THE UK ECONOMY.

Blake, Andrew P. ; Weale, Martin

Martin Weale [*]

Section I. Recent developments and summary of the forecast

The production of this forecast is supported by the Institute's Corporate Members: Bank of England, Barclays Bank plc, Glaxo Wellcome plc, 3i plc, 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 Management Services Ltd, The Post Office, Rio Tinto plc, Standard Chartered Bank, UBS Warburg, Unilever plc and Willis Corroon Group plc.

The current situation

In the summer of last year there was a fairly general consensus that interest rates were likely to rise. In August the Bank of England published a forecast showing inflation above its target rate on the assumption that interest rates remained unchanged from their current levels. By the end of the year, the consensus had changed sharply. Despite warnings from the Governor of the Bank of England indicating that the official view is 'neutral' -- with a further increase not being ruled out -- the balance of market opinion is now firmly expecting a reduction of the base rate to 5.75 per cent early this year, with a further reduction later this year.

This change to expectations, which is widespread in Europe and in North America, has two sources. First of all there is the fear of a recession in the United States, a fear which we, despite the current pause, do not share and with which, as discussed in the Commentary, we suspect has come from a realisation that the growth rate of 2000 cannot continue in 2001. There is no doubt that the US economy will grow much more slowly in 2001 than it did in 2000, but this is mainly because the growth rate in 2000 was unsustainable, and not because anything more fundamental has changed. Secondly, there is the observation that economic growth in the fourth quarter in the UK has been slow; this is taken as evidence of a sharp cyclical slow-down at home.

In fact the short-term indicators of demand and supply give rather different perspectives. Retail sales in the last quarter of 2000 were 1.3 per cent higher than in the previous quarter; it is true that the index rose very little between November and December, but it would be a mistake to pay too much attention to one month's figures, particularly in a series like retail sales which has shown erratic movements in the past. By contrast, the GDP figures for the fourth quarter present a depressed picture, with growth below the economy's long-term trend. While it is always possible to identify special factors which explain why numbers should be discounted, the output data contain a particularly interesting detail. Output of oil and gas has probably fallen by 10 per cent between the third quarter of 2000 and the likely outturn for the fourth quarter. The industry does not make a large contribution to the economy; at 1995 prices it contributed 2.5 per cent of overall output. But a fall of this magnitude reduces ove rall GDP by about 0.25 per cent; in other words it accounts for a large part of the slowdown in the rate of output growth between the third and the fourth quarters.

At least a part of the low level of output may be explained by the mild weather in the Autumn; certainly oil output would not be expected to remain low at a time when oil prices are considerably higher than a year ago, and the weather is now likely to be boosting gas output. But in some sense this is irrelevant. Output of oil and gas is unlikely to be closely related to the state of demand in the UK economy and variations to output of oil and gas have no effect on the state of the labour market. After adjusting for fluctuations in output of oil and gas, it appears that output is growing at about 2 1/4 per cent per annum. This certainly does not, in itself, give a picture of an economy starting a recession and is closer to the most recent evidence from the demand side. Nevertheless, there would be a case for a prompt interest rate reduction if it were clear that the situation had deteriorated. We are starting to hear gloomy sounds from the financial sector. One reason for this is that, as in the United States, the stock market is well below the level of a year ago. Once again a better comparison is with long-term norms (e.g. for the P/E ratio) which suggest that the stock market is still high, perhaps implying a downside risk. Merger activity has also declined, in part because more modest expectations of stock market prospects make merger activity harder to finance. The fall to the stock market may have limited consumption growth and clear signs of overcapacity in the ICT sector have made clear that many shares were seriously overvalued. A sharp fall in US business confidence, associated with more stock market falls, would indeed be a depressing influence on the economy and the threat of this is one of the main downside risks that our forecast faces. Table 1 shows the impact of a decline in US business confidence leading to a 20 per cent fall in the US market and a 10 per cent fall in all other major stock markets except Japan (which is already depressed) on the UK economy. This impact, although substantial, is no t sufficient to turn our main projection into one of recession, provided interest rates are reduced promptly.

But we should be wary of the belief that sentiment and confidence indicators on their own always provide a good guide to economic prospects. In 1998, when there were concerns about the health of the global financial system, confidence fell sharply and then recovered because there was only a small pause in output growth. There are two explanations for this. One is that the Monetary Policy Committee cut interest rates fairly sharply, more than matching cuts in the United States, and thereby restored confidence before business sentiment had any significant effect on the real economy. The other, more plausible explanation is that businesses realised eventually that a financial crisis did not necessarily mean output growth would falter. [1] The lesson of this experience is that monetary authorities have to be prepared to act promptly once it is clear that movements to confidence are starting to have a real effect on the economy, but equally they have to be prepared to reverse their moves once the situation is stab ilised.

With the United States expected to grow by around 2--2 1/2 per cent in 2001, it is difficult to identify any particular contractionary force from outside the UK although the slower growth of world trade (8.1 per cent in 2001 as compared to 11.0 per cent in 2000) would be expected to reduce the growth rate. On the other hand there are two expansionary influences. First of all the volume of consumption by the public sector is projected to increase by 4 per cent in 2001 with a further increase of similar magnitude in 2002. There is likely to be an even more rapid growth in public sector investment. Secondly the euro exchange rate has risen sharply against the pound, to [epsilon]1.56 as against [epsilon]1.73 in November, making the UK more competitive in the Euro Area or at least allowing UK exporters to rebuild profit margins. This should be particularly helpful for the profitability of the manufacturing sector. Either because lower prices in euros raise demand, or because higher profit margins make it more wort hwhile putting effort into selling abroad, there is likely to be some extra stimulus to exports. The impact of public spending is likely to be greater than the impact of the lower exchange rate. However, after taking both these factors into account, we expect growth of around 3 per cent per annum for the next three years.

The budget and government spending

In the US President Bush is aiming to introduce a tax cur worth between 11/4 and 11/2 per cent of GDP per annum over the next ten years. But the nature of the US political process makes both the numbers and the timing uncertain. It is not clear how much taxes will be reduced in the short term. In the UK the government has already announced a discretionary fiscal stimulus for FY 2001/2 relative to 2000/1 of 0.9 per cent of GDP with a further stimulus of 0.5 per cent of GDP in FY 2002/3. After allowing for the crowding out of private investment and increased demand for imports, this is likely to add substantially to GDP over two years. The fiscal stimulus may be smaller than the first tranche of the US cut, but the fact that it is to appear largely as increased spending rather than as a set of planned tax cuts increases its relative importance. Thus, if confidence in the United States requires the tax cut to support it, it can be argued that the corresponding fiscal stimulus in the UK has already been announced . Indeed, the concern remains that, without a marked reduction in the rate of growth of household consumption, it will be difficult for the UK to absorb the government's fiscal stimulus without an increase in interest rates. However, following the January Monetary Policy Committee meeting, there is a real possibility of an early cut to interest rates. We would expect that any change of this kind would soon need to be reversed if inflationary pressures are to be avoided.

Table 3 suggests the public finances are in a healthy state. We expect the financial surplus to be slightly higher than was forecast in the November Pre-Budget Report and, over the medium term, the deficit to be about 1/2 per cent of GDP less than the government has forecast. But the state of the macroeconomy does not allow for any further fiscal loosening.

While any further slackening of fiscal policy would be undesirable, the Chancellor is likely to continue his policy of making changes to the details of the tax structure and benefit system. We have no doubts that there are many improvements which could be made, but there is a risk that his reforms have run ahead of proper research into their consequences. For example, the government has announced a Pension Credit. This is a means-tested benefit which reduces the effect of the current Minimum Income Guarantee in discouraging saving. But the proposals are made with no analysis of their likely consequences for the incentive to save or of the way that they interact with the incentives to take out stakeholder pensions. Among other changes suggested for the budget is the introduction of a lump-sum grant paid to children either at birth or on reaching the age of 18 (Box A). This need not be very expensive but it would be more satisfactory to see it introduced as part of an overall review of how the government thinks resources should be distributed between people of different age groups than as a single policy initiative.

Monetary policy

Our own projection is made on the assumption that the base rate will remain stable at 6 per cent for the next two years, with a gradual fall after that, so that UK and Euro Area rates converge at 5 per cent per annum. We assume that the euro exchange rate will stabilise at [pound]1 = [epsilon]1.49. In view of the current political climate it would be rash to assume that the UK will join the euro, but the figure, which is taken from the term structures in the two currencies, is a plausible rate at which Britain could join EMU and the path we set out is consistent with euro entry. While the evidence of the last few years is that the economy adapts to the exchange rate reasonably rapidly, the current situation is certainly more comfortable than the rate of [epsilon]1.68 at which markets were expecting the exchange rate to stabilise in the Autumn. Concerns have been expressed about the profitability of manufacturing industry at recent exchange rates, and there is no doubt that it has been reduced. But, as Chart 3 shows, levels of profitability low by comparison to the 1990s are high when compared to the 1980s Despite low profitability in the 1980s, manufacturing output rose by about 25 per cent over the 1980s from the recession-damaged levels at the start of that decade.

This monetary policy, in combination with the expansionary fiscal policy the government has set out, leads to inflationary pressures emerging in 2003/4. In consequence, if inflation is to be kept to its target, then with fiscal policy as set out, either interest rates or the exchange rate need to be higher than in our projection.

Cyclical convergence

It is striking how similar the prospects are for the UK and the other European economies (p. 48). They are expected to grow by around 3 per cent this year. This highlights a stronger similarity. Two of the government's tests to see whether Britain should join the euro are: "Are business cycles and economic structures compatible so that we and others in Europe could live comfortably with euro interest rates on a long-term basis?" "If problems do emerge is there sufficient flexibility to deal with them?"

Certainly, the evidence is that the cyclical position of the UK is now very similar to that of the major Euro Area economies. Chart 4 shows the estimates of the output gap published by the OECD. While divergences remain; Britain and France are shown as having output a little above the long-term sustainable level, while in Germany output is somewhat depressed. But compared with the divergences of a decade ago, it is clear that the differences are small and well within the margin of error given the difficulties in calculating output gaps when many economies have recently undertaken structural reforms. Indeed, one would expect inflation to be accelerating in those economies where output is above the long-run sustainable level; that has not been happening in the United Kingdom, suggesting that our output gap may be overstated. In the Euro Area by contrast there have been concerns about inflationary pressures, in part because the euro was weak, and with its appreciation these are now receeding.

