The UK economy.

Pain, Nigel ; Weale, Martin

The production of this forecast is supported by the Institute's Corporate Members: Arcadia Group plc, Bank of England, Barclays Bank plc, Dixons plc, Ernst and Young LLP, GlaxoSmithKline, INVESCO Europe Ltd, Marks and Spencer plc, Morgan Stanley Dean Witter (Europe) Ltd, Morley Fund Management, The National Grid Company plc, Nomura Research Institute Europe Ltd, Pearson plc, Rio Tinto plc, Standard Chartered Bank, UBS Warburg, Unilever plc and Watson Wyatt LLP.

Section I. Recent developments and summary of the forecast

After a pronounced slowdown at the turn of the year economic growth has recovered during the course of 2002. Revised estimates now suggest that GDP rose by 0.6 per cent in the second quarter and, based on our monthly GDP projections, we estimate that growth was 0.5 per cent in the third quarter, marginally below trend rates. It now appears increasingly unlikely that the Budget forecast of 2-21/2 per cent growth in 2002 can be attained, and we expect to see growth of 1.4 per cent for the year as a whole.

Table 1 shows the contribution to growth made by each of the components of demand in the four quarters to 2002Q2 and from 2002Q1-2002Q2, the data for 2002Q3 being not yet available. It is very clear that, over the four quarters, private consumption has been the driving force behind growth in demand. If all components had grown in equal proportions, then the contribution of private consumption would be 0.9 per cent instead of the figure of 2.8 per cent actually recorded. In the last quarter to 2002Q2 it is also true that consumption played a disproportionate role in the growth in demand. Balanced growth would show 0.4 per cent instead of the figure of 0.9 per cent. But the export sector provided an even larger contribution to growth, and in that sense the growth of the second quarter could be described as export-led.

UK exports have moved erratically, but export volumes in the third quarter are at best likely to be little changed from those in the second quarter. The implication of this is that export industries, and in particular manufacturing, are going to be weak (chart 1). We expect to see growth in world trade rise towards its long-run rate next year. Until then, manufacturing industry is going to find it difficult to make much progress.

This weakness in the external sector has been compounded by the fact that the stock market in early October was just over 10 per cent below its level when we produced our July forecast. All told the FTSE share price index was more than 40 per cent below its peak at the end of 1999; this market fall is the second-largest of the postwar period, being outdone only by the 1973/4 Crash. This adjustment has brought share prices to a level which suggests that most of the overvaluation has now been removed, so that there is once again the prospect of a reasonable return on shares. They may be underpinned by the fact that real interest rates are relatively low at the moment, but a further downward adjustment is an obvious possibility. The most that can be said is that, given the stock market falls which have taken place, the scope for further falls is unlikely to be as large as it was six months ago. But it would be foolish to assume that the depressing effects of these falls would be removed by a rapid recovery. Our view remains that the best means of predicting market movements is to assume modest growth from whatever the current level happens to be, whilst recognising that the possibility of further falls presents a downside risk to our forecast.

One of the concerns about a falling stock market is that it might damage business confidence, thereby having a depressing effect on investment activity. This process should be seen as distinct from the economic link between stock market valuations and investment activity -- that when share prices are high investment can be financed cheaply, and therefore investment levels should be expected to be high. Chart 2 shows the recent history of business optimism as measured by the CBI surveys for the industrial and financial sectors. The charts show the proportion of firms which are more optimistic about the near future than about the recent past, less the proportion of firms which are less optimistic. It is clear that levels of optimism measured in this way are considerably higher than in 1998, during the Asian crisis which proved to be less disruptive than expected by many firms at the time, and also in the immediate aftermath of the New York air raid. These data suggest that, while other factors may be exerting a depressing effect on the economy, there is, so far, no real loss of confidence in prospects. It is particularly surprising that the optimism of the financial sector seems not to be affected by stock market weakness.

Internationally, there seems to be an increasing degree of financial fragility. A run on the Commerzbank seems to have been averted narrowly. Market interest rates on loans to some apparently blue chip companies, such as Ford Motor Corporation, are rising, presumably because fear of bankruptcy is becoming a significant concern. Many of these companies are important investors in the UK and if this fragility persists for any length of time it may become an additional depressing effect on the international economy and on the United Kingdom.

Productivity

It is widely recognised, at least among economists, that a substantial gap exists between productivity levels in the UK and those on the Continent and in North America. Rates of growth of labour productivity are notoriously volatile, so that it is difficult to discern underlying trends even from several years of data. Labour productivity (output per hour worked) in the United Kingdom has, since 1950, grown at an average rate of 2.4 per cent per annum On the continent progress was faster than this in the years after the Second World War but fell back in the 1980s. In the United States productivity growth was slower until the mid-1990s but has since outrun Britain. In manufacturing, productivity growth is typically faster than in service industries. It is unclear how far this is a measurement issue and how far it is a genuine characteristic of manufacturing industry.

Over the past five years, Britain's productivity growth (output per hour worked) has fallen to an average of around 1.7 per cent per annum (chart 3) with poor performance in periods of slow growth and only a moderate improvement in good years. We still like to regard this poor performance as mainly cyclical. For example, in 2000 a revival in the growth rate of output led to an acceleration of productivity growth. Firms were able to absorb above-trend growth by increasing productivity in a way which to some extent made up for earlier poor productivity growth. Thus our forecast shows a substantial improvement in productivity growth next year continuing into the medium term, as chart 3 shows.

HM Treasury (Budget 2002, p. 191) make a similar assumption. They distinguish trends in output per hour from trends in hours worked, and suggest that growth in output per hour worked is unchanged from its value from 1986-97 of 2.1 per cent per annum. But they make their calculations by comparing productivity at points when the economy was 'on trend' and were working ahead of the most recent national accounts. Their most recent figures relate to the period from early 1997 to 2001Q3. This includes no marked cyclical downswing and is therefore likely to overstate the underlying productivity growth.

With the recent slow growth in mind, and the fact that productivity performance has been disappointing for a while, we discuss below the fiscal consequences of productivity growth 1/4 per cent point lower than our base forecast suggests.

Monetary policy

Expectations of future interest rates started to fall fairly rapidly in June as stock markets weakened and as there started to be the first indications that the international recovery might be slower than expected. Publication of June's weak industrial production data in early August showed that, at the very least, there were doubts about whether trend economic growth had been attained and led to further falls in expected future interest rates. Since then the picture has remained highly uncertain, complicated further by the difficulty in seasonally-adjusting the industrial production and export series in the light of the erratic movements which may have been induced by the Jubilee holiday. Market expectations changed from anticipating a rise in UK interest rates to expecting no change and now, as discussed in the Commentary, giving some hint of an expected reduction. There is also an expectation that interest rates in the Euro Area will be reduced. At the long end of the market the yield on 20-year UK governm ent stocks has fallen from 5.05 per cent per annum in June to 4.50 per cent per annum in mid-October. These changes in themselves represent a substantial easing of monetary policy.

Arguing against a reduction of the short-term interest rate is the state of the housing market. House prices relative to incomes are back to their peak values of the late 1980s. Obviously, with low interest rates, mortgage service costs are much lower now than they were then but it is difficult to feel comfortable about the speed with which house prices are rising and the fact that, except at the very top of the market, price rises show no sign of slowing down.

Our own forecast implies that the most recent weakness of the international economy is unlikely to be of very great duration, although medium-term growth could well be slower than many people hope. All things considered, we expect growth in the UK to pick up to its trend rate next year. Recovering demand should bring inflation back towards its target value. With these points in mind we do not see a strong case for further interest rate reductions. But if the international weakness continues, we can see the need for further cuts in the UK. In particular, if there are marked reductions to interest rates internationally, then it is likely that UK interest rates will also fall. Otherwise there would be a risk that sterling would rise again. Such a movement, particularly against the euro, would be unwelcome.

In our forecast we have assumed that, because of concerns about the housing market and the prospect of accelerating growth, the Monetary Policy Committee does not cut the short-term interest rate. Table 2 shows the projections we make for short-term interest rates at home and abroad, together with their implications for mortgage interest charges, long-term interest rates and the UK exchange rate. The projected movements in these asset prices are calculated from the assumption that financial markets are efficient, so that expected changes to asset prices including exchange rates can be calculated from expected short-term interest rates. The exchange rates and asset prices shown are nevertheless better described as assumptions than as forecasts.

The fiscal position

The fact that the economy has grown more slowly than was expected in April is likely to mean that revenues will be weaker than anticipated then. We expect a shortfall in receipts of just over [pounds sterling]4bn in the present fiscal year. Current expenditure seems to be running in line with the Government plans, so instead of the surplus of [pounds sterling]3bn on the current budget forecast by the Treasury in 2002-3, we expect a deficit of [pounds sterling]1.7bn, with a return to slight surplus next year.

This shortfall does not, on its own, mean that taxes need to be increased. The Government is committed to raising enough current revenues to pay for current spending over the cycle. A deficit in any one year can be offset by surpluses in other years. But when we look at the long-term pattern, the fiscal position appears somewhat gloomy.

The impact of short-term revenue shortfalls on public sector net borrowing is lower because, as ever, investment spending is running below the levels shown in the budget statement. In such circumstances it is a question of judgement whether and when the levels shown in the budget statement are eventually achieved.

The regularity with which investment spending falls short of its planned values raises awkward questions about the management performance of the government.

One particular issue arises from the Private Finance Initiative. This is supposed to be a device for using private finance to provide public capital in exchange for carrying the risks associated with such investments. The return to such private capital is typically greater than the interest charge on public borrowing, so such arrangements are criticised as being expensive to the taxpayer. This criticism maybe misplaced. It is undoubtedly valuable to the taxpayer to avoid risks associated with particular types of investment, and if that risk can be moved to private entrepreneurs for an appropriate fee then taxpayers may benefit. Only if the charges are excessive, or if private sector rates of return are being charged while the risks remain with the taxpayer is the Private Finance Initiative a bad deal for the taxpayer. Internationally there are a number of examples of this type (Barrell and Hubert, 1999). Obviously the chance of this is greater if use of the PFI is doctrinal rather than considered on a case-by -case basis.

A separate virtue of the PFI is supposed to be that it brings private sector management skills to bear on public sector projects. As the Department of Trade and Industry has now recognised, one must never lose sight of the fact that bad management can be found in the private sector as well as in the public sector. But conclusions might be drawn from the way in which public sector producer interests are critical of the use of the PFL

In our forecast we assume that taxes are adjusted in order to maintain fiscal solvency. We begin the adjustment in the latter part of fiscal year 2003-4 and we impose the adjustment gradually so as to bring the budget deficit, as a proportion of GDP, in the long run to the value predicted in Budget 2002 for the fiscal year 2006-7. Thus our forecast, shown in table 3, really indicates what we expect the fiscal outturn to be, as a consequence of the Government's tax and spending policies only for this fiscal year and 2003-4. Beyond then, we need to look at what we expect to happen in the absence of these tax adjustments in order to understand the overall fiscal position.

