THE UK ECONOMY.

Pain, Nigel ; Kneller, Richard

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

Section I. Recent developments and summary of the forecast

Introduction

The last four years have seen a continuation of the favourable macroeconomic trends which started in 1992. GDP growth has averaged 2.9 per cent per annum, at or above longer-term norms, the public finances have moved into surplus, claimant unemployment has fallen below 1 million for the first time since 1975 and inflation has declined to its lowest level since the 1960s.

However in recent weeks concerns have begun to be expressed about future economic prospects. In part this reflects the expected impact of the current downturn on the external environment and the recent corrections in equity prices. It is clear that the UK cannot remain immune from developments elsewhere in the world. Economic growth in the UK has already slowed since the middle of last year. After rising by 0.9 per cent in the second and third quarters of last year, output growth eased to just 0.3 per cent in the fourth quarter (at basic prices). We estimate that growth remained at this level in the first quarter of this year, taking the annual growth rate down to 2.4 per cent.

Much of the recent slowdown in GDP growth can be attributed to a series of temporary supply-side 'shocks', reflecting disruptions to the rail network, a reduction in oil and gas production and the emerging impact of the foot and mouth epidemic. As these factors diminish, quarterly growth is expected to revive once more.

Some indicators suggest that parts of the economy continue to grow rapidly. The volume of retail sales rose by 1 1/2 per cent in the first quarter of this year compared with the fourth quarter of 2000, and employment in the three months to February was 0.4 per cent higher than in the previous three months. The government's expenditure plans should also boost domestic demand by at least 1 percentage point this year. But there are signs that the slowdown in global activity is beginning to affect the manufacturing sector. Output has fallen sharply since the end of last year, and business sentiment has weakened in recent surveys by the CBI and the Chartered Institute of Purchasing and Supply.

Overall, GDP growth is expected to slow from 3 per cent in 2000 to 2.4 per cent this year, before strengthening to an average 2 3/4 per cent over the next two years. At present it appears that the trough in the unemployment rate and the underlying inflation rate may both occur in the next few months, offering a favourable economic background if a general election were to be called.

On the basis of this central forecast, we calculate that there is still only a slim chance of output declining either this year or next. Indeed, we estimate that the chances of growth being below 2 per cent this year are only about 33 per cent. The quarterly path of output growth is shown in Chart 1.

Monetary policy and inflation prospects

The annual rate of underlying retail price inflation (RPIX) was at 1.9 per cent in March. It is now two years since inflation was last at or above the official target rate of 2 1/2 per cent. Underlying inflation excluding indirect taxes (RPIY) has been below 2 1/2 per cent since June 1998. Other measures of inflation confirm that inflationary pressures have been unusually weak. The private consumption deflator rose by just 0.8 per cent last year, as did harmonised consumer prices. Wholesale prices fell by 0.2 per cent in the first quarter of 2001, and were just 0.4 per cent higher than a year earlier.

There are a number of factors that have helped to restrain price inflation. Perhaps the most important indirect influence in an open economy such as the UK is that global inflation has been weak over the past five years. The effect of this has been exacerbated by the strength of sterling during this period. Import prices, as measured by the aggregate goods and services deflator in the national accounts, have declined by 14 per cent since 1995.

Product markets have also become more contestable. The Single Market Programme has stimulated competition throughout the European Economic Area, and additional reforms in the UK have helped to lower prices in areas such as utilities provision, car sales and financial services. Such reforms should not have a permanent effect on the rate of inflation, but their effect could persist for some time.

Domestic cost pressures have also moderated over the past two years, most importantly in the labour market. Even though the unemployment rate, as measured by the claimant count, has fallen from 10 per cent in 1992 to 3.3 per cent in the first quarter of this year, there have been few signs of any acceleration in wage inflation. In the fourth quarter of last year average earnings, as measured by total compensation per employee, were 4.6 per cent higher than a year before, in line with the average annual growth rate for the calendar year as a whole. The annual rate of growth of whole economy unit labour costs slowed to 2.4 per cent last year from 4 per cent in 1999, reflecting an acceleration in productivity growth.

In the short term it appears quite possible that underlying inflation could dip below 1 1/2 per cent, necessitating a letter of explanation from the Governor of the Bank of England to the Chancellor. The indirect tax measures announced in the Pre-Budget Report and the Budget are expected to reduce inflation by around 0.5 percentage points from April, more than offsetting the impact of higher prices for agricultural produce as a result of the foot and mouth epidemic.