These data do not answer the question whether the UK could live with euro interest rates on a long-term basis. The answer to this is perhaps better provided by economic theory. If the UK enters the monetary union at much the same phase in the cycle but having had a higher interest rate, then demand pressures will rise putting upward pressure on prices. This will lead to an erosion of competitiveness which will depress demand, offsetting the stimulus provided by the lower level of interest rates. During the adjustment process inflation will be higher than the average for the Euro Area and, in consequence, real interest rates will be reduced even further. While this will slow the adjustment process, our models suggest that the price level effect will, in the end, dominate this, restoring macroeconomic balance. This process of price level adjustment is currently underway in countries such as the Irish Republic, the Netherlands and Spain which joined the euro with low exchange rates; the opposite of it can be see n in Germany which joined with a high exchange rate. We regard the mechanism as capable of dealing with problems which may emerge in the monetary union, but it is, of course, also the case that fiscal policy can be used to accelerate the adjustment process. [2]

Joining the Euro Area would have one important implication which is not much discussed. Britain's fiscal policy is intended to ensure that current revenue at least equals current expenditure averaged over the cycle. Since the public sector also undertakes investment, this leads to a financial deficit which the government projects to be 1.1 per cent of GDP from 2003/4 onwards. [3] By contrast the fiscal framework for the Euro Area requires member countries to balance their budgets over the cycle (Buti and Martinot, 2000). This tighter target was the one used, but not met, by the Conservative government here. It follows that, if the UK were to join the Euro Area before 1997, taxes should be higher or public spending lower by 1 per cent of GDP based on the government's arithmetic. This would, of course, make it easier for the economy to live with lower interest rates without the adjustment process referred to above.

On the face of it, it would suggest that substantial tax increases would be needed as a part of euro membership. However, as noted above, our own forecast of the public finances is more optimistic than the government's. The main reason for this is that we expect both real and nominal growth to be faster over the next three years or so. We expect the improved rate of productivity growth in 2000 to be maintained as the economy recoups the period of very poor productivity growth in the second half of the 1990s. This improvement makes it possible for output to expand by more than the longterm average, even though the scope for further falls in unemployment is plainly limited. [4] We expect the current constellation of taxes and spending plans to be consistent with public borrowing of only about 0.5 per cent of GDP. This means that a smaller adjustment will be needed to bring Britain's fiscal position in line with the fiscal rules of the Euro Are+a, but it also means that the government should resist the temptatio n to make further tax cuts or promise further spending increases in the March budget. Given the plans that have already been announced, there is no case for a further budgetary easing, either on macroeconomic grounds or on the grounds that there is at present a budgetary surplus.

Summary of the forecast

Real GDP growth in 2000 is now estimated at 3 per cent despite continuing disruption to the railways and considerably depressed output of oil and gas. We expect strong growth to continue this year and next, with the growth in domestic demand averaging about 3 1/4 per cent per annum over the next three years, with a negative contribution to growth from net trade. GDP growth is projected to be 2.9 per cent in 2001 and 3.3 per cent in 2002.

Such a strong growth forecast is in marked contrast to the apparent consensus with concern about a weakening economy, leading to calls for an immediate interest rate reduction. In our projection we assume that the interest rate is held at 6 per cent until 2003. From then on rates are cut gradually to converge with those of the euro in 2005. This is consistent with EMU entry, although in current political circumstances this seems unlikely. This monetary policy assumption is mildly inflationary in the medium term, and there is certainly a case for even tighter monetary policy than we assume here. It would certainly suggest that it is unwise for the interest rate to be cut just yet.

The inflationary pressures are reflected in our forecast for earnings growth. We expect average earnings to have grown at around 4 1/4 per cent in 2000, a very low rate particularly when a claimant unemployment rate is expected to average only 3.6 per cent for the year. With such low unemployment it seems unlikely that earnings growth will remain restrained and we anticipate it will rise to 6 per cent per annum by 2003. Strong productivity growth is needed to achieve our forecast output growth with such little slack in the labour market. Manufacturing productivity grew at 3.6 per cent in 1999 when exporters faced a very high sterling exchange rate, and we expect this to be exceeded in 2000, and then to rise to above 5 per cent by 2001. This contributes to a sustained whole-economy growth rate of productivity of around 2 1/2 per cent. This is consistent as the economy 'catches up' with the low productivity growth of the late 1990s, and brings the longer-term productivity growth rate to its historical norm of a round 2 per cent per annum.

A further source of inflationary pressure comes from the accelerated spending and investment programmes announced by the government. We have assumed growth rates for both general government consumption and investment consistent with the November Pre-Budget Report. On their own these programmes are unlikely to prejudice the inflation target, although coupled with a falling exchange rate and a looser than previously assumed monetary policy we expect inflation to rise as an inevitable consequence. By contrast, the rate of growth of private sector fixed investment has been much weaker. It is projected to grow by less 1 per cent in both 2000 and 2001.

Section II. The forecast in detail

The components of expenditure (Table 4)

Although we are now into the new year, figures for the final quarter of 2000 are generally estimated in the forecast. Third quarter real GDP growth in 2000 was 0.7 per cent, down from 1 per cent the previous quarter with fourth quarter growth of 0.3 per cent reported after the forecast was completed. Overall this yields an estimate for growth for 2000 as a whole of about 3 per cent. Much of the fourth quarter has been affected by the continued disruption to the railway network coupled with depressed output in the oil and gas industry, something we comment on further below. However, as seasonally adjusted retail sales growth for the fourth quarter was 1.3 per cent, following on from a revised 1.2 per cent growth the previous quarter, the picture is not uniformly weak. It remains to be seen exactly how much the small fourth quarter growth rate is due to special factors. Growth of almost 3 per cent in 2001 is forecast, followed by 3 1/4 per cent in 2002, with the growth rate falling back towards its trend value of 2 1/2 per cent after this.

Domestic demand growth in 2000 is expected to be almost 4 per cent, slightly up from the previous year. The contribution from net trade is therefore negative. Indeed, the third quarter deficit in the net exports of goods and services is a record [pound]11.1 billion, with export growth of only 1.4 per cent in that quarter compared to a 2 per cent rise in imports, although more recent trade figures suggest a strong export performance at the end of the year. General government consumption is forecast to rise strongly for 2000 and by an announced 4 per cent in each of the next two years. The assumed growth in government consumption, together with buoyant public sector investment targets, is an important factor in determining the forecast outcome.

Overall investment fell by a 1/2 per cent in the third quarter, mostly due to a particularly large fall in transport equipment investment. Government fixed capital formation actually fell in the third quarter, and it will need to rise strongly in the future to meet the targets set for the next three years; there is evidence from the fourth quarter public sector accounts that this rise has already begun. Overall investment in the third quarter was 2.1 per cent higher than the same quarter the previous year. This is the lowest growth rate since 1995. We are expecting investment growth to have been 1 3/4 per cent in 2000, down from 5 1/4 per cent in 1999. This should recover in 2001 to 4 per cent and then to 51/4 per cent in 2002. Inventory levels should recover modestly from 2000 onwards, counteracting the de-stocking apparent in 1999.

Domestic demand will continue to expand briskly, but we anticipate a slight reduction in the growth rate for 2001 to 31/4 per cent before rising to 31/2 per cent in 2002. Slower growth of world trade points to slower export growth, but the trade gap should narrow as the exchange rate depreciates, with export margins recovering.

Household sector (Table 5)

Household expenditure at constant prices rose by 1.0 per cent in the third quarter of 2000, following on from a similar increase in the previous quarter. Durables consumption has shown strong growth in expenditure on non-vehicle durables, at 2.3 per cent for the quarter, and a fall in expenditure on vehicles of--0.4 per cent, leading to an overall increase of 1.2 per cent for the quarter. Vehicle expenditure was probably depressed by people delaying purchases of new cars in the expectation of price cuts. Now that new car prices are generally lower, a revival of spending on cars could be one of the factors supporting consumption in 2001 although, for this to happen, customers will have to be convinced that further price cuts are unlikely. Expenditure on non-durable goods grew 1.1 per cent in the third quarter, with particularly strong growth in clothing and footwear but a fall in petrol and gas consumption. Expenditure on services grew at 1.0 per cent in the third quarter, with a particular surge in spending on transport and communications but a fall in the usually erratic expenditure on financial services.

The household balance sheet continues to deteriorate. The savings ratio fell to 3 per cent in the third quarter and will need to recover. Its average value for the whole of the 1990s was 8.9 per cent. The Credit Card Research Group recently reported that last December saw a record [pound]17.9 billion spent using credit and debit cards, a quarter more than the previous December. By contrast, more card users are reported to be paying off balances so as not to incur interest charges. However, if we consider the net lending of households, shown in Chart 5, the recent position is unlikely to be sustained. Financial saving was positive until 1998 but has since become negative. It is interesting to note that the last time such an extended period of borrowing was observed preceded the severe recession in the early 1990s. Conditions are markedly different now, and although we are not forecasting a recession, more prudent future behaviour by the private sector seems necessary. A recovery in the savings ratio to 5 per c ent in the fourth quarter of 2000 would bring it back to where it started the year and it is forecast to rise above 6 per cent from 2001 onwards.

More generally, real household disposable income is believed to have risen by about 3 per cent in 2000. The growth rate is expected to rise to above 5 per cent in 2001 before falling back in subsequent years. Stronger earnings growth is an obvious factor behind this rapid growth of income.

Fixed investment and stockbuilding (Tables 6 and 7)

Our forecast for fixed investment is dominated by a single consideration. The most important determinant of overall fixed investment is the public sector component in the light of government plans. We have used the figures given in the November Pre-Budget Report (Cm 4917, Table B5) as a guide to set overall gross public sector investment in future years. These call for gross investment figures of [pound]30 billion in 2001, [pound]34 billion in 2002, [pound]38 billion in 2003 and more than [pound]40 billion a year after that. These remain official projections and in previous years might have been interpreted as spending limits not to be exceeded. It is now much clearer that these are totals that are actively targets to be met, intended to make 'a significant contribution to tackling the legacy of under-investment whilst remaining consistent with the sustainable investment rule' (Cm 4917, p. 169). Set against this background, we note a near 20 percent rise in general government investment in the second quarter of 2000 over the previous quarter but a 4.8 per cent fall in the third quarter on the same basis. However, the large reported worsening in the government's net cash requirement in December seems in part to be attributable to increased investment spending. As expenditure on large public sector investment projects is difficult to time accurately, some lumpiness of this sort should be expected. Future investment projects are necessarily assumed to come smoothly on line. Public sector housing investment, which is identified separately in our model, is assumed to grow along the same lines as fixed investment.

Private sector fixed investment, by contrast, has shown considerably less buoyancy recently, and there is no reason to expect it to grow at the same rate as the public sector. This is despite the latest CBI industrial trends survey indicating a slight tightening of capacity constraints. Considered by industry group, manufacturing investment fell for five of its seven categories in the third quarter of 2000 with only a modest 2 per cent increase over the previous quarter for engineering and vehicles and 6.1 per cent rise in the residual category. Overall manufacturing investment rose by only 0.2 per cent in the third quarter. Despite this, we estimate that 2000 saw a 3 1/4 per cent per annum increase in total manufacturing investment. However, private sector non-manufacturing investment has been static for much of the year, and we expect this figure to show a fall in the last quarter. Overall business investment is therefore expected to have risen by only about 3/4 per cent, contrasting with the 7.5 per cent s een in 1999. 2001 is likely to remain relatively depressed with less than 1 per cent growth, before a recovery of the growth rate to 4 per cent in 2002.