In chart 4 we show public sector current receipts as a proportion of GDP in our model when no adjustments are made to ensure solvency and as forecast in Budget 2002. Both projections show an increase in the proportion in the next fiscal year as a consequence of the 2 per cent increase in national insurance contributions. But beyond then the Government predicts a continuing increase in receipts as a proportion of income, while we show a modest decline.

There are a number of factors behind the decline which we project. On the expenditure side, government policy plainly implies a change in the pattern of final demand from household consumption towards government consumption. The former forms the bulk of the expenditure tax base while little tax revenue is collected on the latter. So expenditure taxes as a proportion of GDP should be expected to decline unless offset by continuing increases in excise duties or very marked changes in the composition of expenditure towards items that are dutiable. Raising fuel duty is politically difficult, and increases in alcohol and tobacco duties can well be offset by increased cross-border shopping, particularly given a recent court ruling on import of alcohol and tobacco for the importer's own use.

On the income side, we expect to see a change in the distribution of income from the household sector to the corporate sector, as the profit share recovers. The marginal tax rate on corporate profits is lower than that on personal incomes, implying a loss of revenue. While it is possible to think of a number of factors which could make corporation tax revenue more buoyant than we have suggested, it is also quite likely that, with share prices now returned towards normal levels, and interest rates relatively low, the corporate sector will become considerably more geared than it has been. Since interest payments can be offset against tax, this could have the effect of narrowing the tax base.

Finally, we expect the Government's operating surplus to grow marginally more slowly than GDP. This reflects the fact that it continues to sell assets. These changes, taken together, mean that we anticipate revenue will, as a proportion of GDP, be 1.3 per cent lower than the Government has forecast by fiscal year 2006. Our estimates of expenditure are very similar to the Government's, so we see the Government's projected current surplus of 0.7 per cent of GDP being replaced by a deficit of 0.6 per cent of GDP if no new taxes are collected.

We commented above that productivity growth could be lower than we forecast. A shortfall of 0.25 per cent per annum in the future growth rate of productivity compared to that in our forecast would add just under 0.5 per cent of GDP to the current account budget deficit in 2006-7.

Separately, it is likely that the long-term fiscal solvency will require further tax increases to offset the effects of demographic change and to raise the revenue needed to service those debts incurred in financing public investment. We will produce an analysis of these issues ahead of the Budget in our January Review.

Summary of the forecast

GDP is expected to grow by 1.4 per cent this year and 2.5 per cent next year. However, the time profile of output growth means that it is currently growing at, or slightly under, its trend rate. We expect to see a modest increase in the growth rate from its current quarterly value of 0.5-0.6 per cent per quarter to about 0.7 percent per quarter. Manufacturing output is likely to be nearly 4 per cent lower in 2002 than last year. Output does, now, however, seem to have stopped falling and we expect a slow recovery with 2 per cent growth next year supported by expansion of world trade. However, even in 2004 we expect manufacturing output to be below the average level for 2000.

Investment remains weak and is projected to fall by just over 4 per cent this year. The share of investment in GDP at current prices is now low relative to the average figure since 1991. We expect to see a revival in investment next year, with growth of 4 1/2 per cent. This is supported by a more stable output position and an increasing profit share, together with plans for more public sector investment.

Over the year as a whole we expect export volumes to fall by just under 1 per cent. Nevertheless, they should be substantially higher at the end of 2002 than they were at the start. We expect this recovery to continue to give growth of 6 per cent in exports next year. Imports are likely to rise by 1 per cent this year. The revival in economic activity next year is likely to raise their growth rate to 7 per cent.

We see the buoyancy of consumption this year as being mainly a lagged effect of buoyant incomes last year; real disposable incomes grew by 6.5 per cent. This year the growth rate has been much lower, estimated at 2.4 per cent, and we see a modest recovery taking the growth rate of real household disposable income to 3.3 per cent next year. Under these influences household consumption growth (including that of non-profit-making bodies) should moderate to just over 2 1/2 per cent next year, after a rise of over 3 1/4 per cent this year.

Earnings growth, which is estimated at 3.8 per cent for 2002, has been particularly subdued this year. We expect increased pay pressures to lead to growth of nearly 5 per cent in 2003. An improvement in productivity growth, which, with labour input measured on an hourly basis, has grown at only 1.2 per cent this year, and faster overall economic growth nevertheless leave room for a modest improvement in the share of corporate profits in GDP.

The balance of payments position this year is estimated to be more favourable than for some time, with the deficit standing at 1.3 per cent of GDP. This is, in part, a consequence of a decline in import prices, down nearly 2 per cent this year, more than compensating for the increase in import volumes referred to above. Export prices have been maintained, so, despite the loss of volumes, the overall effect has been favourable to the balance of payments. An improvement in the invisibles balance has also helped the balance of payments.

Claimant-count unemployment has continued to fall, although the survey-based measure recommended by the International Labour Office has been increasing very slightly since the middle of last year. We expect both measures to increase over the next two years, with claimant-count unemployment rising above 1 million again.

The underlying inflation rate rose to 2.1 per cent in August and we expect it to creep upwards gradually over the next two years. It should, however, be stressed that monthly figures can be volatile. Our forecast therefore does not rule out the possibility that there will be some months when the inflation rate exceeds its target value of 2.5 per cent per annum, although we do not expect this to happen consistently.

NOTE

(1.) The output and export figures are available only for July and August 2002. For 2002Q3 we show the average of these two months.

REFERENCES

Barrell, R. and Hubert, F, (1999), Modern Budgeting in the Public Sector: Treasury Rules in a Comparative Context, London, NIESR.

Budget 2002, HM Treasury HC592, London, The Stationery Office.

Section II. The forecast in detail

Components of expenditure (table 4)

The data for the second quarter of 2002 and our own flash estimate for the third quarter of 0.5 per cent growth (which is used in this forecast) suggest that the economy is again growing at close to its trend rate. As often happens in combining quarterly movements to produce annual averages, over the four quarters to the end of this year we expect output to rise by 1.8 per cent, as compared to 1.6 per cent in the four quarters to the end of 2001. Nevertheless output at market prices this year is, on average, expected to be only 1.4 per cent higher than in 2001, while last year output grew by 2 per cent.

The second quarter was marked by a sharp reduction in inventories; this had seemed consistent with the view that producers had sold from stock on account of the Jubilee holiday. But the industrial production figures for July and August, which underpin our early estimate of growth, do not suggest that there has been a sharp rebound in the third quarter. The comparison of the output side, measured by our estimate of growth, and the expenditure estimates generated by our model, point to a further reduction of inventory levels in the third quarter.

Public sector consumption grew very rapidly in the first quarter of 2001 but has since fallen back. The public sector is well-known for its urge to spend money towards the end of the financial year. However such effects should be removed in the seasonal adjustment of the data and the move to multi-year budgetary control in the public sector and the pattern in the first half of the year is therefore better seen as ad hoc. Its consequence is that, while we had expected volume growth in public sector consumption of 4.5 per cent in our July forecast produced before the second quarter data were known, we now anticipate an increase of 3.6 per cent in 2002 over 2001. This change depresses the overall rate of growth of the economy by 0.16 per cent in 2002 and is a factor behind the reduction in our estimate of the overall growth rate for 2002 from 1.9 per cent to 1.4 per cent. The growth rates of public consumption shown in these data are typically lower than those promised by the Government. The reason is that the p rice of public consumption tends to rise faster than the GDP deflator which is used in Treasury statements. In the second quarter, costs of public sector consumption were rising at about 5 per cent per annum as compared to the deflator of 2 1/2 per cent used by the Treasury.

Looking ahead, we see the rate of growth accelerating to about 0.7 per cent per quarter from the first quarter of next year onwards. While the growth could be seen as supported by a revival in world trade, led by activity in developing countries such as China and India, it is also true that we anticipate a revival in import volumes, so that, comparing 2003 with 2002, net trade is expected to depress GDP growth in constant prices by about 0.7 per cent with trade continuing to depress growth in 2004. It nevertheless remains the case that, if world trade is weaker than we expect, exports will under-perform and the negative contribution of net trade to UK economic activity will be greater than

we anticipate. From the fourth quarter onwards we expect inventory growth to resume, although for both 2003 and 2004 the rate of inventory accumulation is projected to be lower than it was in each year from 1995 to 2002.

The overall picture we see is one of reasonable economic balance, with the rate of growth of household consumption in constant prices falling to the rate of growth of GDP after three years of growth at more than 4 per cent per annum from 1998 to 2001 and growth at more than 3 per cent per annum this year. We assume that the volume of public consumption will grow from the lower base established in the second quarter of 2002 subject to the limits imposed by current expenditure plans. The dynamics of this mean that public consumption next year is expected to grow by only 2.4 per cent in constant prices, with an acceleration to over 3 per cent per annum occurring in 2004. After three years of weak growth in 1999, 2000 and 2001 and a fall in the volume of gross fixed capital formation this year, we expect to see growth in capital formation resuming next year. But even then fixed capital formation in constant prices is not likely to surpass its level at the start of the new century until the end of 2003. The five y ears from 1999 to 2003 will be a period in which there was very little overall increase in capital formation and in which, therefore, the ratio of capital formation to GDP measured in constant prices will have fallen markedly. It is as a recovery from this that we see relatively rapid growth in capital formation continuing into 2004.

The household sector (table 5)

There are frequent newspaper reports that the consumer boom is coming to an end and our forecast is consistent with this view. It must be remarked that the second quarter saw growth in the volume of consumer spending of 1.4 per cent over the first quarter of the year. The latter was, however, one of stagnation, and a better view of the recent underlying position may be obtained by looking at growth over both quarters. This came to 1.8 per cent, or 3.7 per cent per annum and represents a modest deceleration compared to the rates of growth of consumer spending seen earlier. In establishing what is happening to consumer spending, a part of the problem arises from the fact that there are a number of different indicators which often give conflicting signals. In chart 6 we compare recent movements of consumer spending with those indicated by the retail sales index. It has to be said that quarterly retail sales figures do not yet indicate a slowdown. However the July and August data mean that, unless there has been a surge in sales in September, the growth rate of retail sales is likely to fall well below 1 per cent in the quarter, consistent with our slower forecast for consumption growth but still suggesting that retail sales are growing faster than total consumption. In chart 6 we show for 2002Q3 for retail sales the average of July and August data, September figures being not yet available.