Monetary policy decisions have to be taken in the light of judgements about the prospects for future inflation. The base rate has already been reduced by 50 basis points since January, primarily reflecting the impact of revised judgements about the likely future strength of economic activity both in the UK and abroad. We expect to see a further reduction in base rates to 51/4 per cent by the summer. The surprise reduction in the US Federal Funds rate in mid-April provides one indication that short-term global economic conditions may have continued to be weaker than had previously been expected.

Thereafter we assume that short-term interest rates remain at this level for the next few years. This is a little higher than the level implied by the present forward rates in the financial markets, but appears to be consistent with the monetary policy stance required to ensure that the present inflation target is met, given the present expansionary fiscal stance. In the short term there remains scope for further prudential reductions in interest rates should the recent slowdown in quarterly activity continue for longer than we or the Monetary Policy Committee presently expect.

Underlying inflation, as measured by the RPI excluding mortgage interest payments, is forecast to rise from an average 1.7 per cent this year to 2.3 per cent in 2002, reaching 2.4 per cent by the end of next year. The medium-term projections reported in Table 11 show inflation at or below the present 2 1/2 per cent target for some years to come. The forecast for the next two years can largely be viewed as one in which the rate of price inflation moves into line with the weighted growth of imported and domestic costs.

Import prices are expected to rise by 1 per cent this year and 2 3/4 per cent next year, helped by a modest depreciation in the sterling effective exchange rate. The rate of growth of unit labour costs is expected to moderate to 2 per cent next year from 2.4 per cent this year, despite a modest rise in the rate of increase of average earnings. The latter primarily results from the planned rise from October in the adult minimum wage, taking it to [pound]4.10 per hour from the present level of [pound]3.70 per hour. Estimates from the Low Pay Commission suggest that this will raise the total wage bill, and hence for given employment average earnings, by 0.3 per cent. The policies announced in the Pre-Budget Report and the Budget may also add modestly to price inflation next year because duties on fuel and alcohol have been frozen only for the 2001-02 fiscal year.

An important factor helping to hold down inflationary pressures is an expected further rise in the rate of growth of labour productivity from 2.1 per cent this year to 2.6 per cent in 2002 and 2003. Recent and prospective trends in the growth of economy-wide employment and productivity per worker are shown in Chart 2. Between 1995 and 1999 productivity growth was unusually weak by historical standards, but employment rose sharply as successive labour market reforms began to take effect. Over the past 18 months these trends have been reversed, with employment growth slowing and productivity growth rising. In part this may reflect a rise in the flow of capital services used in production as a result of strong business investment growth in recent years, raising labour but not total factor productivity. But it also reflects some improvement in the 'human capital', and hence average productivity levels, of workers brought back into employment from long-term unemployment.

If productivity growth remains robust, it is unlikely that a modest rise in the rate of growth of average earnings to around 5 per cent will be of much concern to the Monetary Policy Committee. Total employment is expected to be largely unchanged over the course of next year, and the claimant count and the ILO unemployment rates are both expected to rise slightly, which should also help to moderate wage pressures.

It is possible that a change in the monetary policy framework could be introduced after the general election, although we have not sought to take account of this in our present forecast. The Bank of England has been required to achieve an inflation target of 2 1/2 per cent since it was granted formal operational independence in 1997. At that time the Treasury stated, "The presumption is that there will be no changes during the present Parliament. However the target could be lowered if the Government judges that an improvement in the underlying performance of the economy or international trends justifies such a move." [1]

It is not clear what the first justification means, given that there are plenty of academic studies which suggest that lower (but still positive) rates of inflation are more likely to improve the prospects for real economic growth than higher rates are. But it is certainly clear that the low rates of price inflation experienced during the 1990s appear to have posed few problems for the economy, and lowering the inflation target at a time when inflation is already well below the existing target should minimise any additional adjustment costs.