Balance of payments (Tables 8 and 9)

World trade growth has been consistently strong over the last few years. This has led to strong growth of UK exports. Recent concerns about the US economy do not translate necessarily into weak prospects for global trade, particularly given the aggressive response of the US monetary authorities. In 2000 it seems likely that world trade growth exceeded 11 1/2 per cent and although we are forecasting a reasonable reduction from such a high level it is likely to remain at a very healthy 8 per cent for the next two years.

The UK still has a negative net trade position. In particular, net exports in the third quarter of 2000 deteriorated quite sharply. Capital goods and intermediate goods imports from non-EU countries contributed strongly despite the fact that these are not directly affected by the weakness of the euro. The services component of imports was dominated by increased overseas travel and other business services.

Future trade movements will necessarily reflect evolving price competitiveness. Export price competitiveness had already improved by almost 6 per cent in the third quarter of 2000 compared to the start of the year. Early on this was entirely due to reductions in the prices of export goods and services, but recently sterling has depreciated considerably, notably against the euro. With such a weakening of the domestic currency in the UK's major market, it is to be expected that some increase in export prices will follow. The latest available provisional prices data, for November 2000, show that the export price of goods rose by almost 1 per cent over the previous quarter whereas the corresponding import price rose by only 0.3 per cent. Similarly, the November deficit on traded goods has been provisionally estimated to be [pound]2.1 billion, down from the [pound]2.5 billion for October. This reflects a 3 per cent increase in total goods exports in value terms. Export prices are forecast to rise by more than impo rt prices, reflecting the fact that the latter had been insensitive to the earlier rise of the exchange rate and are thus affected less as sterling weakens.

Overall the growth in exports of manufactures for 2000 is therefore expected to have been almost 12 per cent. This growth rate is down only very slightly on previous forecasts for the year. It is forecast to fall to 10 1/2 per cent in 2001, reflecting the balance between recovering margins and an expected sterling depreciation. The growth of imports of manufactures is expected to have been almost 12 per cent in 2000 falling to 9 per cent next year in the face of a weaker pound.

Output and employment (Tables 10 and 11)

The fall in the output of the oil and gas extraction industry makes a very notable contribution to the low real GDP growth rate for the last quarter of 2000. Between September and October the output index fell by 7 per cent followed by a further fall in November. Output in the three months to November (including the relatively buoyant September figure) was almost 4 per cent down on the same period the previous year. We project fourth quarter output to be 10 per cent below the third quarter figure. Turning to market sectors over the same period, a fall of more than 5 per cent in the output of cars was recorded. This contributed to a 6.6 per cent fall in the output of durable goods in the three months to November. This fall has continued, with motor vehicle production in December being 32.3 per cent lower than in December of the previous year. It seems an inescapable conclusion that manufacturers will either have to reduce prices further than the 10 per cent or so already seen across the board or consumers will need to become convinced that margins have been squeezed as much as possible in domestic markets.

In the face of weak oil and gas output the index of production fell by 0.6 per cent between the three months to November 2000 and the previous three months. We expect manufacturing output growth to have been of the order of 1 1/4 per cent in 2000 and expect it to rise to about 1 3/4 per cent in 2001 with faster growth in 2002.

Unemployment seems to have levelled out, at least partly because there is little scope for further falls of the size we have seen in the last few years. In Chart 6 we show both the claimant unemployment rate and the equivalent ILOf measure. Both measures remain remarkably flat until well into the medium term. This reflects the static nature of both unemployment rates in 2000, with the claimant count unemployment rate remaining at 3.6 per cent for the five months up to December last year. Employment growth is reported to have similarly levelled off, with 74.5 per cent of the working age population employed in the three months September to November 2000. We forecast employment levels to remain almost static over the next three years. In order to attain the output growth forecast, we expect whole-economy productivity growth to average above 2 1/2 per cent per annum for the next three years, with manufacturing productivity growth rising from an estimated 4 per cent in 2000 to 5 per cent per annum in 2001-3. The o verall growth rate of productivity, which is faster than the long-term rate of 2 per cent per annum, reflects catch-up after the slower growth rates of the late 1990s. It is not meant to represent a 'new economy' effect.

Earnings and prices (Tables 5 and 12)

Earnings growth may seem remarkably weak in the short run given the low unemployment rate and widely reported persistent skill shortages. Examining quarter-on-quarter growth rates, earnings growth in 2000, on the national accounts basis used in the forecast, displays an unusual pattern with negative growth in the second quarter. We show this in Chart 7, where the quarterly growth rate is plotted, together with the four-quarter growth rate over the same period. The second quarter figure is largely attributable to distortions associated with bonus payments, which were unusually high at the start of 2000. However, the growth rate over the same quarter in the previous year actually shows a modest upward trend from the late 1990s onwards.

We forecast this upward trend to continue, and the future earnings growth is forecast to accelerate further so that by 2003 the annual growth rate will be some 6 per cent. This is partly, but not solely, a consequence of our fiscal and monetary policy assumptions. It appears clear that on balance the Monetary Policy Committee of the Bank of England is more likely to cut interest rates in the immediate future than to raise them. After a period of unanimity of interest rate decisions, with all members voting to keep rates on hold, there has been movement towards cutting rates, with the latest (January) decision by five votes to four to keep base rates at 6 per cent. Although the strong growth in public sector spending investment and consumption plans might indicate that a tightening of monetary policy would be appropriate, this view is not reflected either in market expectations or in the minutes of the MPC (Bank of England, 2001). These stress fears for business confidence, brought on by the weakening of US ec onomic prospects. We have chosen to assume interest rates are kept on hold at the current 6 per cent until the monetary authority begins cutting them to make possible entry into the European Monetary Union with an interest rate of 5 per cent in 2005. This is mildly inflationary and an interest rate reduction, which has become more likely since the forecast was completed and the GDP figures were published, would raise the risk of mild inflationary pressure.

Even with the interest rate at 6 per cent our projection has a degree of inconsistency. Earnings growth accelerates to over 6 per cent per annum. By contrast, in the more immediate future inflation remains subdued, with a reduction in housing costs from decreases in the mortgage interest component and a falling cost of motoring. Our forecast of 2.9 per cent RPI inflation for 2000 is confirmed by the latest available figures. The government's preferred measure of the inflation target, RPIX inflation, is forecast to be below 2 per cent for most of this year, and to fall below 1.5 per cent by the end of the year. It will then rise to above 3 per cent per annum after 2003, a rate that, if anticipated by the monetary authority, would seem to require some corrective action. Below, in the section describing forecast errors and probability distribution, we discuss the implications of our central projection for the probability that the RPIX inflation rate will breach the lower target value of 1.5 per cent.

In many ways, our forecast scenario takes a balanced view on the basis of the conflicting signals given by each of the sectors. The combination of increasing public sector expenditure and a depreciating exchange rate are likely to force tighter monetary policy than we have projected in perhaps two years time. However, assumed monetary policy is consistent with EMU entry at an exchange rate of [pound]1 = [epsilon]1.49 in 2005.

National and sectoral saving (Table 13)

The net financial position of the economy as a whole can be assessed from the current account deficit, subject to a statistical residual. In Table 12 we show the imbalances between the saving and investment of households, companies and the government together with residual finance from overseas. Investment not financed from domestic saving must be financed from abroad.

Household sector saving in 2000 is expected to have fallen to only 2.8 per cent of GDP with investment exceeding this and financial saving being negative (see Chart 5). This situation is forecast to turn round very quickly, with household investment steadying at 4 1/4 per cent and saving passing that as early as this year. Company sector saving is believed to have been 10 per cent of GDP in 2000 and is forecast to remain so for the next three years. This is less than investment which is forecast to stabilise at some 11 3/4 per cent of GDP. The government sector targets an investment Golden Rule. This says that net investment can be financed by borrowing, but means that saving gross of depreciation is positive. Government investment is expected to rise to 2 1/4 per cent of GDP in order to meet its investment plans.

The movement to current account deficit from surplus seems to have been led by the household sector but is being sustained by companies which contribute about 2 per cent of GDP to national borrowing. The current account deficit is certainly not unsustainably high for the next few years, and the general expansion in government saving has been an important component in keeping the deficit low given the high level of household indebtedness.

The economy in the medium term (Table 14)

The medium-term prospects for the economy are always uncertain, given the inherent unforecastability of shocks and, indeed, a variety of possible structural shifts. Any assessment must be predicated on a set of assumptions that can be quickly violated by the turn of events. Even if our model were a perfect representation of the economy as it is now, a departure from the announced policy framework would immediately affect its predictive power.

We have commented above on the significance of our monetary and fiscal policy assumptions on the medium term prospects for the economy. Earlier in this chapter we discussed the stabilisation of the euro exchange rate at the start of 2005, at [pound]1 = [epsilon]1.49 (equivalent to DM 2.92). This is consistent with a depreciation of sterling from its current position by an amount equal to the interest rate differential between sterling and the euro, so that the expected returns in the two currencies are equal. Nominal interest rates are set at 6 per cent until the end of 2002 before being smoothly cut to the assumed long-run euro area rate of S per cent. This monetary policy assumption is based on the pragmatic assessment that short-term rises now seem unlikely and the long-run requirement that they converge to S per cent on adopting the euro.

The real exchange rate remains above many estimated fundamental equilibrium rates (see Wren-Lewis and Driver, 1998) but does not look necessarily unsustainable, particularly as the UK seems to have adapted reasonably well to the persistently high value of sterling. The long-run rate of growth of exports at 5 per cent is only partly helped by the depreciation of sterling.

Fiscal effects are equally important. In the medium term government sector spending, particularly investment, is assumed to remain high consistent with the Pre-Budget Report, and this has important inflationary consequences as well as an expansionary effect on domestic demand. The current account deficit as a percentage of GDP remains high but falls gradually to 1/2 a per cent as households and companies adjust.

The change in monetary policy assumptions generates some medium-term inflation, although this is by no means excessive. RPIX inflation, even on the basis of a fixed nominal interest rate at 5 per cent, never breaches the 3 1/2 per cent upper band and settles back to around 2.8 per cent in the long term. It does, however take some considerable time for inflation to build up, reflecting the current general lack of inflationary pressure. Inflation is, of course, partly anchored by the stable exchange rate. Real interest rates at around 2 per cent are low by historical standards.