In 2001 consumption growth was supported by the fact that gross disposable income rose by 7 per cent and consumer prices measured by the consumption deflator rose by only 0.5 per cent, so that real incomes increased by 6.5 per cent. In those circumstances it was possible to have both rapid growth in consumption and an increase in the savings ratio. This year growth of real disposable income has slowed to 2.4 per cent, as employee compensation and the other components of disposable income have grown more slowly. In pure arithmetic terms one could not say that household consumption has been supported by wealth effects. House price inflation has picked up sharply, and we expect that the official index of house prices will finish the year over 18 per cent above its level of a year ago. The decline in the value of financial assets has, however, been sharp, falling from [pounds sterling]2400bn at the end of 1999 to [pounds sterling]1600bn at the end of this year. Total wealth including housing has declined much les s, but, despite house price rises, it is still S per cent lower than it was three years ago even before making any adjustment for consumer price inflation. In our consumption model wealth effects are relatively slow acting and we take the view that the momentum of consumption has carried on into this year in the aftermath of last year's rapid income growth. This means that, in the second quarter, the savings ratio dropped to 4.5 per cent as compared to its average of 6.1 per cent for 2001. We expect the savings ratio to recover to just under 6 per cent by the end of this year and to stabilise there. The rate of growth of house prices is expected to decelerate to that of nominal GDP. Since we project stock market movements on the same basis and household financial saving is forecast to be positive, these assumptions imply that household wealth will stop falling.

Nevertheless, the depressing effects of past falls on consumption growth continue to overhang the economy and will remain a mild dampening factor affecting consumption. The major downside risk facing consumption is a sharp rise in the saving ratio. In 1995, at the start of the last leg of the stock market boom, households saved 10 per cent of their incomes, and wealth at the end of the year was 6 times income during the year. At the end of 2002 we forecast wealth of 5.6 times the annualised income of the last quarter and we anticipate a savings rate of only 5.2 per cent. Plainly it is not a high level of overall wealth which is depressing savings. We had in the past considered it possible that many of the tax increases imposed after 1997 had been paid dispro-portionately out of savings and that this had depressed the savings rate. Such an explanation of the fall in the savings rate remains a possibility, but one might expect that, eventually, households would decide that they had to cut back on their consumpt ion to meet the extra tax burden. In making our forecast we assume that this is going to be a gradual process.

While there should be some recovery in the growth rate of real disposable income next year as compared to this year, the increase is expected to underpin the modest recovery to the savings rate rather than to maintain this year's rate of growth of consumer spending.

Fixed investment (table 6)

Business investment has declined for the last six quarters for which we have data (2001Q1-2001Q2) with both manufacturing and non-manufacturing investment being weak. The rates of decline of both have been much less marked this year than they were in 2001 and, with a more stable rate of growth of GDP, there are grounds for believing that the floor has been reached. The decline of the equity market might be seen as a factor limiting investment but concern about sales prospects is probably more important.

While it is easy, at least in qualitative terms, to understand the movements in business investment, the weakness of housing investment last year was very surprising. The boom in house prices would have been expected to encourage house-building. This year it seems to be having its expected effect, with investment in housing likely to be nearly 10 per cent higher than in 2001. From now on we expect the growth rate of housing investment to fall back as the rate of house price increases eases off.

Looking at the economy as a whole, it is fair to say that it experienced a modest investment bubble in the late 1990s. At current prices the share of investment in GDP rose from 16.9 per cent in 1995 (and also the average for 1991Q1-2002Q2) to 18.2 per cent in 1998. By 2001 it had fallen back to 16.7 per cent and in 2002 we expect it to average 15.4 per cent of GDP. It might be thought that the investment boom would leave behind an overhang of capital depressing the investment share in the future. There are two reasons for not expecting the impact of this to be too great.

First of all, much of the extra investment was probably either in goods such as computers and electronic equipment, which depreciate rapidly, or in things which might have a reasonable economic life but which have been written off because they were installed to provide services for which there was no demand. Secondly, while there may have been a surfeit of private sector investment in the late 1990s, there was certainly not a surfeit of public sector investment. Public sector gross investment as a proportion of GDP is intended to be just over 1 per cent point higher than it was in 1998 and 0.8 per cent points higher than it was in 1995. Thus, if one regarded 1995 as a reasonably normal year, ahead of the stock market boom but after the economy had recovered from the recession of the early 1990s, that might be thought to set a reference point for the investment share.

One possible reason why the investment share may be lower is that the profit share has fallen slightly, from an average of 24.1 per cent of GDP for the period 1991Q1-2002Q2 to 22.9 per cent in 2002. These profits are measured gross of depreciation, the impact on profits net of depreciation is considerably larger. But, given the growth in public investment, it seems reasonable that, if the economy grows at its trend rate, the overall share of fixed investment should revive from its current level.

Balance of payments (table 7)

We have already commented that the recovery in UK exports, so marked in the second quarter of this year, seems to have stalled in the third quarter. We expect this pause to be only temporary, with growth in UK exports resuming next year. Since 1999 the United Kingdom has lost market share measured at constant prices; that process is likely to continue this year with UK goods exports expected to be marginally lower than in 2001, while the volume of world trade is likely to be higher. Next year, however, we anticipate that the volume of UK exports will grow slightly faster than world trade, although in fact this reflects relatively high growth of non-manufacturing exports.

Import volumes respond mainly to the state of domestic economic activity and, with GDP expected to grow at around its trend rate next year, we see import growth also recovering to its long-run norm. A slight improvement in export price competitiveness is expected to lead to a modest worsening of the terms of trade.

2002 is expected to show a balance of payments outturn better than for some time, with a deficit of 1.3 per cent of GDP. However, the relatively good performance of the UK economy next year and in 2004, together with stagnation and then decline in the surplus on invisible earnings, means that the balance of payments deficit is expected to increase to 2 per cent of GDP by 2004. The invisibles balance has in the past proved erratic and this gives an inevitable degree of uncertainty to our balance of payments forecast.

Output and productivity (table 8)

The erratic monthly pattern of manufacturing output makes it difficult to establish whether or how far the situation has improved compared to the start of the year. But with figures for July and August available, it is likely that manufacturing output in the third quarter will be slightly larger than it was in the second quarter, after six consecutive quarters of decline. Consistent with our view of world trade, we see this as the start of a very weak recovery in manufacturing output. However, with the growth rare of output considerably lower than the growth rate of exports, manufacturers are continuing to lose sales in the home market. More and more manufacturing industries will be producing solely for export.

The link between the output of public sector services and the consumption of goods and services by the public sector is not as strong as might be expected. While public sector consumption fell sharply between the first and second quarters of this year, output continued to rise. We expect a modest acceleration of output growth in 2003 and 2004.

For several years business services have grown rapidly, but stock market weakness among other factors has contributed to much slower growth this year. We expect to see some improvement in this as the growth rate of the economy returns to trend. But the rapid growth of parts of the sector was fuelled by the stock market boom. In the current environment we expect to see weaker medium-term demand growth for the output of this sector.

Just as the link between public sector consumption and public sector output is weak, so too is the link between gross fixed capital formation and the output of the construction industry. At current prices, buildings and structures (including dwellings) account for 44 per cent of gross fixed capital formation. While construction work also covers maintenance and repair, it is nevertheless surprising that construction output has been buoyant this year while investment is weak. Even with the improvement in investment activity that we anticipate, we do not see the buoyancy of the construction sector being maintained. Growth is likely to be lower next year.

Our model suggests a revival in productivity growth following on from the revival to GDP growth. There is no doubt that the UK now has a large productivity gap compared to where productivity would have been if it had continued to grow at its long-run average since 1995. This is true of both manufacturing and the whole economy. Our forecast suggests that, if GDP is able to grow in the way we suggest, some part of this lost ground can be made up. There are certainly historical parallels for sharp improvements to productivity growth associated with cyclical recovery. Here the recovery is relatively modest, and the poor productivity performance stretches back for several years. Without the productivity improvement we are forecasting, it will not be possible to deliver the GDP growth we anticipate. We have discussed on p. 42 the fiscal consequences of productivity growth being slower than we have forecast.

The labour market (table 9)

The counterpart of poor productivity performance has been employment, which is stable or rising even though output growth has been slow. Unemployment, as measured by the claimant count, has remained below one million for six quarters, and fears that economic slowdown would raise unemployment have not yet materialised. The unemployment rate measured by survey on the ILO basis has, however, increased very modestly since the spring of last year and the proportion of the population of working age who are not employed has risen more markedly. We regard this as the best indicator of labour market tightness of the three measures discussed.

Looking ahead we see very little change in the labour market situation. The population of working age is likely to run slightly ahead of employment. There is a decline in hours worked implicit in our forecast which reconciles the growth in output, the growth in employment and the productivity figures of table 8.

The first results from the recent Census showed many fewer young men in the country than had been expected. Births and deaths are, of course, registered, but records of travel are based on sample surveys of passengers, and the Office for National Statistics has suggested that many of these young men are, at least temporarily, living abroad. If this is true, it affects our estimates of the population of working age. Data on numbers of people employed/self employed are collected from tax sources and survey data, with corrections for the black economy.

The Census can have no implications for the number of properly-recorded employees. It could, and perhaps should, lead to a reduction in the size of the estimated black economy; with fewer people working in this, output in the economy as a whole is likely to be lower than had been thought. On the other hand, because black economy jobs are typically low-productivity jobs, the conclusion from the Census also implies that productivity in the economy as a whole is likely to be slightly higher than had been thought.

However, it is also worth considering that there may be other explanations for the missing men. It is possible, for example, that they did not answer the Census because they wish to conceal themselves from the Child Support Agency, (1) but that they remain a part of the population of working age.

Wages and prices (table 10)

Inflation remains just below its target; the inflation rate excluding mortgage interest payments moves erratically from time to time, but has so far stayed above the lower limit of the inflation band, 1.5 per cent per annum, so the Governor of the Bank of England has so far avoided the need to write an excuse letter. We expect this state of affairs to continue, with inflation rising gradually to its target value in 2004. The circumstances do not justify a reduction in interest rates in order to bring inflation to its target sooner, but equally they mean that there is room to cut interest rates further should the need arise, without a worry that control of inflation will be lost. Given current concerns about deflation, the very low rates of growth of producer prices are likely to attract attention. We note that prices fell between the end of last year and the first quarter of this year, but it would be difficult to say that this caused the slow growth of the first quarter. More pertinently, the average producer output price index fell, year-on-year, in 1998 and 1999, although growth averaged 2.7 per cent per annum over the two years. It is possible that modest falls to prices across the board might cause economic difficulties. But one should not assume that deflationary difficulties are bound to occur or are likely to occur simply because the output prices of some particular sector of the economy happen to fall.

In fact we see room for a modest improvement in profit margins, as a result of our view of productivity growth. Wage moderation in combination with the latter implies that unit labour costs are likely to grow more slowly than they did in the three years to 2001. This should give room for a modest revival of the corporate profit share (table 6).

