| Abstract: | The slowdown in the world economy, which followed last year's oil price collapse and which awakened fears that the world was on the threshold of a new recession, is coming to an end. Output growth in the first half of the year was stronger than we had previously expected and a gentle acceleration is forecast over the next eighteen months. In contrast to this improvement on output, there has been little or no progress on the major problems of the world economy, including the USA's twin structural deficits, budget and trade, and the international debt crisis. Moreover, with the US facing elections in just over a year's time, no economic initiative is likely until 1989. Hence the prevailing view that the US and world economies will "muddle through" for another year. But in 1989 a new US administration is likely to face up to the trade and budget imbalances and many US forecasters believe that the required fiscal tightening will lead to recession. As we explain below, this is not our view and the forecast embodies steady 3 per cent growth in the world economy over the medium term. Inflation has now passed the low point brought about by the oil price collapse. On our forecast of output, inflation is expected to remain close to its present underlying rate of 4 per cent. |