Earnings growth is anticipated to pick up more quickly than inflation, reflecting tighter labour market conditions. The long-run ILO unemployment rate at about 4 3/4 per cent is a slight fall on the current rate but remains a reasonable estimate of the sustainable rate of unemployment. Real earning growth, assessed using the GDP deflator, quickly converges to about 2 1/2 per cent, consistent with the rate of growth of productivity.

Forecast errors and probability distribution (Tables 15 and 16)

Table 14 gives summary information on the accuracy of our published forecasts in the first quarter of the year for selected key variables. The latest complete national accounts data which have been available for each of these forecasts is the third quarter of the previous year.

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 rule of thumb approach is to construct a 70 per cent confidence interval around the central forecast using plus and minus the average absolute forecast error. For the forecast of GDP growth in 2001 this yields a range of 2.2 per cent to 3.6 per cent. This widens considerably as the forecast horizon increases, so that the 70 per cent error band for GDP growth two years ahead is 2.0 per cent to 4.6 per cent. It is worth noting that these forecast errors reflect quite well the degree of difficulty associated with forecasting the different variables. Investment growth forecasting is inherently more uncertain than consumption expenditure growth forecasting.

We can 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 specified range. This is useful when we wish to consider recession probabilities. Also, for the inflation target, 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 the forecast and used the normal cumulative density function to evaluate the likelihood of the GDP growth rate and RPI inflation rate falling within designated bands. These figures are given in Table 16.

We calculate that there is a 66 per cent chance that real GDP growth will fall between 2 and 4 per cent per annum in 2001. The probability of growth below 2 per cent is less than 20 per cent and the chance of a fall in GDP is negligible. The downside risks for 2002 are similar; we are forecasting a mean growth rate some 0.4 per cent higher with a 35 per cent chance that it will exceed 4 per cent.

This time the inflation forecast is particularly interesting. Our central forecast for the last quarter of 2001 is below the 1.5 per cent trigger point, generating a 56 per cent probability of requiring the Governor of the Bank of England to write to the Chancellor of the Exchequer explaining how the Monetary Policy Committee will raise the inflation rate. However, our forecast for 2002 suggests that he need not say very much, with the central projection already back on target, and the probabilities roughly a third each of below 1.5 per cent, 1.5-3.5 per cent and above 3.5 per cent. Given the success of the MPC in keeping the inflation rate within the target band with its interest rate setting decisions so far, this may indicate that the forecast standard error does not fully reflect the recent stability of the inflation rate. We could adopt a forward-looking approach to assessing the uncertainty of the forecast using our forecast model with a successful inflation-targeting regime. This suggests that a standa rd error for the longer-range forecast of about 1.3 per cent is more appropriate than the historical figure of 2.3 per cent. Use of this standard error would necessarily improve the chance that inflation would fall within the target range.

(*.) The forecast was compiled using the latest version of the National Institute Domestic Econometric Model. We are grateful to Ray Barrell, Karen Dury, Richard Kneller, Nigel Pain and Rebecca Riley for comment and discussion.

REFERENCE

Buti, M. and Martinot, B. (2000), 'Open issues in the implementation of the Stability and Growth Pact', National Institute Economic Review, 174, pp. 92-104.

NOTES

(1.) This follows the experience of 1992 when an expansionary measure, departure from the ERM, was seen as a disaster and expectations worsened sharply. They recovered when people realised that their expectations of the consequences of ERM departure were mistaken.

(2.) There is very considerable scope here. For example, the capacity to vary interest rates could be replaced by a tax on interest payments to be collected by the lender. This would apply whether money was borrowed at home or abroad and someone who wanted to enforce a debt would have to show that the tax had been collected.

(3.) See table 4.1, p. 24 of HM Treasury (2000), Delivering Economic Stability.

(4.) Although there is scope for increasing the participation rate of people over 50 as a means of raising labour supply.

REFERENCES

Bank of England, 2001, 'Minutes of the Monetary Policy Committee Meeting 10 and 11 January 2001', http://www.bankofengland.co.uk/mpc/mpc0101.pdf.

Wren-Lewis, S. and Driver, R. (1998), Real Exchange Rates for the Year 2000, Washington D.C., Institute for International Economics.

 Effects of a fall in equity prices
 of 20 per cent in US and 10 per cent
 in other major (except Japan) following
 a loss of US confidence (per cent
 difference from baseline)
Annual averages Year 1 Year 2 Year 3
UK output -0.79 -0.38 0.14
UK dollar exchange rate [a] 11.45 12.53 13.35
UK interest rate (% points) -1.40 -1.70 -1.54
(a.)A positive number indicates an appreciation.
 Exchange rates and interest rates
 UK exchange rates Oil FT
 price [b] All-share
 Effective [a] $ Euro $ index
1997 100.5 1.64 1.45 18.6 2236
1998 103.9 1.66 1.49 12.4 2626
1999 103.7 1.62 1.52 17.4 2918
2000 107.5 1.52 1.65 28.8 3046
2001 102.0 1.47 1.56 27.3 3240
2002 100.7 1.47 1.53 26.3 3436
2003 99.6 1.47 1.51 27.1 3664
2000 I 108.4 1.61 1.63 25.5 3048
2000 II 107.7 1.53 1.64 25.7 3012
2000 III 106.4 1.48 1.65 30.1 3104
Forecast
2000 IV 107.6 1.45 1.67 34.1 3019
2001 I 102.5 1.45 1.57 30.1 3172
2001 II 102.1 1.48 1.56 27.6 3222
2001 III 101.8 1.48 1.55 25.7 3261
2001 IV 101.5 1.48 1.55 25.7 3306
2002 I 101.2 1.48 1.54 26.0 3356
2002 II 100.9 1.47 1.54 26.2 3408
2002 III 100.6 1.47 1.53 26.4 3462
2002 IV 100.3 1.47 1.53 26.6 3519
Percentage changes
1998/97 3.4 1.2 2.3 -33.3 17.5
1999/98 -0.2 -2.3 2.2 40.5 11.1
2000/99 3.7 -6.3 8.3 65.5 4.4
2001/00 -5.1 -3.0 -5.3 -5.4 6.4
2002/01 -1.2 0.1 -1.6 -3.7 6.0
2003/02 -1.1 -0.4 -1.3 3.3 6.6
2000IV/99IV 1.6 -11.3 7.5 46.0 0.5
2001IV/00IV -5.7 2.1 -7.1 -24.5 9.5
2002IV/01IV -1.2 -0.5 -1.4 3.4 6.4
 Interest rates
 UK base Mortgage 20-year World inter-
 rate interest UK gilts [d] est rates [e]
1997 6.6 7.2 7.1 4.0
1998 7.2 7.7 5.3 3.9
1999 5.3 6.4 4.5 3.3
2000 6.0 6.8 4.6 4.5
2001 6.0 6.8 4.9 4.4
2002 6.0 6.8 4.9 4.4
2003 5.7 6.5 4.9 4.4
2000 I 5.9 6.9 4.4 3.8
2000 II 6.0 6.9 4.3 4.4
2000 III 6.0 6.8 4.6 4.8
Forecast
2000 IV 6.0 6.8 4.9 4.9
2001 I 6.0 6.8 4.9 4.5
2001 II 6.0 6.8 4.9 4.3
2001 III 6.0 6.8 4.9 4.3
2001 IV 6.0 6.8 4.9 4.3
2002 I 6.0 6.8 4.9 4.3
2002 II 6.0 6.8 4.9 4.3
2002 III 6.0 6.8 4.9 4.4
2002 IV 6.0 6.8 4.9 4.4
Percentage changes
1998/97
1999/98
2000/99
2001/00
2002/01
2003/02
2000IV/99IV
2001IV/00IV
2002IV/01IV
 Monetary
 aggregates [c]
 M4 M0
 ([pound] billion)
1997 720 26
1998 781 28
1999 811 31
2000 894 32
2001 980 34
2002 1071 36
2003 1161 38
2000 I 828 30
2000 II 846 31
2000 III 868 32
Forecast
2000 IV 894 32
2001 I 915 33
2001 II 936 33
2001 III 958 34
2001 IV 980 34
2002 I 1003 35
2002 II 1025 35
2002 III 1048 35
2002 IV 1071 36
Percentage changes
1998/97 8.4 5.4
1999/98 3.9 12.1
2000/99 10.2 4.2
2001/00 9.7 5.1
2002/01 9.2 5.3
2003/02 8.4 5.3
2000IV/99IV 10.2 4.2
2001IV/00IV 9.7 5.1
2002IV/01IV 9.2 5.3

Source: Economic Trends; Financial Statistics; NIESR estimates.

(a.)1990=100.

(b.)Per barrel, OPEC average.

(c.)Seasonally adjusted, end quarter figures.

(d.)Nominal zero coupon yields.

(e.)Average 3-month rates in G7 countries (excluding UK).