National and sectoral savings (table II)

This table shows the contribution made by each sector to saving in the economy and the way in which that saving is spent on investment. The excess of investment over saving has to be met by finance from abroad and represents the deficit on the current account of the balance of payments. Both saving and investment are measured gross of depreciation.

The table shows that, since 1999, there has been a downward drift in the proportion of GDP which is saved. This has been more than matched by a downward drift in the share of investment, so that finance from abroad has declined. Looking ahead we see a continuing decline in saving, while there should be a modest recovery in investment.

It is difficult to say that one sector more than another has been clearly responsible for this decline in saving. It is, however, the case that over the period from 1999 to 2004 the decline in government saving will have been the most marked. The decline in corporate saving is largely offset by a projected rise in household saving.

The decline in saving, especially if it continues, should be seen as a cause for concern. Economies that do not save enough for the future are likely to find it difficult to enjoy substantial increases in living standards. It is of course possible to say that the Government should do no net saving (and its position net of depreciation is close to zero) leaving the private sector to decide for itself how much to save as it decides how to divide its resources between current and future consumption. But it is equally possible to argue that the Government should set its surplus or deficit not with reference to its own borrowing and lending (the current position) but with reference to the saving of the nation. An interim stage, which we would welcome, would be for the Government to report annually on the question of national saving and whether, on the basis of what is currently known, saving is adequate to meet the country's future needs.

The medium term (table 12)

While we can confidently expect there to be further disturbances to the economy, it is not possible to say what form they will take or when they will happen. The projection for the economy in the medium term shows how the economy might evolve in the absence of further shocks. We see a medium-term growth rate of 2 1/2 per cent per annum. This is the rate used in making official projections but compares to the Government's real belief that the trend growth rate is now 2 3/4 per cent per annum. We project a declining labour input, with increasing employment offset by declining hours worked; this bridges the gap between our projection for GDP growth and the rate of growth of whole economy output per hour which emerges from our model.

The current account of the balance of payments is expected to remain stable and the government is assumed to meet its targets for public borrowing. As we discuss on page 42 this is, however, achieved through tax increases; the figures do not imply that, with current tax policy, the Government's spending plans are affordable.

Interest rates are expected to rise gradually from the current level of 4 per cent per annum to 5 per cent per annum. This reflects a view that the short-term real rate of interest is about 2 1/2 per cent per annum The recent behaviour of long-term interest rates suggests that the traditional risk premium on long-dated loans has disappeared, and our model shows a long-term interest rate only just above the short-term rare.

This projection assumes that Britain does not join the euro. If we do join it is likely that interest rates and the exchange rate would be lower. Inflation and growth are both likely to be higher during a transition period. Eventually, however, growth will fall back to the rate we are currently projecting, while inflation will probably drop slightly, reflecting the European Central Bank's target.

Forecast errors and the probability distribution (tables 13 and 14)

Table 13 gives summary information on the accuracy of our published forecasts in the fourth quarter of the year for selected key variables. This information can be used in a variety of ways to help assess the uncertainty inherent in the forecast. We can construct prediction intervals for the forecasts assuming a distribution for past and future forecast errors. A rough order of magnitude can be obtained through constructing a 70 per cent confidence interval around the central forecast using plus and minus the average absolute forecast error reported in table 13. For our forecast of 1.4 per cent GDP growth in 2002 this yields a range of 0.9 per cent to 1.9 per cent. This range rises considerably as the forecast horizon increases, so that the 70 per cent error band for growth in 2002 is 1.4 per cent to 3.6 per cent. It is worth noting that the forecast errors provide a reasonable indication of the degree of difficulty associated with forecasting particular variables. Forecasts of investment growth are inherentl y more uncertain than those of consumers' expenditure for instance.

To calculate the probability distribution of our growth and inflation forecasts reported in table 14 we adopt a slightly more sophisticated approach by assuming a parametric density function for the forecasts, typically a normal distribution. This allows us to calculate more accurately the likelihood of the outturn being within a specific range. This is useful when we wish to consider recession possibilities. Also, for the targeted measure of inflation, RPIX, there are key trigger points at which the Governor of the Bank of England is expected to justify why the inflation rate has fallen outside the designated range.

We calculated the standard error of our forecasts and used the normal cumulative density function to evaluate the likelihood of GDP growth rate and RPIX inflation falling within designated bands. For GDP growth the standard error is calculated over the period 1982-2001. For RPIX it is calculated for the period 1994-2001. We should stress that during this period inflation forecasts have been much more accurate than in the past; it is not possible to put a probability on inflation becoming more volatile, and thus inflation forecasts becoming less accurate again. But the risk of this suggests that we may be understating the true error margins.

We calculate that there is now very little chance of inflation being outside the target range of 1.5 to 3.5 per cent per annum in 2002. Next year the chance of inflation being outside the target range is 16 per cent.

The probability of growth this year below 1 per cent is 26 per cent and the chance of a fall in GDP is virtually zero. The risk of output falling in 2003 is put at 4 per cent. Our central forecast is for growth of 2.5 per cent, with a 64 per cent chance that it will exceed 2 per cent.

NOTE

I We are grateful to Colette Bowe for suggesting this.

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Table 1

Contributions to growth in GDP (% of GDP)

 2001 Q2-2002 Q2 2002 Q1-2002 Q2

Consumption 2.8 0.9
Public consumption 0.8 -0.5
Gross fixed capital formation -1.0 0.0
Inventories etc -0.7 -0.7
Exports -0.5 1.1
Less Imports 0.0 0.2
GDP 1.4 0.6
Table 2

Exchange rates and interest rates

 UK exchange rates FT
 Effective Dollar Euro All-share
 index

1999 103.73 1.62 1.52 2918.2
2000 107.52 1.52 1.64 3045.8
2001 105.77 1.44 1.61 2681.2
2002 106.07 1.50 1.60 2199.4
2003 105.90 1.54 1.58 1890.2
2004 104.63 1.50 1.57 1990.5

2001 Q1 104.50 1.46 1.58 2898.3
2001 Q2 106.40 1.42 1.63 2799.9
2001 Q3 106.10 1.44 1.62 2543.4
2001 Q4 106.10 1.44 1.61 2483.1

2002 Q1 106.90 1.43 1.63 2511.0
2002 Q2 105.30 1.46 1.59 2451.5
2002 Q3 105.48 1.55 1.58 2005.0
2002 Q4 106.60 1.56 1.59 1830.0

2002 Q1 106.35 1.55 1.59 1853.8
2003 Q2 106.05 1.54 1.58 1877.9
2003 Q3 105.75 1.53 1.58 1902.3
2003 Q4 105.44 1.52 1.58 1927.0

Percentage changes

1999/98 -0.2 -2.3 2.1 11.1
2000/99 3.7 -6.3 8.2 4.4
2001/00 -1.6 -5.0 -2.1 -12.0
2002/01 0.3 4.1 -0.8 -18.0
2003/02 -0.2 2.4 -0.9 -14.1
2004/03 -1.2 -2.2 -1.0 5.3

2001 Q4/00Q4 -1.4 -0.2 -3.2 -17.7
2002 Q4/01Q4 0.5 7.9 -1.3 -26.3
2003 Q4/02Q4 -1.1 -2.1 -0.9 5.3

 Interest rates
 3-month Mortgage 10-year World (a)
 rates interest gilts

1999 5.45 6.41 5.08 3.22
2000 6.10 6.80 5.31 4.45
2001 4.97 5.88 4.94 3.86
2002 4.03 4.99 4.87 2.88
2003 4.00 4.88 4.53 2.64
2004 4.50 5.23 4.86 3.02

2001 Q1 5.64 6.44 4.81 4.50
2001 Q2 5.23 6.07 5.10 4.16
2001 Q3 4.92 5.83 5.05 3.81
2001 Q4 4.09 5.17 4.79 2.96

2002 Q1 4.01 5.05 5.05 2.87
2002 Q2 4.10 5.02 5.22 2.94
2002 Q3 4.00 4.96 4.70 2.87
2002 Q4 4.00 4.92 4.50 2.83

2002 Q1 4.00 4.91 4.50 2.63
2003 Q2 4.00 4.89 4.50 2.60
2003 Q3 4.00 4.88 4.50 2.62
2003 Q4 4.00 4.86 4.61 2.72

Percentage changes

1999/98
2000/99
2001/00
2002/01
2003/02
2004/03

2001 Q4/00Q4
2002 Q4/01Q4
2003 Q4/02Q4

(a) Weighted average of 3-month interbank rates in other OECD economies.
Table 3

Public sector financial balance and borrowing requirement

[pounds sterling] billion, fiscal years

 2000-01 2001-2

Current expenditure: Goods and services 181.4 197.5
 Net social benefits paid 116.6 125.1
 Debt interest 26.4 22.6
 Subsidies 4.6 5.0
 Other current expenditure 19.3 19.5

 Total 348.4 369.6
Gross investment 17.0 21.2
Net investment 5.6 9.2
(as a % of GDP) 0.6 0.9

Total managed expenditure 367.1 392.2
(as a % of GDP) 38.2 39.3
Current receipts: Taxes on income 161.3 165.2
 Taxes on expenditure 135.1 138.8
 Social security contributions 73.3 76.4
 Gross operating surplus (a) 8.0 8.3
 Other current receipts 4.2 2.9

 Total current receipts 381.9 391.5
 (as a % of GDP) 39.7 39.2

Public sector current balance 20.5 8.4
Public sector net borrowing -15.3 0.1
(as a % of GDP) -1.6 0.0

Financial transactions 21.9 -3.5
Public sector net cash requirement -37.2 3.6
(as a % of GDP) -3.9 0.4
Public sector net debt (% of GDP) 31.3 30.5

GDP deflator at market prices 115.2 117.7
 (1995=100)
Money GDP 961.8 998.3

Financial balance under Maastricht 1.6 0.9
 (calendar year, % of GDP)
Gross debt under Maastricht 42.1 39.1
 (calendar year, % of GDP)

 2002-3 2003-4

Current expenditure: Goods and services 210.2 225.1
 Net social benefits paid 128.1 137.4
 Debt interest 21.5 22.1
 Subsidies 6.9 7.6
 Other current expenditure 24.1 24.9

 Total 390.8 417.0
Gross investment 25.9 32.6
Net investment 11.0 18.1
(as a % of GDP) 1.1 1.7

Total managed expenditure 415.6 449.6
(as a % of GDP) 40.0 41.2
Current receipts: Taxes on income 169.0 178.5
 Taxes on expenditure 143.9 150.8
 Social security contributions 78.7 90.7
 Gross operating surplus (a) 8.4 8.5
 Other current receipts 2.8 4.2

 Total current receipts 402.9 432.7
 (as a % of GDP) 38.8 39.7

Public sector current balance -1.7 1.2
Public sector net borrowing 14.1 16.9
(as a % of GDP) 1.3 1.6