There are a number of external factors that provide a much stronger justification for a downward revision in the inflation target. Most other independent monetary authorities in the major industrialised economies have a lower target than the Bank of England does. For instance, the ECB has an objective of price stability within an implicit target band of 0-2 per cent for inflation, the Bank of Canada has a target range of 1-3 per cent and the Federal Reserve interprets its mandate as one of achieving price stability. If all are successful, then on average medium-term inflation in the UK will be between 1/2-1 per cent above that of our major competitors. It is difficult to justify such a policy, especially at a time when the UK real effective exchange rate is already well above historical norms, as shown in Chart 3 using relative whole economy unit labour costs.

Reducing the target for underlying retail price inflation to 2 per cent, with an implicit band of 1-3 per cent, would also be consistent with eventual entry into the Euro Area. On average the rate of harmonised consumer price inflation in the UK can be expected to be just over 1/2 a percentage point lower than the rate of RPIX inflation, due to differences in the method of calculation. (The former uses a geometric mean of prices, the latter an arithmetic mean.) Hence a 2 per cent RPIX inflation target would be consistent with a harmonised consumer price inflation rate of about 1 1/2 per cent, in line with the rate of harmonised consumer price inflation that the ECB would like to see in the Euro Area. Given underlying improvements in product quality, this is broadly consistent with price stability.

If a lower target were adopted in the UK, then in the medium-term the level of nominal interest rates would also be correspondingly lower. This reflects the fact that the equilibrium real interest rate in an open economy like the UK cannot differ all that much from that in the EU as a whole given the absence of barriers to capital mobility. The speed at which the Bank of England would be able to lower nominal rates would depend in part on the speed with which inflation expectations adjusted to the new target.

Fiscal policy

The public finances have moved into substantial surplus over the past two years. In the last fiscal year public sector net borrowing was -[pound]16.5 billion (1 3/4 per cent of GDP), again well above the estimates made by the Treasury and other forecasters at the start of the fiscal year. Tax receipts have again proved to be more buoyant than expected, whilst the public sector continues to experience difficulties in meeting expenditure plans. Public sector net investment was over [pound]3 billion lower last year than the estimated outturn made in the 2001 Budget only a month before the end of the fiscal year.

The structure of the Budget in March was much as had been expected, with the announcement of a number of additional tax reductions and expenditure increases worth [pound]3.6 billion in the current and next fiscal years. These measures come on top of previously announced changes costing [pound]5.5 billion this fiscal year, rising to [pound]7.9 billion in fiscal year 2002-03. In total these amount to a little over 1 per cent of GDP by 2002-03. In addition, there is also likely to be further strong growth in public expenditure as a result of the expenditure plans put in place last year, with Total Managed Expenditure presently planned to rise from 38.9 per cent of GDP in 2000-01 to 40.8 per cent of GDP by 2003-04.

It is clear that this amounts to a significant easing in the fiscal stance, and one which can be expected to provide a short-term stimulus to economic activity. Although this may be welcome given other developments, it is fortuitous as it has not been the primary motivation for the majority of the measures. Irrespective of the wider economic background, the extent of the fiscal relaxation almost certainly means that interest rates, and hence the exchange rate, will be higher than would otherwise have been the case, as is indicated by the simulation on our UK macroeconometric model summarised in Box A.

Fiscal policy continues to be set to achieve two fiscal rules, that over the economic cycle the government will borrow only to finance investment not current expenditure, and that public sector net debt (PSND) will be held at under 40 per cent of GDP. Both fiscal rules are met comfortably at present, and on our present projections it appears likely that they will continue to be met during the next few years. It should perhaps be noted that the rules place few practical constraints on what the Chancellor can choose to do at times of fiscal surplus when PSND is already well below 40 per cent of GDP. For instance, on the Treasury's own figures, the Chancellor could have announced further tax reductions of 1.7 per cent of GDP in 2001-02 and still claimed to be borrowing only to invest. Equally he could have chosen to introduce no tax reductions at all.

Our fiscal projections are set out in Table 2 and were completed before the first estimates for the outturn in 2000-01 became available. The principal difference from those set out in the Budget is that we project net borrowing to undershoot the government's estimates by around 0.5 per cent of GDP per annum. The Budget projections show net borrowing moving from -0.6 per cent of GDP in 2001-02 to 1.1 per cent of GDP by 2005-06, whereas our figures show net borrowing of -1.1 per cent of GDP in 2001-02 rising to 0.4 per cent of GDP by 2005-06. PSND is projected to decline to 25 per cent of GDP at that time, compared to the Budget projection of 30 per cent.