 Public sector financial balance and
 borrowing requirement
 [pound] billion, fiscal years
 2000-1 2001-2 2002-3 2003-4 2004-5
Current expenditure: Goods and services 177.8 189.0 202.4 216.4 230.1
 Net social benefits
 paid 117.2 126.0 130.4 136.9 145.2
 Debt interest 29.2 28.1 27.5 27.2 27.1
 Subsidies 4.9 5.6 5.9 6.2 6.6
 Other current
 expenditure 20.8 18.1 20.0 28.5 30.5
 Total 349.9 366.8 386.1 415.2 439.4
Gross investment 20.8 25.1 30.9 34.6 37.6
Net investment 6.15 10.17 15.61 18.62 20.65
(as a % of GDP) 0.65 1.02 1.48 1.65 1.71
Total managed expenditure 370.7 391.9 417.0 449.8 477.1
(as a% of GDP) 39.2 39.4 39.4 39.9 39.6
Memo items: GDP deflator at
 market prices
 (1995=100) 114.4 116.9 120.3 124.6 129.3
 Money GDP 945.0 995.4 1057.4 1128.2 1205.0
Current receipts: Taxes on income and
 oil royalties 159.0 164.3 171.6 180.5 191.7
 Taxes on expendi-
 ture 137.5 146.9 154.6 163.3 173.3
 Social security
 contributions 72.6 74.0 78.5 83.9 89.9
 Gross operating
 surplus 12.9 14.4 14.7 15.3 16.2
 Other current
 receipts -4.1 -4.0 -5.6 -0.4 -1.0
 Total current
 receipts 377.8 395.6 413.7 442.5 470.0
Public sector current balance 13.3 13.8 12.3 11.3 13.6
Public sector financial deficit -12.0 -3.7 3.3 7.4 7.1
Financial transactions 28.4 0.0 0.0 0.0 0.0
Public sector net cash requirement -40.4 -3.7 3.3 7.4 7.1
(as a % of GDP) -4.3 -0.4 0.3 0.7 0.6
Govt deficit under Maastricht (calendar
 year, % of GDP) -2.1 -0.4 0.0 0.4 0.5
Govt debt under Maastricht 52.3 48.9 45.8 43.0 40.6
 2005-6
Current expenditure: Goods and services 244.2
 Net social benefits
 paid 155.0
 Debt interest 26.9
 Subsidies 7.0
 Other current
 expenditure 32.6
 Total 465.7
Gross investment 40.2
Net investment 22.02
(as a % of GDP) 1.71
Total managed expenditure 505.9
(as a% of GDP) 39.3
Memo items: GDP deflator at
 market prices
 (1995=100) 134.4
 Money GDP 1287.2
Current receipts: Taxes on income and
 oil royalties 203.2
 Taxes on expendi-
 ture 184.4
 Social security
 contributions 96.4
 Gross operating
 surplus 17.3
 Other current
 receipts -1.9
 Total current
 receipts 499.4
Public sector current balance 15.5
Public sector financial deficit 6.5
Financial transactions 0.0
Public sector net cash requirement 6.5
(as a % of GDP) 0.5
Govt deficit under Maastricht (calendar
 year, % of GDP) 0.4
Govt debt under Maastricht 38.2
Note: Public sector current balance is total current receipts less total
current expenditure and depreciation.
Depreciation is the difference between gross and net investment.
 Gross domestic product and components of
 expenditure
 [pound] billion, 1995 prices,
 seasonally adjusted
 Final consumption Gross Capital
 expenditure formation
 Households General Gross Change in
 & NPISH [a] gov't fixed in- inventories
 vestment [b]
1997 489.8 141.5 131.3 3.8
1998 509.5 143.1 144.9 4.2
1999 532.0 148.8 152.4 -1.4
2000 552.6 153.6 155.0 2.7
2001 570.1 159.8 161.3 0.0
2002 585.9 166.1 169.8 1.1
2003 601.0 171.6 178.8 2.0
2000 I 136.1 37.3 38.6 0.4
2000 II 137.5 38.5 38.7 0.8
2000 III 138.9 38.8 38.7 1.1
Forecast
2000 IV 140.1 39.0 39.1 0.3
2001 I 140.9 39.3 39.7 0.0
2001 II 142.0 39.8 40.1 -0.1
2001 III 143.1 40.2 40.5 0.0
2001 IV 144.1 40.5 41.0 0.1
2002 I 145.1 40.9 41.5 0.2
2002 II 146.0 41.3 42.1 0.2
2002 III 146.9 41.7 42.7 0.3
2002 IV 147.9 42.1 43.4 0.4
Percentage changes
1998/97 4.0 1.1 10.4
1999/98 4.4 4.0 5.2
2000/99 3.9 3.3 1.7
2001/00 3.2 4.0 4.0
2002/01 2.8 4.0 5.3
2003/02 2.6 3.3 5.3
2000IV/99IV 3.7 3.7 0.4
2001IV/00IV 2.9 3.8 4.9
2002IV/01IV 2.6 4.0 5.8
 Domestic Total Total Total Residual GDP Adjust-
 demand exports final imports at ment to
 expendi- market basic
 ture prices prices
1997 766.3 236.3 1002.6 244.6 0.0 757.9 84.5
1998 801.7 242.5 1044.2 266.2 0.0 777.9 84.4
1999 831.8 252.1 1083.9 287.8 -0.4 795.7 87.1
2000 863.8 271.7 1135.5 313.9 -1.4 820.3 89.9
2001 891.2 291.9 1183.1 337.3 -1.5 844.3 93.5
2002 922.8 311.9 1234.8 361.2 -1.6 872.0 96.7
2003 953.4 332.3 1285.7 385.2 -1.6 898.9 99.9
2000 I 212.4 65.9 278.3 75.4 -0.3 202.5 22.3
2000 II 215.5 67.5 283.0 78.0 -0.3 204.6 22.4
2000 III 217.5 68.4 286.0 79.6 -0.4 206.0 22.4
Forecast
2000 IV 218.4 69.9 288.3 80.8 -0.4 207.1 22.9
2001 I 219.9 71.1 291.0 82.1 -0.4 208.5 23.0
2001 II 221.9 72.3 294.2 83.6 -0.4 210.2 23.3
2001 III 223.7 73.6 297.3 85.0 -0.4 211.9 23.5
2001 IV 225.7 74.9 300.6 86.5 -0.4 213.7 23.7
2002 I 227.7 76.2 303.8 88.0 -0.4 215.4 23.9
2002 II 229.7 77.3 307.0 89.5 -0.4 217.1 24.1
2002 III 231.7 78.6 310.3 91.1 -0.4 218.8 24.3
2002 IV 233.8 79.9 313.6 92.6 -0.4 220.6 24.5
Percentage changes
1998/97 4.6 2.6 4.2 8.8 2.6 -0.2
1999/98 3.8 4.0 3.8 8.1 2.3 3.2
2000/99 3.9 7.8 4.8 9.1 3.1 3.3
2001/00 3.2 7.4 4.2 7.5 2.9 3.9
2002/01 3.6 6.9 4.4 7.1 3.3 3.5
2003/02 3.3 6.5 4.1 6.6 3.1 3.3
2000IV/99IV 3.1 7.9 4.2 8.3 2.7 3.0
2001IV/00IV 3.3 7.2 4.3 7.1 3.2 3.6
2002IV/01IV 3.6 6.6 4.3 7.0 3.3 3.4
 Gross
 value
 added
 at basic
 prices
1997 673.4
1998 693.6
1999 708.7
2000 730.3
2001 750.8
2002 775.2
2003 798.9
2000 I 180.3
2000 II 182.2
2000 III 183.6
Forecast
2000 IV 184.2
2001 I 185.4
2001 II 187.0
2001 III 188.4
2001 IV 190.0
2002 I 191.5
2002 II 193.0
2002 III 194.6
2002 IV 196.1
Percentage changes
1998/97 3.0
1999/98 2.2
2000/99 3.1
2001/00 2.8
2002/01 3.3
2003/02 3.1
2000IV/99IV 2.6
2001IV/00IV 3.1
2002IV/01IV 3.2
Source: Economic Trends; NIESR estimates.
(a.)Non-profit institutions households.
(b.)Including acquisitions less disposals of valuables.
 Household income and
 expenditure
 Seasonally adjusted
 Compensation Gross
 Average [a] Employees of employees [d] disposable
 earnings income
 1995=100 millions [pound] billion,
 current prices
1997 107.9 23.3 432.4 555.5
1998 112.5 23.8 463.0 569.5
1999 118.0 24.1 492.4 599.3
2000 123.1 24.3 517.9 620.7
2001 128.6 24.4 542.6 667.1
2002 135.4 24.5 573.4 703.4
2003 143.5 24.7 611.8 749.6
2000 I 122.3 24.3 128.0 154.5
2000 II 122.1 24.3 128.5 153.1
2000 III 123.4 24.3 129.9 153.9
Forecast
2000 IV 124.7 24.4 131.5 159.3
2001 I 126.3 24.4 133.3 163.1
2001 II 127.9 24.4 134.8 166.4
2001 III 129.3 24.4 136.3 167.6
2001 IV 130.9 24.5 138.2 170.1
2002 I 132.5 24.5 140.0 171.9
2002 II 134.4 24.5 142.2 174.6
2002 III 136.3 24.6 144.4 176.9
2002 IV 138.3 24.6 146.8 179.9
Percentage changes
1998/97 4.3 2.5 7.1 2.5
1999/98 4.9 1.2 6.3 5.2
2000/99 4.3 0.8 5.2 3.6
2001/00 4.5 0.4 4.8 7.5
2002/01 5.3 0.5 5.7 5.4
2003/02 6.0 0.7 6.7 6.6
2000IV/99IV 3.9 0.4 4.4 3.8
2001IV/00IV 5.0 0.4 5.1 6.8
2002IV/01IV 5.6 0.6 6.2 5.8
 Real Real Final consumption
 household non-property expenditure
 disposable income [f]
 income [b] Total Durable
 [pound] billion,
 1995 prices
1997 525.3 385.1 489.8 48.0
1998 525.8 385.4 509.5 51.8
1999 544.5 400.2 532.0 55.0
2000 560.1 410.2 552.6 58.2
2001 591.4 426.3 570.1 63.2
2002 609.8 437.9 585.9 65.3
2003 631.9 452.5 601.0 68.3
2000 I 139.9 103.5 136.1 14.3
2000 II 138.4 101.4 137.5 14.4
2000 III 138.9 100.8 138.9 14.6
Forecast
2000 IV 142.9 104.6 140.1 14.9
2001 I 145.5 105.2 140.9 15.4
2001 II 147.9 106.6 142.0 15.8
2001 III 148.3 106.8 143.1 15.9
2001 IV 149.7 107.8 144.1 16.0
2002 I 150.5 108.2 145.1 16.1
2002 II 151.8 109.1 146.0 16.2
2002 III 152.9 109.8 146.9 16.4
2002 IV 154.5 110.9 147.9 16.6
Percentage changes
1998/97 0.1 0.1 4.0 8.0
1999/98 3.6 3.8 4.4 6.2
2000/99 2.9 2.5 3.9 5.9
2001/00 5.6 3.9 3.2 8.5
2002/01 3.1 2.7 2.8 3.4
2003/02 3.6 3.3 2.6 4.5
2000IV/99IV 3.2 2.7 3.7 6.1
2001IV/00IV 4.8 3.0 2.9 7.5
2002IV/01IV 3.2 2.9 2.6 3.5
 Savings House
 ratio [c] prices [e]
 per cent 1995=100
1997 9.3 112.8
1998 5.8 125.7
1999 5.2 139.4
2000 4.1 159.6
2001 6.4 168.0
2002 6.7 168.4
2003 7.7 170.0
2000 I 5.2 151.3
2000 II 3.4 159.5
2000 III 3.0 162.5
Forecast
2000 IV 4.9 165.0
2001 I 6.0 166.8
2001 II 6.7 168.2
2001 III 6.3 168.5
2001 IV 6.5 168.6
2002 I 6.4 168.5
2002 II 6.6 168.4
2002 III 6.7 168.3
2002 IV 7.1 168.4
Percentage changes
1998/97 11.5
1999/98 10.9
2000/99 14.5
2001/00 5.3
2002/01 0.2
2003/02 1.0
2000IV/99IV 11.8
2001IV/00IV 2.2
2002IV/01IV -0.1

Source: Economic Trends; NIESR estimates.

(a.)Average earnings equal wages and salaries divided by the number of employees in employment.

(b.)Deflated by consumers' expenditure deflator.

(c.)Ratio of savings to disposable income.

(d.)Includes employers' social contribution.

(e.)Department of Environment, mix adjusted.