Financial transactions -3.9 -3.9
Public sector net cash requirement 17.9 20.8
(as a % of GDP) 1.7 1.9
Public sector net debt (% of GDP) 31.5 31.8

GDP deflator at market prices 120.4 123.1
 (1995=100)
Money GDP 1039.3 1090.4

Financial balance under Maastricht -1.3 -1.7
 (calendar year, % of GDP)
Gross debt under Maastricht 38.6 38.4
 (calendar year, % of GDP)

 2004-5 2005-6

Current expenditure: Goods and services 239.4 254.3
 Net social benefits paid 146.8 155.7
 Debt interest 22.4 23.2
 Subsidies 8.1 8.5
 Other current expenditure 25.8 26.8

 Total 442.4 468.6
Gross investment 37.3 41.1
Net investment 22.0 24.9
(as a % of GDP) 1.9 2.1

Total managed expenditure 479.7 509.7
(as a % of GDP) 41.6 41.9
Current receipts: Taxes on income 192.9 208.3
 Taxes on expenditure 158.1 165.5
 Social security contributions 96.1 101.5
 Gross operating surplus (a) 8.6 8.7
 Other current receipts 4.8 5.0

 Total current receipts 460.6 489.1
 (as a % of GDP) 40.0 40.2

Public sector current balance 2.8 4.4
Public sector net borrowing 19.1 20.6
(as a % of GDP) 1.7 1.7

Financial transactions -2.9 -1.9
Public sector net cash requirement 22.0 22.4
(as a % of GDP) 1.9 1.8
Public sector net debt (% of GDP) 31.9 32.1

GDP deflator at market prices 126.5 130.0
 (1995=100)
Money GDP 1151.8 1215.7

Financial balance under Maastricht -1.7 -1.8
 (calendar year, % of GDP)
Gross debt under Maastricht 37.9 37.5
 (calendar year, % of GDP)

 2006-7

Current expenditure: Goods and services 269.5
 Net social benefits paid 165.5
 Debt interest 23.3
 Subsidies 8.9
 Other current expenditure 27.2

 Total 494.5
Gross investment 44.3
Net investment 27.2
(as a % of GDP) 2.1

Total managed expenditure 538.7
(as a % of GDP) 42.1
Current receipts: Taxes on income 224.0
 Taxes on expenditure 172.7
 Social security contributions 106.7
 Gross operating surplus (a) 8.8
 Other current receipts 5.3

 Total current receipts 517.5
 (as a % of GDP) 40.5

Public sector current balance 6.0
Public sector net borrowing 21.2
(as a % of GDP) 1.7

Financial transactions -1.5
Public sector net cash requirement 22.7
(as a % of GDP) 1.8
Public sector net debt (% of GDP) 32.3

GDP deflator at market prices 133.2
 (1995=100)
Money GDP 1278.6

Financial balance under Maastricht -1.7
 (calendar year, % of GDP)
Gross debt under Maastricht 37.2
 (calendar year, % of GDP)

Note: Public sector current balance is total current receipts less total
current expenditure and depreciation.

(a) General government.
Table 4

Gross domestic product and components of expenditure

[pounds sterling] billion, 1995 prices, seasonally adjusted

 Final consumption Gross
 capital
 expenditure formation

 Households General Gross
 & NPISH (a) gov't fixed in-
 vestment

1999 537.5 149.4 149.1
2000 565.3 152.5 152.0
2001 588.4 157.2 152.4
2002 608.1 162.9 146.1
2003 624.1 166.7 152.5
2004 639.5 172.3 160.4

2001 Q1 145.1 39.0 38.7
2001 Q2 146.2 38.5 38.5
2001 Q3 147.7 39.5 38.2
2001 Q4 149.4 40.2 37.0

2002 Q1 150.1 41.4 36.4
2002 Q2 152.1 40.3 36.4
2002 Q3 152.8 40.5 36.4
2002 Q4 153.2 40.7 36.9

2003 Q1 154.4 41.1 37.4
2003 Q2 155.6 41.5 37.9
2003 Q3 156.6 41.9 38.4
2003 Q4 157.5 42.3 38.9

Percentage changes
1999/98 4.5 3.1 0.6
2000/99 5.2 2.1 1.9
2001/00 4.1 3.1 0.3
2002/01 3.3 3.6 -4.2
2003/02 2.6 2.4 4.4
2004/03 2.5 3.4 5.2

2001Q4/00Q4 4.2 5.3 -6.9
2002Q4/01Q4 2.5 1.1 -0.2
2003Q4/02Q4 2.8 3.9 5.4

 Gross capital Domestic Total Total
 formation demand exports final
 expendi-
 Changes in ture
 inventories (b)


1999 6.5 842.5 258.9 1101.4
2000 6.0 875.8 285.1 1160.9
2001 0.7 898.8 288.6 1186.6
2002 -0.6 916.4 286.5 1201.9
2003 0.8 944.2 304.2 1247.4
2004 1.2 973.4 325.4 1297.9

2001 Q1 0.1 222.9 74.8 297.5
2001 Q2 0.7 223.9 73.2 297.0
2001 Q3 -0.4 225.1 70.9 295.7
2001 Q4 0.3 226.9 69.8 296.4

2002 Q1 0.5 228.4 69.7 297.8
2002 Q2 -0.9 227.8 72.1 299.7
2002 Q3 -0.5 229.2 72.1 301.0
2002 Q4 0.2 230.9 72.7 303.4

2003 Q1 0.2 233.1 74.2 307.1
2003 Q2 0.2 235.1 75.4 310.3
2003 Q3 0.2 237.0 76.6 313.4
2003 Q4 0.2 238.9 77.9 316.5

Percentage changes
1999/98 3.6 5.3 4.0
2000/99 3.9 10.1 5.4
2001/00 2.6 1.2 2.2
2002/01 2.0 -0.7 1.3
2003/02 3.0 6.2 3.8
2004/03 3.1 7.0 4.0

2001Q4/00Q4 2.3 -5.0 0.4
2002Q4/01Q4 1.8 4.2 2.4
2003Q4/02Q4 3.4 7.2 4.3

 Total Residual GDP Adjust- GDP
 imports at ment to at
 market basic basic
 prices prices prices



1999 296.7 0.0 804.7 88.9 715.9
2000 331.4 0.0 829.5 91.8 737.7
2001 340.8 -0.8 845.8 95.2 750.6
2002 344.1 -1.0 857.8 99.9 757.9
2003 368.0 -1.0 879.4 102.9 776.6
2004 393.8 -1.0 904.0 106.1 797.9

2001 Q1 87.1 -0.2 210.4 23.3 187.2
2001 Q2 85.8 -0.2 211.2 23.6 187.6
2001 Q3 83.8 -0.2 211.9 24.0 187.9
2001 Q4 84.1 -0.2 212.3 24.4 188.0

2002 Q1 85.2 -0.2 212.6 24.7 187.9
2002 Q2 85.7 -0.2 214.0 25.0 189.0
2002 Q3 85.9 -0.2 215.1 25.1 190.0
2002 Q4 87.3 -0.2 216.1 25.1 191.0

2003 Q1 89.4 -0.2 217.7 25.4 192.3
2003 Q2 91.2 -0.2 219.1 25.6 193.5
2003 Q3 92.9 -0.2 220.6 25.8 194.8
2003 Q4 94.5 -0.2 222.1 26.0 196.0

Percentage changes
1999/98 8.7 2.4 4.4 2.2
2000/99 11.7 3.1 3.3 3.1
2001/00 2.8 2.0 3.7 1.8
2002/01 1.0 1.4 5.0 1.0
2003/02 6.9 2.5 2.9 2.5
2004/03 7.0 2.8 3.2 2.7

2001Q4/00Q4 -2.5 1.6 5.2 1.1
2002Q4/01Q4 3.8 1.8 3.1 1.6
2003Q4/02Q4 8.3 2.7 3.6 2.6

Notes: (a) Non-profit institutions serving households.

(b) Including acquisitions less disposals of valuables and quarterly
alignment adjustment.
Table 5

Household income and expenditure

Seasonally adjusted


 Average (a) Compensation
 earnings of
 employees
 1995 = 100 [pounds sterling]
 billion, current
 prices

1999 118.0 492.7
2000 123.8 524.9
2001 130.1 556.3
2002 135.1 578.1
2003 141.6 607.8
2004 147.9 637.1

2001 Q1 129.1 137.7
2001 Q2 129.4 138.3
2001 Q3 130.5 139.5
2001 Q4 131.6 140.7

2002 Q1 133.1 142.3
2002 Q2 134.3 143.5
2002 Q3 135.7 145.2
2002 Q4 137.3 147.0

2003 Q1 138.9 148.9
2003 Q2 141.1 151.3
2003 Q3 142.6 153.0
2003 Q4 144.0 154.7

Percentage changes

1999/98 3.9 5.9
2000/99 4.9 6.5
2001/00 5.1 6.0
2002/01 3.8 3.9
2003/02 4.9 5.1
2004/03 4.4 4.8

2001Q4/00Q4 3.4 3.8
2002Q4/01Q4 4.3 4.5
2003Q4/02Q4 4.9 5.2

 Gross Real
 disposable household
 income disposable
 income (b)
 [pounds sterling] billion, [pounds sterling]
 current prices billion, 1995 prices

1999 608.5 552.8
2000 640.7 578.0
2001 685.5 615.9
2002 709.3 630.8
2003 746.6 651.2
2004 778.9 664.7

2001 Q1 169.7 152.9
2001 Q2 170.1 152.8
2001 Q3 171.3 153.6
2001 Q4 174.4 156.5

2002 Q1 174.7 155.9
2002 Q2 176.1 157.2
2002 Q3 177.9 157.9
2002 Q4 180.7 159.7

2003 Q1 183.2 161.1
2003 Q2 185.7 162.5
2003 Q3 188.0 163.5
2003 Q4 189.7 164.1

Percentage changes

1999/98 5.5 3.8
2000/99 5.3 4.6
2001/00 7.0 6.5
2002/01 3.5 2.4
2003/02 5.2 3.2
2004/03 4.3 2.1

2001Q4/00Q4 6.7 6.6
2002Q4/01Q4 3.6 2.0
2003Q4/02Q4 5.0 2.8

 Final consumption
 expenditure Savings
 ratio (c)
 Total Durable
 [pounds sterling] billion, 1995 per cent
 prices

1999 537.5 69.4 5.1
2000 565.3 76.4 4.2
2001 588.4 86.0 6.1
2002 608.1 92.8 5.2
2003 624.1 99.4 5.8
2004 639.5 104.6 5.7