There are two factors that account for most of these comparatively small differences. Firstly, we expect that the level of net investment will remain lower than in the Budget projections, reflecting the ongoing difficulties that many departments are clearly experiencing in raising expenditure after many years of restraint. By 2004-05 our numbers are in line with the current expenditure plans, but we have allowed bygones to be bygones and not assumed that the previous shortfall is made up. In practice the government may be able to make up some of the shortfall by expanding capital grants to the private sector, as these are included in the public sector investment figures. The second factor is that the official public finance projections are based on cautious economic assumptions, with real GDP growth estimated to average 2 1/4 per cent per annum. Longer-term trends and our own forecasts point to growth of 2 1/2 per cent or more. By 2005-06 the level of money GDP in our projections is nearly 2 per cent above th at in the Budget assumptions, raising tax receipts and the size of the surplus on the current budget.

The foot and mouth epidemic

Whilst it is clear that the foot and mouth epidemic is not going to be without cost, the extent of these costs remains unknown. Some rural regions are clearly experiencing significant costs, but for the economy as a whole the likely impact presently appears to be small.

Agricultural output presently accounts for a little over 1 per cent of GDP at constant prices. Of this, approximately half is generated by livestock and dairy farming. Exports of meat, dairy products and eggs represented around 0.56 per cent of the total volume of exported goods and services last year, approximately half the level they represented in 1995. So even if the industry disappeared completely, which is not expected to happen, the direct costs would not be huge. A reduction of 20 per cent in livestock output for a year would be equivalent to a reduction of around 0.06 per cent in GDP. Some of this shortfall could be made up through higher imports, although the patterns of domestic output and trade over the last few years suggest that a more likely outcome is a drop in meat consumption.

There may also be costs that arise as a result of disruption to the tourist industry, either due to a fall in visitors from abroad or from more UK residents choosing to holiday abroad.

Expenditure on travel to the UK is classified as an export of services in the national accounts. In 1999 exports of travel services amounted to [pound]14.1 billion (1.6 per cent of money GDP). Of this some 30 per cent represented business travel, which is not likely to change as a result of the foot and mouth epidemic although it might be affected this year by the weakness of economic activity in the industrialised economies. The level of travel exports and the value of expenditure on personal travel has remained largely unchanged since 1995, suggesting that previous events such as the BSE crisis have had little long-run impact on tourism. Recent media reports suggest that visitor numbers may fall this year, although in itself this is uninformative about the likely total expenditure of those visitors who do arrive. But a 10 per cent reduction in personal travel expenditure would reduce money GDP by around [pound]1 billion, equivalent to 0.1 per cent of GDP at 1995 prices. There would be additional losses on t op of this, partly because of the foregone goods and services that visitors would have consumed here.

Foreign travel by UK residents has risen steadily for many years, and in 1999 was worth [pound]22.9 billion, with personal travel accounting for approximately 80 per cent of this. There is no reason to expect this long-term trend to come to an end, and presently little evidence that it is going to accelerate as a result of recent events.

In estimating the overall impact of the foot and mouth crisis account also needs to be taken of the indirect stimulus given to other economic activities. Demand for the services of those workers involved in controlling the epidemic has risen, and some expenditure that would have been undertaken on travel to rural areas is likely to have been switched elsewhere.

Putting all these pieces together, a reasonable estimate of the likely impact of the foot and mouth epidemic at the present time is that it is likely to lower GDP growth by around 0.2-0.3 percentage points this year, equivalent to [pound]21/2 billion at 1995 prices and [pound]3 billion at current prices. The primary expenditure counterparts to this decline in output are likely to be a lower level of exports, a decline in inventory levels (as livestock are killed) and higher imports. Compensation payments for slaughtered livestock are likely to raise the level of government expenditure by at least [pound]1 billion, although give the size of the AME margin, this may not involve any increase in planned total public expenditure.

Equity prices and global economic developments

The impact of the foot and mouth epidemic is likely to be smaller than that arising from the recent corrections in equity prices, both in the UK and overseas. In the January Review we presented the results from a simulation on the National Institute Global Econometric Model in which US equity prices were lowered permanently by 20 per cent, and equity prices in other economies declined by 10 per cent. These indicated that the first year impact would be to lower output in the UK by 0.8 per cent.

