backed IPOs. Further, our results show that a significant portion of the initial day returns is due to deliberate underpricing in the premarket.     

Research and development alliances and accounting

Very little is known about the information used by managers to evaluate, plan and control R&D alliances. This paper focuses on the R&D accounting numbers that may be used and points to their inherent limitations and their potential to mislead. Alliance partners, in particular, need a clear agreement on the activities they include in R&D and on the costs they attribute to those activities.