2001 Q1 145.1 20.9 6.9
2001 Q2 146.2 21.0 6.2
2001 Q3 147.7 21.6 5.7
2001 Q4 149.4 22.5 5.8

2002 Q1 150.1 22.5 5.8
2002 Q2 152.1 23.2 4.5
2002 Q3 152.8 23.4 4.9
2002 Q4 153.2 23.7 5.7

2003 Q1 154.4 24.2 5.7
2003 Q2 155.6 24.7 5.8
2003 Q3 156.6 25.1 5.8
2003 Q4 157.5 25.4 5.7

Percentage changes

1999/98 4.5 9.7
2000/99 5.2 10.1
2001/00 4.1 12.5
2002/01 3.3 7.9
2003/02 2.6 7.1
2004/03 2.5 5.2

2001Q4/00Q4 4.2 12.6
2002Q4/01Q4 2.5 5.5
2003Q4/02Q4 2.8 7.2

 Net Total
 House financial net
 prices (d) assets worth (e)

 1995 = 100 [pounds sterling] billion

1999 139.4 2449.8 4278.6
2000 160.2 2406.4 4458.8
2001 173.2 2012.9 4137.0
2002 197.7 1591.6 4090.4
2003 214.9 1633.8 4272.0
2004 223.7 1682.3 4420.1

2001 Q1 166.5 2169.0 4258.1
2001 Q2 172.5 2143.5 4264.0
2001 Q3 178.7 1898.4 4030.6
2001 Q4 175.1 2012.9 4137.0

2002 Q1 181.6 2012.1 4210.6
2002 Q2 196.2 1828.9 4199.8
2002 Q3 206.0 1710.6 4196.7
2002 Q4 207.2 1591.6 4090.4

2003 Q1 210.5 1611.0 4148.0
2003 Q2 213.6 1623.2 4196.8
2003 Q3 216.4 1632.8 4240.6
2003 Q4 218.9 1633.8 4272.0

Percentage changes

1999/98 10.9 19.6 17.2
2000/99 14.9 -1.8 4.2
2001/00 8.1 -16.4 -7.2
2002/01 14.2 -20.9 -1.1
2003/02 8.7 2.7 4.4
2004/03 4.1 3.0 3.5

2001Q4/00Q4 4.6 -16.4 -7.2
2002Q4/01Q4 18.3 -20.9 -1.1
2003Q4/02Q4 5.6 2.7 4.4

Notes: (a) Average earnings equals total labour compensation divided by
the number of employees in employment.

(b) Deflated by consumers' expenditure deflator.

(c) Includes adjustment for change in net equity of households in
pension funds.

(d) Office of the Deputy Prime Minister, mix adjusted.

(e) Excluding household sector intangible assets.
Table 6

Forecasts of fixed investment

[pounds sterling] billion, 1995 prices, seasonally adjusted

 Business investment

 Manufacturing Non-manufacturing Total

1999 17.7 94.3 112.0
2000 17.9 96.1 114.0
2001 17.0 98.1 115.0
2002 15.3 88.8 104.1
2003 15.7 90.9 106.6
2004 16.3 94.8 111.1

2001 Q1 4.5 24.9 29.3
2001 Q2 4.4 24.8 29.2
2001 Q3 4.0 24.9 28.9
2001 Q4 4.1 23.5 27.6

2002 Q1 3.7 22.4 26.1
2002 Q2 3.8 22.2 26.0
2002 Q3 3.8 22.0 25.9
2002 Q4 3.9 22.2 26.0

2003 Q1 3.9 22.4 26.3
2003 Q2 3.9 22.6 26.5
2003 Q3 3.9 22.8 26.8
2004 Q4 4.0 23.1 27.1

Percentage changes

1999/98 -14.6 5.3 1.6
2000/99 1.0 2.0 1.8
2001/00 -5.1 2.1 0.9
2002/01 -9.9 -9.5 -9.5
2003/02 2.8 2.4 2.5
2004/03 3.6 4.3 4.2

2001Q4/00Q4 -9.4 -8.2 -8.4
2002Q4/01Q4 -4.7 -5.9 -5.7
2003Q4/02Q4 2.7 4.3 4.1

 Private General Total User cost
 housing (a) government of capital
 (%)

1999 25.7 11.4 149.1 11.4
2000 26.0 12.1 152.0 11.4
2001 24.9 12.5 152.4 11.1
2002 27.4 14.6 146.1 10.9
2003 28.6 17.3 152.5 10.5
2004 29.3 20.0 160.4 10.8


2001 Q1 6.3 3.1 38.7 10.9
2001 Q2 6.1 3.2 38.5 11.1
2001 Q3 6.2 3.1 38.2 11.2
2001 Q4 6.3 3.1 37.0 11.1

2002 Q1 6.7 3.5 36.4 11.3
2002 Q2 6.9 3.4 36.4 11.2
2002 Q3 6.8 3.7 36.4 10.7
2002 Q4 6.9 3.9 36.9 10.5

2003 Q1 7.1 4.1 37.4 10.5
2003 Q2 7.1 4.2 37.9 10.5
2003 Q3 7.2 4.4 38.4 10.5
2004 Q4 7.2 4.6 38.9 10.6

Percentage changes

1999/98 -2.8 -0.8 0.6
2000/99 0.8 5.3 1.9
2001/00 -4.0 3.5 0.3
2002/01 9.9 17.3 -4.2
2003/02 4.4 18.3 4.4
2004/03 2.4 15.7 5.2

2001Q4/00Q4 0.4 -7.1 -6.9
2002Q4/01Q4 9.7 28.8 -0.2
2003Q4/02Q4 4.7 15.8 5.4

 Corporate
 profit share
 of GDP (%)

1999 24.3
2000 24.3
2001 23.0
2002 22.9
2003 23.0
2004 23.4

2001 Q1 23.2
2001 Q2 22.4
2001 Q3 23.0
2001 Q4 23.5

2002 Q1 23.5
2002 Q2 22.7
2002 Q3 22.5
2002 Q4 22.8

2003 Q1 22.9
2003 Q2 22.9
2003 Q3 23.0
2004 Q4 23.1

Percentage changes

1999/98
2000/99
2001/00
2002/01
2003/02
2004/03

2001Q4/00Q4
2002Q4/01Q4
2003Q4/02Q4

(a) Includes private sector transfer costs of non-produced assets.
Table 7

Balance of payments: current account

Seasonally adjusted

 Exports Exports
 of manufactures of goods
 [pounds sterling] billion at 1995
 prices) (a)

1999 163.9 189.5
2000 184.8 211.4
2001 190.2 216.2
2002 188.5 216.1
2003 202.5 233.5
2004 218.6 251.8

2001 Q1 49.6 56.3
2001 Q2 48.2 54.7
2001 Q3 46.5 53.0
2001 Q4 45.8 52.2

2002 Q1 45.7 51.8
2002 Q2 47.8 54.5
2002 Q3 47.2 54.5
2002 Q4 47.8 55.2

2003 Q1 49.2 56.8
2003 Q2 50.1 57.8
2003 Q3 51.1 58.9
2003 Q4 52.1 60.0

Percentage changes

1999/98 5.1 4.3
2000/99 12.7 11.5
2001/00 2.9 2.3
2002/01 -0.9 0.0
2003/02 7.4 8.1
2004/03 7.9 7.8

2001 Q4/00 Q4 -5.3 -5.1
2002 Q4/01 Q4 4.4 5.8
2003 Q4/02 Q4 9.0 8.8

 Imports Imports Terms of
 of manufactures of goods trade (b)
 [pounds sterling] billion
 at 1995 prices) (a)

1999 199.5 233.9 107.5
2000 225.5 262.3 108.6
2001 234.6 272.4 109.0
2002 235.4 273.7 112.1
2003 253.0 294.4 110.7
2004 272.5 317.0 110.6

2001 Q1 60.5 69.9 109.1
2001 Q2 59.1 68.7 109.0
2001 Q3 57.5 66.7 106.3
2001 Q4 57.5 67.1 111.5

2002 Q1 58.3 67.7 113.9
2002 Q2 58.9 68.3 112.5
2002 Q3 58.6 68.3 110.5
2002 Q4 59.6 69.4 111.7

2003 Q1 61.3 71.4 111.2
2003 Q2 62.6 72.9 111.0
2003 Q3 63.9 74.4 110.6
2003 Q4 65.1 75.8 110.2

Percentage changes

1999/98 8.8 7.7 0.7
2000/99 13.1 12.1 1.1
2001/00 4.0 3.8 0.3
2002/01 0.3 0.5 2.9
2003/02 7.5 7.6 -1.3
2004/03 7.7 7.7 -0.1

2001 Q4/00 Q4 -2.5 -2.1 2.5
2002 Q4/01 Q4 3.6 3.5 0.3
2003 Q4/02 Q4 9.3 9.1 -1.4

 Export price Goods Invisibles
 competitiveness (d) balance
 [pounds sterling] (billion)

1999 114.4 -27.4 7.6
2000 115.8 -30.3 11.1
2001 116.2 -33.5 12.5
2002 117.4 -28.8 15.5
2003 116.4 -32.0 15.7
2004 114.9 -34.2 11.3

2001 Q1 114.3 -7.9 4.2
2001 Q2 116.1 -8.9 2.6
2001 Q3 117.0 -8.4 4.0
2001 Q4 117.4 -8.4 1.6

2002 Q1 117.7 -7.9 4.1
2002 Q2 116.7 -6.5 2.5
2002 Q3 117.2 -7.3 3.9
2002 Q4 118.1 -7.0 5.0

2003 Q1 117.3 -7.4 4.4
2003 Q2 116.6 -7.8 4.1
2003 Q3 116.1 -8.3 3.8
2003 Q4 115.7 -8.5 3.5

Percentage changes

1999/98 0.7
2000/99 1.2
2001/00 0.4
2002/01 1.1
2003/02 -0.9
2004/03 -1.3

2001 Q4/00 Q4 2.1
2002 Q4/01 Q4 0.6
2003 Q4/02 Q4 -2.1

 Current Current World
 balance balance (% of GDP) trade (c)
 [pounds 1994=100
 sterling]
 (billion)

1999 -19.7 -2.2 145.9
2000 -19.2 -2.0 165.7
2001 -21.1 -2.1 165.4
2002 -13.3 -1.3 169.6
2003 -16.3 -1.5 182.3
2004 -22.9 -2.0 196.9

2001 Q1 -3.6 -1.5 167.3
2001 Q2 -6.3 -2.5 165.4
2001 Q3 -4.4 -1.8 164.5
2001 Q4 -6.8 -2.7 164.3

2002 Q1 -3.8 -1.5 165.6
2002 Q2 -4.0 -1.6 168.6
2002 Q3 -3.4 -1.3 171.3
2002 Q4 -2.1 -0.8 173.0

2003 Q1 -3.0 -1.1 177.0
2003 Q2 -3.8 -1.4 180.6
2003 Q3 -4.5 -1.7 183.9
2003 Q4 -5.0 -1.8 187.7

Percentage changes

1999/98 6.8
2000/99 13.6
2001/00 -0.2
2002/01 2.6
2003/02 7.5
2004/03 8.0

2001 Q4/00 Q4 -6.6
2002 Q4/01 Q4 5.3
2003 Q4/02 Q4 8.5

Notes: (a) Balance of payments basis.

