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.