(f.)Real non-property income is wages and salaries plus social benefits received plus a share of the gross operating surplus less social contributions paid by households less taxes paid on non-property income.

 Forecasts of fixed investment
 [pound] billion, 1995 prices, seasonally adjusted
 Business investment Housing
 Manufact- Non-manu- Total Private Public
 uring facturing
1997 19.8 73.2 93.0 20.8 1.8
1998 20.7 85.2 105.9 21.5 1.7
1999 17.7 96.1 113.8 21.7 1.4
2000 18.2 96.3 114.6 22.4 1.6
2001 18.6 96.6 115.2 23.4 2.3
2002 19.2 100.5 119.7 23.7 2.9
2003 19.9 104.6 124.4 24.5 3.5
2000 I 4.7 24.1 28.7 5.5 0.3
2000 II 4.5 24.4 28.9 5.5 0.4
2000 III 4.5 24.3 28.8 5.6 0.4
Forecast
2000 IV 4.6 23.5 28.1 5.7 0.5
2001 I 4.6 23.8 28.4 5.8 0.5
2001 II 4.6 24.0 28.7 5.9 0.6
2001 III 4.7 24.3 28.9 5.9 0.6
2001 IV 4.7 24.5 29.2 5.9 0.6
2002 I 4.7 24.8 29.5 5.9 0.7
2002 II 4.8 25.0 29.8 5.9 0.7
2002 III 4.8 25.2 30.1 5.9 0.7
2002 IV 4.9 25.5 30.4 6.0 0.8
Percentage changes
1998/97 4.4 16.4 13.8 3.3 -7.3
1999/98 -14.7 12.9 7.5 0.9 -17.9
2000/99 3.2 0.2 0.7 2.9 11.7
2001/00 2.1 0.2 0.5 4.7 45.2
2002/01 3.4 4.1 4.0 1.2 27.1
2003/02 3.4 4.0 3.9 3.6 21.6
2000IV/99IV 2.1 -3.2 -2.4 0.3 40.7
2001IV/00IV 3.2 4.1 3.9 3.1 22.5
2002IV/01IV 3.4 4.1 4.0 1.7 30.1
 General Total Real cost Corporate
 government [a] of capital profit share
 (excl. dwellings) (%) of GDP (%)
1997 9.4 131.3 4.1 26.9
1998 10.0 144.9 3.8 26.2
1999 9.9 152.4 3.4 25.1
2000 11.3 155.0 3.3 25.9
2001 15.2 161.3 3.4 26.6
2002 18.0 169.8 3.3 26.9
2003 20.6 178.8 3.2 27.0
2000 I 2.4 38.6 3.2 25.0
2000 II 2.8 38.7 3.4 25.4
2000 III 2.6 38.7 3.1 26.4
Forecast
2000 IV 3.5 39.1 3.4 26.8
2001 I 3.7 39.7 3.4 26.5
2001 II 3.8 40.1 3.5 26.5
2001 III 3.8 40.5 3.4 26.6
2001 IV 4.0 41.0 3.4 26.6
2002 I 4.2 41.5 3.4 26.8
2002 II 4.4 42.1 3.4 26.8
2002 III 4.6 42.7 3.3 26.9
2002 IV 4.8 43.4 3.3 27.0
Percentage changes
1998/97 5.9 10.4
1999/98 -0.2 5.2
2000/99 14.0 1.7
2001/00 34.1 4.0
2002/01 18.2 5.3
2003/02 14.3 5.3
2000IV/99IV 43.4 0.4
2001IV/00IV 13.5 4.9
2002IV/01IV 21.6 5.8
Source: Economic Trends; NIESR estimates.
 Inventory accumulation
 Change in inentories, [pound]
 billion at 1995 prices
 Manufacturing Distribution Other [a] Total
1996 -0.3 1.3 0.8 1.8
1997 -0.6 2.3 2.1 3.8
1998 0.5 1.0 2.8 4.2
1999 -1.2 0.0 -0.2 -1.4
2000 0.6 2.1 -0.1 2.7
2001 -1.4 0.7 0.7 0.0
 Stock-output ratios
 (1990=100) Cost of
 Manufacturig [b] Distribution [c] Other Stocks (%)
1996 100.8 101.0 100.2 5.8
1997 99.5 103.2 98.2 10.2
1998 97.3 104.4 104.0 9.5
1999 96.3 103.4 102.5 1.3
2000 95.8 104.8 96.2 1.2
2001 93.1 101.7 98.6 8.7
Source: Economic Trendsand NIESR estimates.
(a.)Includes National Accounts quarterly alignment adjustment.
(b.)Manufacturers' stockto manufacturing production.
(c.)Distributors' stocks to distribution output.
 Balance of payments: current account
 Seasonally adjusted
 Export volume Import volume Terms of
 Total Total trade [b]
 Manufactures goods Manufactures goods
 ([pounds] billion 1995=100
 at 1995 prices) [a]
1997 152.9 179.1 165.0 196.8 103.7
1998 155.7 181.3 180.8 213.6 106.0
1999 162.2 187.6 96.2 229.4 107.2
2000 181.4 208.3 219.5 253.6 108.2
2001 200.6 228.3 239.6 273.4 108.9
2002 219.1 248.1 259.4 293.4 109.6
2003 237.3 267.8 278.5 313.3 11O.6
2000 I 43.6 50.3 52.2 60.7 107.4
2000 II 44.9 51.7 54.6 63.1 108.0
2000 III 45.8 52.4 55.8 64.4 108.2
Forecast
2000 IV 47.1 53.9 56.9 65.4 109.0
2001 I 48.3 55.1 58.1 66.5 108.4
2001 II 49.6 56.4 59.3 67.7 109.3
2001 III 50.8 57.7 60.5 68.9 109.0
2001 IV 52.0 59.0 61.7 70.2 109.0
2002 I 53.1 60.2 63.0 71.5 109.3
2002 II 54.2 61.4 64.2 72.7 109.5
2002 III 55.3 62.6 65.5 74.0 109.8
2002 IV 56.5 63.8 66.7 75.2 110.0
Percentage changes
1998/97 1.8 1.2 9.6 8.5 2.2
1999/98 4.2 3.5 8.5 7.4 1.1
2000/99 11.9 11.0 11.9 10.5 0.9
2001/00 10.6 9.6 9.1 7.8 0.7
2002/01 9.2 8.7 8.3 7.3 0.7
2003/02 8.3 7.9 7.4 6.8 0.9
2000IV/99IV 12.7 10.9 11.0 9.4 0.8
2001IV/00IV 10.2 9.5 8.5 7.3 0.0
2002IV/01IV 8.7 8.2 8.0 7.2 1.0
 Export price Goods Service
 competitiveness [e] balance transfers & income
 balance
 ([pounds]
 billion) [c]
1997 111.1 -11.9 19.3
1998 109.9 -20.5 20.9
1999 104.9 -26.2 17.1
2000 99.6 -27.2 15.9
2001 97.4 -23.7 13.6
2002 98.1 -20.9 9.4
2003 98.8 -17.2 4.2
2000 I 103.0 -6.6 3.6
2000 II 100.5 -6.9 4.2
2000 III 97.2 -7.2 4.5
Forecast
2000 IV 97.6 -6.4 3.6
2001 I 96.4 -6.5 3.4
2001 II 97.5 -5.8 3.6
2001 III 97.7 -5.8 3.5
2001 IV 97.8 -5.7 3.2
2002 I 98.0 -5.5 2.8
2002 II 98.1 -5.3 2.5
2002 III 98.2 -5.1 2.2
2002 IV 98.3 -4.9 1.9
Percentage changes
1998/97 -1.1
1999/98 -4.5
2000/99 -5.1
2001/00 -2.2
2002/01 0.8
2003/02 0.7
2000IV/99IV -5.7
2001IV/00IV 0.2
2002IV/01IV 0.5
 Current World
 balance trade [d]
 1995=100
1997 7.4 117.2
1998 0.4 125.0
1999 -9.1 132.5
2000 -11.3 147.9
2001 -10.1 159.8
2002 -11.4 172.4
2003 -12.9 186.2
2000 I -3.1 141.8
2000 II -2.7 146.5
2000 III -2.7 150.7
Forecast
2000 IV -2.7 152.5
2001 I -3.1 155.4
2001 II -2.2 157.7
2001 III -2.3 161.5
2001 IV -2.5 164.8
2002 I -2.6 168.0
2002 II -2.8 170.5
2002 III -2.9 173.8
2002 IV -3.0 177.2
Percentage changes
1998/97 9.4
1999/98 6.7
2000/99 6.0
2001/00 11.6
2002/01 8.1
2003/02 7.8
2000IV/99IV 10.0
2001IV/00IV 8.1
2002IV/01IV 7.5

Source: Economic Trends; NIESR estimates.

(a.)Balance of payments basis.

(b.)Ratio of average value of exports of goods to imports of goods.

(c.)Balance of payments basis.

(d.)UK export market weights.

(e.)A rise denotes a loss in UK competitiveness.