(b) Ratio of average value of exports of goods to imports of goods, 1995
= 100.

(c) UK export market weights.

(d) A rise denotes a loss in UK competitiveness 1994 = 100.
Table 8

Output and productivity

Seasonally adjusted, 1995=100

 Sectoral output (a)

 Manufac- Public Disri- Business
 turing bution services

 (0.218) (0.224) (0.145) (0.142)

1999 103.1 107.5 116.0 127.3
2000 105.2 109.6 118.5 133.2
2001 102.7 112.1 121.5 140.1
2002 98.8 114.5 125.4 142.2
2003 100.8 117.9 129.1 147.2
2004 103.1 121.6 132.3 152.3

2001 Q1 105.6 111.1 120.7 137.0
2001 Q2 103.4 111.8 120.9 140.4
2001 Q3 102.1 112.4 121.4 141.2
2001 Q4 99.8 113.2 123.0 141.6

2002 Q1 98.7 113.7 123.5 140.4
2002 Q2 97.9 114.3 125.1 141.6
2002 Q3 99.1 114.7 126.4 142.8
2002 Q4 99.5 115.2 126.8 144.0

2003 Q1 100.1 116.2 127.7 145.2
2003 Q2 100.5 117.3 128.7 146.5
2003 Q3 101.0 118.4 129.6 147.8
2003 Q4 101.5 119.5 130.3 149.1

Percentage changes

1999/98 0.3 1.9 2.8 4.7
2000/99 2.0 1.9 2.2 4.6
2001/00 -2.3 2.3 2.5 5.2
2002/01 -3.8 2.1 3.2 1.5
2003/02 2.0 3.0 2.9 3.5
2004/03 2.3 3.2 2.5 3.5

2001 Q4/00Q4 -6.1 2.6 2.9 5.4
2002 Q4/01Q4 -0.3 1.7 3.0 1.7
2003 Q4/02Q4 2.0 3.8 2.8 3.6

 Sectoral output (a) GDP (b)

 Construct- Oil Rest Total Per
 ion hour (c)

 (0.052) (0.021) (0.198)

1999 107.8 112.2 113.3 111.9 106.6
2000 109.7 110.7 119.6 115.3 109.1
2001 113.6 105.2 122.1 117.3 110.0
2002 120.7 100.4 123.8 118.4 111.4
2003 122.7 102.6 125.5 121.4 114.5
2004 124.7 104.3 128.8 124.7 117.5

2001 Q1 111.5 103.2 122.2 117.0 109.7
2001 Q2 112.9 108.2 121.6 117.2 109.7
2001 Q3 114.1 107.6 122.0 117.4 110.1
2001 Q4 116.1 102.0 122.7 117.5 110.6

2002 Q1 119.5 100.2 122.9 117.5 110.3
2002 Q2 120.9 106.5 123.3 118.1 111.0
2002 Q3 121.1 95.8 124.1 118.8 111.8
2002 Q4 121.2 99.0 124.9 119.4 112.4

2003 Q1 121.8 102.0 125.0 120.2 113.2
2003 Q2 122.4 102.4 125.2 121.0 114.1
2003 Q3 123.0 102.8 125.6 121.7 114.9
2003 Q4 123.5 103.2 126.2 122.5 115.7

Percentage changes

1999/98 0.8 4.4 2.0 2.2 1.4
2000/99 1.8 -1.3 5.6 3.1 2.3
2001/00 3.6 -4.9 2.1 1.8 0.9
2002/01 6.2 -4.6 1.4 1.0 1.2
2003/02 1.7 2.2 1.4 2.5 2.8
2004/03 1.6 1.6 2.6 2.7 2.6

2001 Q4/00Q4 6.3 -0.9 0.8 1.1 1.3
2002 Q4/01Q4 4.4 -2.9 1.8 1.6 1.6
2003 Q4/02Q4 1.9 4.3 1.1 2.6 2.9

 GDP (b)

 Manufacturing
 productivity (c)



1999 104.2
2000 109.4
2001 110.7
2002 110.2
2003 113.5
2004 118.2

2001 Q1 112.2
2001 Q2 110.7
2001 Q3 110.6
2001 Q4 109.2

2002 Q1 109.2
2002 Q2 109.1
2002 Q3 111.0
2002 Q4 111.5

2003 Q1 111.7
2003 Q2 112.9
2003 Q3 114.0
2003 Q4 115.2

Percentage changes

1999/98 3.9
2000/99 5.0
2001/00 1.2
2002/01 -0.5
2003/02 2.9
2004/03 4.2

2001 Q4/00Q4 -2.7
2002 Q4/01Q4 2.1
2003 Q4/02Q4 3.3

Notes:

(a) 1995 share of output in parentheses.

(b) Gross value added at constant 1995 basic prices.

(c) Including self-employment.
Table 9

The UK labour market

Seasonally adjusted, millions

 Employment, thousands (a)


 Self Training
 Employees employment schemes Total

1999 25141 3475 335 28952
2000 25524 3432 325 29282
2001 25733 3433 302 29468
2002 25766 3463 300 29528
2003 25836 3478 301 29616
2004 25937 3490 301 29728

2001 Q1 25695 3424 315 29434
2001 Q2 25746 3439 305 29490
2001 Q3 25744 3438 294 29476
2001 Q4 25748 3430 295 29473

2002 Q1 25764 3435 295 29493
2002 Q2 25734 3477 301 29512
2002 Q3 25773 3468 301 29542
2002 Q4 25794 3471 301 29566

2003 Q1 25818 3474 301 29593
2003 Q2 25833 3477 301 29611
2003 Q3 25840 3480 301 29621
2003 Q4 25854 3483 301 29638

Percentage changes

1999/98 1.9 -1.3 -2.4 1.5
2000/99 1.5 -1.2 -2.9 1.1
2001/00 0.8 0.0 -7.1 0.6
2002/01 0.1 0.9 -0.9 0.2
2003/02 0.3 0.4 0.5 0.3
2004/03 0.4 0.3 0.0 0.4

2001Q4/00Q4 0.4 0.3 -7.8 0.3
2002Q4/01Q4 0.2 1.2 2.0 0.3
2003Q4/02Q4 0.2 0.3 0.0 0.2

 Claimant unemployment, Participation,
 thousands
 thousands

 Civilian
 Total Longterm (c) workforce (d)

1999 1248 522 30200
2000 1089 422 30370
2001 970 348 30438
2002 955 309 30483
2003 1022 313 30638
2004 1075 310 30803

2001 Q1 995 312 30428
2001 Q2 974 372 30464
2001 Q3 954 353 30430
2001 Q4 958 356 30432

2002 Q1 948 271 30441
2002 Q2 952 334 30464
2002 Q3 951 309 30493
2002 Q4 969 321 30534

2003 Q1 983 293 30576
2003 Q2 1006 322 30617
2003 Q3 1038 321 30658
2003 Q4 1062 317 30700

Percentage changes

1999/98 -7.4 -13.5 1.1
2000/99 -12.8 -19.2 0.6
2001/00 -10.9 -17.4 0.2
2002/01 -1.6 -11.3 0.1
2003/02 7.0 1.4 0.5
2004/03 5.2 -1.0 0.5

2001Q4/00Q4 -7.5 -12.5 0.0
2002Q4/01Q4 1.1 -9.7 0.3
2003Q4/02Q4 9.6 -1.3 0.5

 Participation, thousands Underutilisation %
 (b)

 Population ILO
 of working unemployment
 Inactive age rate

1999 5529 36301 6.0
2000 5608 36553 5.5
2001 5798 36811 5.1
2002 5949 37055 5.2
2003 6049 37311 5.4
2004 6099 37530 5.5

2001 Q1 5730 36716 5.1
2001 Q2 5768 36781 5.0
2001 Q3 5816 36844 5.1
2001 Q4 5877 36902 5.1

2002 Q1 5912 36958 5.1
2002 Q2 5919 37016 5.2
2002 Q3 5969 37089 5.2
2002 Q4 5997 37156 5.2

2003 Q1 6021 37221 5.3
2003 Q2 6041 37283 5.3
2003 Q3 6059 37342 5.4
2003 Q4 6073 37399 5.5

Percentage changes

1999/98 -2.3 0.6
2000/99 1.4 0.7
2001/00 3.4 0.7
2002/01 2.6 0.7
2003/02 1.7 0.7
2004/03 0.8 0.6

2001Q4/00Q4 3.3 0.7
2002Q4/01Q4 2.1 0.7
2003Q4/02Q4 1.3 0.7

 Underutilisation % (b)

 Claimant Population
 unemployment not employed
 rate rate

1999 4.1 20.2
2000 3.6 19.9
2001 3.2 19.9
2002 3.1 20.3
2003 3.3 20.6
2004 3.5 20.8

2001 Q1 3.3 19.8
2001 Q2 3.2 19.8
2001 Q3 3.1 20.0
2001 Q4 3.1 20.1

2002 Q1 3.1 20.2
2002 Q2 3.1 20.3
2002 Q3 3.1 20.3
2002 Q4 3.2 20.4

2003 Q1 3.2 20.5
2003 Q2 3.3 20.6
2003 Q3 3.4 20.7
2003 Q4 3.5 20.8

Percentage changes

1999/98
2000/99
2001/00
2002/01
2003/02
2004/03

2001Q4/00Q4
2002Q4/01Q4
2003Q4/02Q4

Notes: (a) Includes self-employed, excludes HM Forces. Average figure
per quarter.

(b) The population not employed is defined as the ratio of the inactive
population plus ILO unemployment to the population of working age.

(c) Over six months.

