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.