 Financial account
 Basic Current Net direct Net portfolio Other invest-
 balance [a] account investment [b] investment ment abroad [b,c]
1997 -33.6 7.4 -16.3 -24.8 -170.8
1998 -51.9 0.4 -33.5 -18.8 -16.1
1999 19.4 -9.1 -76.0 104.5 -57.4
Forecast
2000 25.1 -11.3 -77.0 113.4 -266.5
2001 166.3 -10.1 22.3 154.2 -192.1
2002 136.4 -11.4 23.7 124.2 -192.1
 Other invest- Balancing
 ment in the UK [b,c] item
1997 210.2 5.8
1998 81.9 13.9
1999 35.2 -2.8
Forecast
2000 272.3 30.9
2001 18.5 -7.2
2002 55.2 -0.5
Source: Economic Trends; NIESR estimates.
(a.)Current account plus net direct and portfolio investments.
(b.)A negative sign implies a capital outflow.
(c.)'Other' investment includes international bank loans and deposits.
 Output and productivity
 Seasonally adjusted, 1995=100
 Sectoral output [a]
 Manufac- Public Distri- Business Construct-
 turing bution services ion
 (0.216) (0.225) (0.146) (0.138) (0.052)
1997 101.7 103.5 106.5 114.7 104.7
1998 102.2 105.6 109.2 123.1 106.1
1999 102.2 106.6 111.0 128.6 107.0
2000 103.6 108.6 113.3 136.4 108.9
2001 105.3 111.7 119.0 144.0 110.9
2002 108.1 115.7 124.9 151.1 115.6
2003 112.1 119.1 130.2 157.6 120.0
2000 I 102.8 107.7 111.4 132.7 111.3
2000 II 103.2 108.5 112.6 135.6 108.8
2000 III 103.9 108.9 114.0 137.9 107.3
Forecast
2000 IV 104.3 109.4 115.1 139.3 108.0
2001 I 104.6 110.1 116.7 141.2 109.2
2001 II 105.0 111.4 118.2 143.1 110.3
2001 III 105.5 112.3 119.8 144.9 111.4
2001 IV 106.2 113.1 121.3 146.8 112.6
2002 I 106.9 114.1 122.8 148.6 113.8
2002 II 107.6 115.2 124.2 150.2 115.0
2002 III 108.5 116.2 125.6 151.9 116.2
2002 IV 109.4 117.2 126.9 153.6 117.4
Percentage changes
1998/97 0.5 2.0 2.5 7.3 1.3
1999/98 0.0 1.0 1.7 4.5 0.8
2000/99 1.3 1.9 2.0 6.0 1.8
2001/00 1.7 2.9 5.1 5.6 1.9
2002/01 2.6 3.5 4.9 4.9 4.2
2003/02 3.7 2.9 4.3 4.3 3.8
2000IV/99IV 1.0 1.9 3.1 5.3 -0.3
2001IV/00IV 1.8 3.4 5.4 5.4 4.3
2002IV/01IV 3.1 3.6 4.6 4.6 4.2
 GDP(b)
 Oil Rest Total Per Manufact-
 worker uring pro-
 ductivity [c]
 (0.021) (0.202)
1997 104.7 107.3 105.9 103.0 99.9
1998 107.5 111.7 109.1 104.4 99.8
1999 112.2 116.7 111.5 105.9 103.3
2000 112.6 122.2 114.9 108.6 107.5
2001 106.6 122.6 118.2 111.5 113.1
2002 108.7 123.7 122.0 114.6 118.9
2003 110.9 124.4 125.7 117.4 124.9
2000 I 111.4 120.5 113.5 107.3 105.3
2000 II 116.4 122.5 114.7 108.4 106.5
2000 III 117.2 123.5 115.6 109.2 108.5
Forecast
2000 IV 105.3 122.4 116.0 109.6 109.8
2001 I 105.8 122.3 116.8 110.3 111.0
2001 II 106.3 122.3 117.7 111.1 112.4
2001 III 106.8 122.7 118.6 111.8 113.8
2001 IV 107.4 123.0 119.6 112.7 115.2
2002 I 107.9 123.3 120.6 113.4 116.7
2002 II 108.5 123.6 121.5 114.2 118.1
2002 III 109.0 123.8 122.5 114.9 119.6
2002 IV 109.5 124.0 123.5 115.7 121.1
Percentage changes
1998/97 2.6 4.2 3.0 1.4 -0.1
1999/98 4.3 4.4 2.2 1.4 3.6
2000/99 0.4 4.7 3.1 2.6 4.1
2001/00 -5.3 0.3 2.8 2.6 5.2
2002/01 2.0 0.9 3.3 2.8 5.1
2003/02 2.0 0.6 3.1 2.5 5.1
2000IV/99IV -6.0 3.1 2.6 2.5 4.0
2001IV/00IV 2.0 0.5 3.1 2.8 4.9
2002IV/01IV 2.0 0.8 3.2 2.7 5.1
Source: Economic Trends; Labour Market Trends; NIESR estimates.
(a.)1995 share of output in parentheses.
(b.)Gross value added at constant 1995 basic prices.
(c.)Including self-employment.
 The UK labor market
 Seasonally adjusted, millions
 Employment, thousands [a]
 Self Training
 Employees employment schemes Total
1997 23262 3614 381 27257
1998 23839 3516 339 27693
1999 24123 3464 312 27902
2000 24326 3407 308 28041
2001 24415 3369 308 28092
2002 24544 3368 308 28220
2003 24707 3358 308 28373
2000 I 24289 3425 306 28019
2000 II 24323 3423 308 28054
2000 III 24339 3399 308 28045
Forecast
2000 IV 24354 3383 308 28045
2001 I 24371 3374 308 28053
2001 II 24404 3370 308 28082
2001 III 24429 3367 308 28104
2001 IV 24455 3367 308 28130
2002 I 24488 3367 308 28163
2002 II 24523 3368 308 28198
2002 III 24562 3368 308 28238
2002 IV 24605 3368 308 28281
Percentage changes
1998/97 2.5 -2.7 -11.2 1.6
1999/98 1.2 -1.5 -7.7 0.8
2000/99 0.8 -1.6 -1.6 0.5
2001/00 0.4 -1.1 0.2 0.2
2002/01 0.5 -0.1 0.0 0.5
2003/02 0.7 -0.3 0.0 0.5
2000IV/99IV 0.4 -1.3 1.8 0.2
2001IV/00IV 0.4 -0.5 0.0 0.3
2002IV/01IV 0.6 0.0 0.0 0.5
 Unemployment, thousands
 ILO definition Claimant Long-term [c]
1997 2032 1586 776
1998 1832 1347 585
1999 1768 1250 522
2000 1629 1091 429
2001 1606 1069 414
2002 1581 1061 411
2003 1543 1033 400
2000 I 1704 1158 456
2000 II 1623 1107 441
2000 III 1590 1055 412
Forecast
2000 IV 1599 1045 406
2001 I 1606 1060 411
2001 II 1604 1064 412
2001 III 1606 1073 416
2001 IV 1608 1080 419
2002 I 1598 1074 416
2002 II 1587 1067 413
2002 III 1576 1058 410
2002 IV 1563 1047 406
Percentage changes
1998/97 -9.8 -15.1 -24.6
1999/98 -3.5 -7.2 -10.8
2000/99 -7.8 -12.7 -17.8
2001/00 -1.4 -2.0 -3.4
2002/01 -1.6 -0.7 -0.8
2003/02 -2.4 -2.6 -2.6
2000IV/99IV -8.1 -11.9 -19.7
2001IV/00IV 0.6 3.4 3.2
2002IV/01IV -2.8 -3.1 -3.1
 Participation, thousands
 Population of
 Civilian workforce [d] Inactive working age
1997 29288 6948 36236
1998 29525 6904 36429
1999 29670 6988 36658
2000 29670 7221 36891
2001 29698 7428 37126
2002 29801 7519 37320
2003 29916 7573 37489
2000 I 29723 7080 36803
2000 II 29678 7184 36861
2000 III 29635 7285 36920
Forecast
2000 IV 29644 7334 36978
2001 I 29659 7378 37037
2001 II 29686 7410 37096
2001 III 29710 7445 37155
2001 IV 29738 7477 37215
2002 I 29760 7496 37257
2002 II 29785 7514 37299
2002 III 29813 7528 37341
2002 IV 29844 7540 37383
Percentage changes
1998/97 0.8 -0.6 0.5
1999/98 0.5 1.2 0.6
2000/99 0.0 3.3 0.6
2001/00 0.1 2.9 0.6
2002/01 0.3 1.2 0.5
2003/02 0.4 0.7 0.5
2000IV/99IV -0.3 4.7 0.6
2001IV/00IV 0.3 1.9 0.6
2002IV/01IV 0.4 0.8 0.5
 Underutilisation %[b]
 ILO unemployment Claimant unem- Population em-
 rate ployment rate ployed rate
1997 6.9 5.5 24.8
1998 6.2 4.6 24.0
1999 6.0 4.3 23.9
2000 5.5 3.7 24.0
2001 5.4 3.7 24.3
2002 5.3 3.6 24.4
2003 5.2 3.5 24.3
2000 I 5.7 4.0 23.9
2000 II 5.5 3.8 23.9
2000 III 5.4 3.6 24.0
Forecast
2000 IV 5.4 3.6 24.2
2001 I 5.4 3.6 24.3
2001 II 5.4 3.6 24.3
2001 III 5.4 3.7 24.4
2001 IV 5.4 3.7 24.4
2002 I 5.4 3.7 24.4
2002 II 5.3 3.6 24.4
2002 III 5.3 3.6 24.4
2002 IV 5.2 3.6 24.3
Percentage changes
1998/97
1999/98
2000/99
2001/00
2002/01
2003/02
2000IV/99IV
2001IV/00IV
2002IV/01IV

Source: Economic Trends; Labour Market Trends, Population Trends; NIESR estimates.

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

(b.)The ILO unemployment rate is expressed as a percentage of the civilian workforce. The claimant unemployment rate is expressed as a percentage of employment plus training schemes and claimant unemployment. The population not employed is expressed as a percentage of the population of working age.

(c.)Over six months.

(d.)Employment plus ILO unemployment.