(d) Employment plus claimant unemployment.
Table 10

Price indices

Seasonally adjusted, 1995=100


 Whole-
 Unit sale Word Consumer
 labor Imports price oil price
 costs deflator index (b) price index
 ($) (c)

1999 113.9 85.0 101.6 17.3 110.1
2000 117.7 85.6 102.4 27.1 110.8
2001 122.3 85.4 102.6 23.5 111.3
2002 125.3 83.7 103.0 24.8 112.5
2003 128.5 84.3 104.0 26.0 114.6
2004 131.0 85.4 105.7 23.0 117.2

2001 Q1 121.7 86.0 102.5 24.6 111.0
2001 Q2 121.8 86.7 102.5 26.1 111.3
2001 Q3 122.5 85.4 102.7 24.5 111.5
2001 Q4 123.2 83.4 102.7 18.7 111.4

2002 Q1 124.5 82.7 102.6 20.5 112.0
2002 Q2 124.7 84.4 102.9 24.6 112.0
2002 Q3 125.6 84.1 103.1 26.1 112.6
2002 Q4 126.5 83.7 103.3 28.0 113.2

2003 Q1 127.2 84.1 103.5 28.0 113.7
2003 Q2 128.4 84.3 103.9 27.0 114.3
2003 Q3 129.0 84.4 104.2 25.0 114.9
2003 Q4 129.5 84.6 104.6 24.0 115.6

Percentage changes

1999/98 3.5 -2.5 -0.3 40.2 1.6
2000/99 3.3 0.6 0.8 56.3 0.7
2001/00 3.9 -0.2 0.2 -13.3 0.4
2002/01 2.5 -1.9 0.4 5.6 1.0
2003/02 2.6 0.7 1.0 4.8 1.9
2004/03 2.0 1.3 1.6 -11.6 2.2

2001 Q4/00Q4 2.2 -3.4 0.0 -34.1 0.1
2002 Q4/01Q4 2.7 0.3 0.6 49.2 1.6
2003 Q4/02Q4 2.4 1.1 1.3 -14.3 2.1

 Retail price index (a)

 Harmonised Excluding Excluding
 index of All mortgage mortgage
 consumer items interest interest &
 price indirect taxes

1999 104.8 111.0 111.1 108.7
2000 105.6 114.2 113.4 110.7
2001 106.9 116.3 115.8 113.3
2002 108.2 118.0 118.2 115.7
2003 110.0 120.8 120.9 118.3
2004 112.1 124.4 123.9 121.2

2001 Q1 105.7 115.2 114.2 111.5
2001 Q2 107.3 116.7 116.2 113.6
2001 Q3 107.3 116.7 116.4 114.0
2001 Q4 107.4 116.6 116.6 114.2

2002 Q1 107.4 116.7 116.9 114.6
2002 Q2 108.3 118.1 118.3 115.7
2002 Q3 108.4 118.4 118.6 116.1
2002 Q4 108.8 118.9 119.1 116.5

2003 Q1 109.3 119.3 119.4 116.8
2003 Q2 109.7 120.8 120.9 118.3
2003 Q3 110.2 121.2 121.3 118.7
2003 Q4 110.8 l21.9 121.9 119.3

Percentage changes

1999/98 1.4 1.6 2.3 1.6
2000/99 0.8 2.9 2.1 1.8
2001/00 1.2 1.8 2.1 2.4
2002/01 1.2 1.5 2.1 2.1
2003/02 1.6 2.4 2.2 2.2
2004/03 1.9 3.0 2.5 2.5

2001 Q4/00Q4 1.0 1.0 2.0 2.4
2002 Q4/01Q4 1.3 2.0 2.1 2.0
2003 Q4/02Q4 1.8 2.5 2.4 2.4


 GDP
 deflator
 (market
 prices


1999 112.1
2000 114.6
2001 116.8
2002 120.0
2003 122.4
2004 125.7

2001 Q1 116.0
2001 Q2 116.7
2001 Q3 116.2
2001 Q4 118.2

2002 Q1 119.8
2002 Q2 119.7
2002 Q3 119.8
2002 Q4 120.9

2003 Q1 121.3
2003 Q2 122.0
2003 Q3 122.7
2003 Q4 123.4

Percentage changes

1999/98 2.5
2000/99 2.2
2001/00 1.9
2002/01 2.8
2003/02 1.9
2004/03 2.7

2001 Q4/00Q4 2.4
2002 Q4/01Q4 2.3
2003 Q4/02Q4 2.1

Notes:

(a) Not seasonally adjusted.

(b) Excluding food, drink, tobacco and petroleum.

(c) Per barrel, OPEC average.
Table 11

National and sectoral savings

 Household sector Company sector Government
 sector

 Saving Investment Saving Investment Saving

1999 3.5 4.3 9.4 12.4 2.6
2000 2.9 4.0 9.4 12.3 2.9
2001 4.3 4.2 7.6 11.5 2.4
2002 3.7 4.2 9.5 9.8 0.6
2003 4.1 4.1 9.0 9.7 0.8
2004 4.0 4.1 8.6 9.7 1.0

2001 Q1 4.9 4.2 7.3 11.8 3.1
2001 Q2 4.4 4.0 7.2 12.0 2.7
2001 Q3 4.0 4.3 7.7 11.3 2.8
2001 Q4 4.1 4.1 8.0 10.8 0.8

2002 Q1 4.1 4.3 9.5 10.1 0.2
2002 Q2 3.2 4.2 9.4 9.9 0.8
2002 Q3 3.4 4.1 9.6 9.7 0.7
2002 Q4 4.0 4.1 9.7 9.7 0.7

2003 Q1 4.0 4.1 9.7 9.7 0.3
2003 Q2 4.1 4.1 8.9 9.7 1.0
2003 Q3 4.1 4.1 8.7 9.7 0.9
2003 Q4 4.1 4.1 8.7 9.7 0.9

 Government Whole economy Finance
 sector
 from
 Investment Saving Investment overseas

1999 1.0 15.5 17.7 2.2
2000 1.0 15.3 17.3 2.0
2001 1.1 14.6 16.7 2.1
2002 1.3 14.1 15.4 1.3
2003 1.7 14.0 15.5 1.5
2004 1.9 13.7 15.7 2.0

2001 Q1 1.0 15.5 17.0 1.5
2001 Q2 1.1 14.7 17.2 2.5
2001 Q3 1.1 14.9 16.7 1.8
2001 Q4 1.1 13.3 16.0 2.7

2002 Q1 1.2 14.1 15.6 1.5
2002 Q2 1.2 13.7 15.3 1.6
2002 Q3 1.4 13.9 15.2 1.3
2002 Q4 1.5 14.6 15.4 0.8

2003 Q1 1.6 14.3 15.4 1.1
2003 Q2 1.7 14.1 15.5 1.4
2003 Q3 1.7 13.9 15.5 1.7
2003 Q4 1.8 13.8 15.6 1.8
Table 12

Long-term projections

All figures percentage change unless otherwise stated

 1999 2000 2001 2002 2003 2004

GDP (market prices) 2.4 3.1 2.0 1.4 2.5 2.8
Average earnings 3.9 4.9 5.1 3.8 4.9 4.4
GDP deflator (market prices) 2.5 2.2 1.9 2.8 1.9 2.7
RPIX 2.3 2.1 2.1 2.1 2.2 2.5
Manufacturing productivity 3.9 5.0 1.2 -0.5 2.9 4.2
Whole economy productivity (a) 1.4 2.3 0.9 1.2 2.8 2.6
Labour input (b) 0.8 0.7 0.9 -0.3 -0.3 0.1
ILO unemployment rate (%) 6.0 5.5 5.1 5.2 5.4 5.5
Current account
 (%of GDP) -2.2 -2.0 -2.1 -1.3 -1.5 -2.0
Total managed expenditure
 (%of GDP) 37.7 37.9 38.9 39.9 41.1 41.6
Public sector net borrowing
 (%GDP) -1.1 -1.6 -0.8 1.2 1.6 1.7
Effective exchange rate
 (1990=100) 103.7 107.5 105.8 106.1 105.9 104.6
3 month interest rates (%) 5.5 6.1 5.0 4.0 4.0 4.5
10 year interest rates (%) 5.1 5.3 4.9 4.9 4.5 4.9

 2005 2006-10

GDP (market prices) 2.8 2.5
Average earnings 4.5 4.5
GDP deflator (market prices) 2.7 2.3
RPIX 2.5 2.5
Manufacturing productivity 4.2 3.4
Whole economy productivity (a) 2.5 2.6
Labour input (b) 0.3 -0.1
ILO unemployment rate (%) 5.4 5.6
Current account
 (%of GDP) -2.3 -1.9
Total managed expenditure
 (%of GDP) 41.9 42.9
Public sector net borrowing
 (%GDP) 1.7 1.8
Effective exchange rate
 (1990=100) 103.5 102.4
3 month interest rates (%) 4.5 5.0
10 year interest rates (%) 5.1 5.1

Notes: (a) Per hour. (b) Total hours worked.
Table 13

Average absolute errors, NIESR forecasts made in October/November *

All figures per cent unless otherwise indicated

 Current year Next year

 Average error Error range Average error

Real GDP growth 0.5 0.0 - 1.5 1.1
Domestic demand growth 0.6 0.0 - 2.4 1.5
Consumers expenditure 0.9 0.0 - 1.9 1.7
 growth
Investment growth 2.1 0.0 - 5.8 3.4
Export volume growth 1.5 0.3 - 4.6 2.2
Import volume growth 1.6 0.5 - 3.5 3.1
Real personal disposable 1.3 0.0 - 3.6 1.7
 income growth
Current account 2.6 0.5 - 5.8 4.9
 ([pounds sterling]bn)
Public sector borrowing 4.0 0.3 - 17.2 10.0
 requirement
 ([pounds sterling]bn) (a)
Retail price inflation (Q4) 0.4 0.0 - 2.0 1.3

 Next year Average
 outturn
 Error range 1989-2001

Real GDP growth 0.0 - 2.7 2.6
Domestic demand growth 0.1 - 4.3 3.0
Consumers expenditure 0.1 - 4.1 3.2
 growth
Investment growth 0.0 - 11.3 4.4
Export volume growth 0.0 - 6.5 4.7
Import volume growth 0.1 - 11.0 6.1
Real personal disposable 0.3 - 3.1 3.0
 income growth
Current account 0.0 - 14.7 -5.1
 ([pounds sterling]bn)
Public sector borrowing 0.1 - 24.7 10.1
 requirement
 ([pounds sterling]bn) (a)
Retail price inflation (Q4) 0.0 - 4.3 4.4

* All errors defined by subtracting the forecast from the outturns for
1989-2001; retail price inflation errors calculated from outturns for
1993-2001.

(a) Financial year.
Table 14

Probability distribution of growth and inflation forecasts

Inflation: probability of 12 month RPIX inflation falling in the
following ranges

 2002Q4 2003Q4

less than 1.5 per cent 0 10
1.5 to 2.0 per cent 13 18
2.0 to 2.5 per cent 64 27
2.5 to 3.0 per cent 22 24
3.0 to 3.5 per cent 0 14
more than 3.5 per cent 0 6

 100 100
Central projection 2.3 2.4
Standard deviation 0.27 0.71
Growth: probability of annual growth rate folling in the following
ranges

 2002 2003

less than 0 per cent 1 4
0 to 1 percent 25 10
1 to 2 per cent 57 22
2 to 3 percent 16 28
3 to 4 percent 1 22
more than 4 per cent 0 14

 100 100
 1.4 2.5
 0.63 1 .38