 Price indices
 Seasonally adjusted, 1995=100
 Retail price
 index [a]
 Whole- Harmonised
 Unit sale Consumer index of
 labour Imports price price consumer All
 costs deflator index [b] index prices items
1997 106.0 93.6 102.2 105.7 104.3 105.6
1998 110.2 87.7 102.1 108.3 106.0 109.3
1999 114.7 85.5 101.7 110.0 107.4 110.9
2000 117.1 86.2 102.6 110.8 108.2 114.1
2001 119.3 87.8 104.0 112.8 109.7 116.4
2002 122.1 89.4 106.0 115.3 111.5 119.2
2003 126.5 91.9 108.8 118.6 114.1 122.4
2000 I 117.1 85.8 102.2 110.4 107.4 112.3
2000 II 116.5 86.0 102.5 110.6 108.3 114.3
2000 III 116.9 86.1 102.7 110.8 108.3 114.6
Forecast
2000 IV 117.9 86.8 103.0 111.5 108.8 115.3
2001 I 118.8 87.9 103.4 112.0 108.7 115.1
2001 II 119.0 87.4 103.7 112.5 110.1 116.7
2001 III 119.4 87.8 104.2 113.0 110.0 116.8
2001 IV 120.1 88.1 104.6 113.6 109.8 116.9
2002 I 120.8 88.6 105.1 114.3 110.0 117.4
2002 II 121.7 89.1 105.7 115.0 111.8 119.4
2002 III 122.6 89.7 106.3 115.7 112.0 119.8
2002 IV 123.6 90.3 106.9 116.5 112.0 120.1
Percentage changes
1998/97 4.0 -6.3 -0.1 2.4 1.6 3.4
1999/98 4.1 -2.5 -0.4 1.6 1.4 1.5
2000/99 2.1 0.8 0.9 0.7 0.8 2.9
2001/00 1.9 1.9 1.3 1.8 1.4 1.9
2002/01 2.4 1.9 1.9 2.3 1.6 2.4
2003/02 3.5 2.7 2.6 2.8 2.4 2.7
2000IV/99IV 1.8 2.1 1.0 0.6 0.9 3.2
2001IV/00IV 1.9 1.6 1.5 1.9 0.9 1.3
2002IV/01IV 2.9 2.5 2.2 2.5 2.0 2.7
 GDP GDP Manufac-
 Excluding deflator deflator turing
 mortgage (basic (market capacity
 interest prices) prices) utilisation
1997 105.8 106.2 106.3 98.3
1998 108.6 108.9 109.5 98.2
1999 111.1 111.0 112.0 96.8
2000 113.4 112.6 113.9 97.2
2001 115.5 115.2 116.2 98.0
2002 117.9 118.5 119.4 99.0
2003 121.1 122.7 123.4 100.3
2000 I 112.1 112.0 113.2 96.6
2000 II 113.6 111.9 113.3 96.8
2000 III 113.7 112.7 114.1 97.6
Forecast
2000 IV 114.3 113.8 114.9 97.7
2001 I 114.3 114.2 115.2 97.7
2001 II 115.9 115.0 116.0 97.9
2001 III 115.9 115.5 116.5 98.0
2001 IV 115.8 116.2 117.2 98.3
2002 I 116.2 117.1 118.0 98.5
2002 II 118.2 118.0 118.9 98.8
2002 III 118.4 118.9 119.8 99.1
2002 IV 118.6 120.0 120.8 99.5
Percentage changes
1998/97 2.7 2.5 3.0 -0.1
1999/98 2.3 1.9 2.3 -1.5
2000/99 2.1 1.5 1.7 0.4
2001/00 1.8 2.3 2.1 0.8
2002/01 2.1 2.8 2.7 1.0
2003/02 2.8 3.6 3.4 1.4
2000IV/99IV 2.1 1.3 1.3 0.1
2001IV/00IV 1.3 2.1 2.0 0.6
2002IV/01IV 2.4 3.2 3.1 1.2
Source: Economic Trends; NIESR estimates.
(a.)Not seasonally adjusted.
(b.)Excluding food, drink, tobacco and petroleum.
 National and sectoral savings
 As a percentage of GDP
 Household sector Company sector
 Saving Investment Saving Investment
1997 6.6 4.2 11.8 11.8
1998 4.0 4.1 12.0 12.7
1999 3.6 4.3 9.9 12.1
Forecast
2000 2.8 4.3 9.9 12.2
2001 4.5 4.3 9.9 11.4
2002 4.7 4.2 10.0 11.6
2003 5.3 4.2 9.8 11.7
2004 5.9 4.4 9.4 11.7
 Government sector Whole economy Finance
 from
 Saving Investment Saving Investment overseas
1997 -0.4 1.2 18.0 17.2 -0.9
1998 2.0 1.2 18.0 18.0 0.0
1999 2.7 1.0 16.2 17.5 1.0
Forecast
2000 3.6 1.2 16.3 17.8 1.2
2001 2.4 1.7 16.8 17.4 1.0
2002 2.3 2.0 17.0 17.8 1.1
2003 2.2 2.3 17.3 18.2 1.2
2004 2.2 2.4 17.5 18.5 1.2
 Residual
1997 0.1
1998 0.1
1999 0.2
Forecast
2000 0.3
2001 -0.3
2002 -0.3
2003 -0.3
2004 -0.2
 Medium-term projections
 Seasonally adjusted
 1999 2000 2001 2002
Growth rate of expenditure and output (per cent)
 Household spending 4.4 3.9 3.2 2.8
 Govt spending 4.0 3.3 4.0 4.0
 Fixed investment 5.2 1.7 4.0 5.3
 Exports of goods and
 services 4.0 7.8 7.4 6.9
 Imports of goods and
 services 8.1 9.1 7.5 7.1
 GDP at market prices 2.3 3.1 2.9 3.3
Manufacturing output 0.0 1.3 1.7 2.6
Growth rate of cost and prices (per cent)
 Average earnings 4.9 4.3 4.5 5.3
 RPI 1.5 2.9 1.9 2.4
 RPIX 2.3 2.1 1.8 2.1
 Consumer price index 1.6 0.7 1.8 2.3
 GDP deflator (basic prices) 1.93 1.46 2.32 2.82
Productivity growth 1.43 2.56 2.62 2.78
ILO unemployment rate 5.96 5.49 5.41 5.30
Manufacturing capacity
 utilisation 0.88 0.89 0.89 0.90
Base rates 5.34 5.98 6.00 6.00
Effective exchange rate 103.72 107.53 101.99 100.73
Current account deficit
 (% of GDP) 1.03 1.21 1.03 1.10
PSNCR (as a % of GDP) -0.33 -4.57 -0.71 0.19
Government debt
 (as % of GDP) 57.30 52.25 48.89 45.76
 2003 Average
 2004-13
Growth rate of expenditure and output (per cent)
 Household spending 2.6 2.6
 Govt spending 3.3 1.7
 Fixed investment 5.3 2.8
 Exports of goods and
 services 6.5 5.0
 Imports of goods and
 services 6.6 4.8
 GDP at market prices 3.1 2.4
Manufacturing output 3.7 2.1
Growth rate of cost and prices (per cent)
 Average earnings 6.0 5.5
 RPI 2.7 3.1
 RPIX 2.8 2.8
 Consumer price index 2.8 3.0
 GDP deflator (basic prices) 3.59 3.50
Productivity growth 2.50 1.84
ILO unemployment rate 5.16 4.77
Manufacturing capacity
 utilisation 0.91 0.93
Base rates 5.69 5.02
Effective exchange rate 99.57 99.00
Current account deficit
 (% of GDP) 1.17 0.56
PSNCR (as a % of GDP) 0.59 0.44
Government debt
 (as % of GDP) 43.04 31.86
 Average absolute errors, NIESR forecasts
 made in January/February [*]
 All figures per cent unless
 otherwise indicated
 Current year
 Average error Error range
Real GDP growth 1.0 0.1 - 2.3
Domestic demand growth 1.1 0.2 - 2.2
Consumers expenditure growth 1.4 0.0 - 4.2
Investment growth 3.0 0.2 - 8.7
Export volume growth 2.4 0.5 - 4.5
Import volume growth 2.7 0.3 - 4.9
Real personal disposable income growth 1.5 0.2 - 4.0
Current account ([pound]bn) 5.1 0.1 - 12.7
Public sector borrowing
requirement ([pound]bn) [a] 7.3 0.1 - 24.0
Retail price inflation (Q4) 1.1 0.3 - 2.7
 Year ahead Average
 outturn
 Average error Error range 1982-99
Real GDP growth 1.4 0.1 - 3.2 2.6
Domestic demand growth 1.9 0.2 - 5.6 2.9
Consumers expenditure growth 2.0 0.0 - 5.9 3.0
Investment growth 4.1 0.1 - 12.6 4.2
Export volume growth 2.3 0.1 - 5.6 4.7
Import volume growth 3.9 0.1 - 10.5 6.0
Real personal disposable income growth 1.9 0.3 - 6.3 2.9
Current account ([pound]bn) 7.1 0.0 - 20.4 -5.8
Public sector borrowing
requirement ([pound]bn) [a] 11.1 0.0 - 27.1 11.5
Retail price inflation (Q4) 1.8 0.4 - 5.1 4.5
(*.)All errors defined by subtracting the forecast
from the outturns for 1982-99.
(a.)Financial year.
 Probability distribution of growth and inflation forecasts
 2001Q4 2000Q4
Inflation: probability of 12 month RPIX
inflation falling in the following ranges
less than 1.5 per cent 56 35
1.5 to 2.5 percent 26 17
2.5 to 3.5 per cent 13 17
more than 3.5 per cent 5 31
 100 100
Central projection 1.3 2.4
Standard deviation 1.34 2.28
Growth: probability of annual growth
rate falling in the following ranges
less than 0 per cent -- 4
0 to 1 percent 3 7
1 to 2 percent 16 13
2 to 3 percent 34 19
3 to 4 percent 32 21
more than 4 per cent 15 35
 100 100
Central projection 2.9 3.3
Standard deviation 1.05 1.84

Box A. A state-funded silver spoon?

One of the more interesting proposals (Nissan and Le Grand, 2000) for the budget is that the Government should pay a capital sum to children either at birth or when they reach the age of 18. There is a powerful economic argument for this. Most people can expect their incomes to rise during the first twenty years of their working lives while they would probably like their consumption levels to be fairly stable. These two could be reconciled only if people are able to borrow while young and repay their debts in the second part of their working lives. But financial institutions are understandably chary of lending to people on the assumption that their incomes will rise. This is true on average but not true for everyone.

However, the state can help in a number of ways. One is to allow people to defer part of their tax bill until they can afford to pay it. Taxes on income from capital fulfil this function (Dutta, Sefton and Weale, 2000). Another is the proposal described above, providing money to people when they are young and collecting the resources needed to pay for the scheme by general taxation or from a revision to the inheritance tax system. With just over 700,000 live births per year, a scheme to pay [pounds]1000 for each child would cost the taxpayer [pounds]700 million or less than 0.1 per cent of GDP and would have negligible effect on the overall fiscal balance. If the money were invested for children to have access to it from the age of 18 for approved purposes such as education or a mortgage, the value of the [pounds]1000 would increase, allowing for a real return of 5 per cent per annum to [pounds]2400.

This makes it seem as though giving money to children at birth and letting it accumulate offers a cheap way of providing a much larger sum at the age of 18. Of course this is a fallacy. The scheme appears cheaper to the taxpayer, because a payment at age 18 might start immediately, while if the smaller payment is made at birth it is equivalent to beginning to pay a larger sum to 18-year olds in 18 years time. Spending deferred is spending reduced.

It is, of course, impossible to avoid noting an irony in the scheme. The sum of [pounds]2400 which would be available at 18 is not so much less than the fee cost of a three-year university course. Thus the scheme would not be very different from abolishing university fees and making a compensatory payment to those who do not go to university. Nissan and Le Grand suggest that one purpose of the scheme is to reduce the degree of wealth inequality, which is much greater than that of income inequality. This may be desirable but it has to be remembered that many government policies, such as old age pensions, reduce the need for people to provide for their old age and affect the poor disproportionately relative to the rich. This increases the degree of wealth inequality because it reduces the need of poor people to save for their retirement. Thus it would be foolish to promote a single policy of this sort to alleviate a situation which is, in part, a consequence of other government policies.

There is another anomaly. At the same time as the government would be making resources available to young people, it is increasing the transfer to retired people, by raising benefits available to pensioners. These benefits are paid for out of taxes on young people and thus they worsen the very liquidity constraint which the lump sum donation is intended to alleviate.

There is a risk that yet another haphazard benefit will be added to what is already a haphazard tax and social security system. Before introducing the scheme it would be sensible for the government to conduct a serious review of how it wants to transfer resources from one age group to another and then to take a coherent overview of the various age-specific policies it may have in mind.

Dutta, J, Sefton, J.A. and Weale, M.R. (2000), 'Capital income taxation and public choice', National Institute Discussion Paper No. 162.

Nissan, D. and Le Grand, J. (2000), A Capital Idea: Start-up Grants for Young People, London, Fabian Society.