Equity prices have declined markedly since the turn of the year, both in the UK and elsewhere. Our assumptions for the path of the FT All-Share Index are shown in Table 1. At the time of writing, prices are around 10 per cent lower than in the third quarter of last year. For the year as a whole the average level is projected to be 6 1/2 per cent below that in 2000, based on an assumption that in the future prices rise in line with the trend rate of growth of nominal GDP. The declines already seen can be expected to reduce the growth of investment, by raising the cost of equity finance, and private consumption, via wealth effects.

The sustained growth of the value of financial and housing assets has been the key factor behind the strength of private consumption in recent years. Household expenditure has increased significantly faster than incomes, with a rising wealth--income ratio reducing the need to save. The ratio of household savings to disposable income last year was 4 1/2 per cent, some 6 percentage points lower than in 1995. The recent correction in equity prices has been sufficient to reduce the overall value of net financial wealth, and this, along with a forecast moderation of annual house price inflation to 5 1/2 per cent by the end of this year, should eventually lead to a greater propensity to save out of current income. The savings ratio is expected to rise by 1 percentage point next year, with the rate of growth of private consumption moderating to 21/2 per cent.

The value of net household sector financial assets fell by 3 per cent in the fourth quarter of last year, and we estimate by a further 4 per cent in the first three months of 2001. Our econometric model of consumers expenditure in the UK implies that a permanent reduction of 10 per cent in net financial wealth will eventually reduce the volume of expenditure by 1.3 per cent, other things being equal. The further declines in equity price levels since the turn of the year are thus an important factor behind the moderation of our previous forecasts for GDP growth both this year and next.

The openness of the economy means that the UK could not remain immune from developments in the United States even if UK equity prices were not directly affected. Exports of goods and services to the US were equivalent to 4.4 per cent of national income in 1999, and the investment income earned on assets held in the US represented 2.8 per cent of national income. It should be noted that these are far smaller than the receipts earned from linkages with the rest of Europe, with exports to the EU and investment income from assets held in the EU amounting to 13.5 per cent and 4.8 per cent of national income in 1999.

The income flow data provide only a partial indication of the full extent of exposure to the US as a result of cross-border asset holdings. For instance, UK-owned banks have significant loans in the United States, and US-owned foreign affiliates account for a significant proportion of economic activity in the UK. Recent figures from the Bank for International Settlements (BIS, 2001) indicate that in September 2000 UK-owned banks had outstanding loans of $112.4 billion to US residents (equivalent to 8 per cent of UK GDP), representing a little over one-fifth of their total foreign liabilities.

Inward direct investment from the US is also important to the UK, not least because US-owned firms are more capital intensive and have higher labour productivity than the average UK-based firm (Pain, 2000). The most recent US data, which are for 1998, indicate that the UK-based non-bank affiliates of US parent companies employed 1.04 million workers (representing 4.2 per cent of total employees), with value-added output of $99.3 billion, equivalent to 7 per cent of UK GDP at market prices. Their capital expenditure accounted for 8 per cent of total gross fixed capital formation that year (BEA, 2000). [2]

Whilst there is no reason to assume that all these affiliates will cease operating in the UK or that loans to the US will not be repaid, it is clear that a prolonged downturn in the United States could have substantial effects on the structure of economic activity in the UK. In principle, a downturn largely confined to the US could see US multinationals expand operations elsewhere. In practice it is more likely that their world-wide investment and employment levels will be affected as a result of tighter financial conditions in the US.

The downturn that has begun in the rate of global economic growth will inevitably affect the growth of UK exports over the next two years. World trade growth, as measured by the weighted average of import volume growth in the UK's main export markets, is expected to slow to 8 per cent this year and 6 1/2 per cent in 2002 from 11 3/4 per cent last year. This pattern reflects the dynamics of trade in the UK's main export markets in Europe, with economic growth in the Euro Area expected to be weaker next year than this year.

UK export performance has deteriorated consistently over the past five years, coinciding with the strong appreciation in the real effective exchange rate. Whilst export volume growth was strong last year, with exports of goods rising by nearly 10 1/2 per cent and exports of manufactures by over 11 per cent, this was still less than the growth of world trade, suggesting that the level of the real exchange rate continues to cause difficulties for some potential exporters.

The provisional data for trade with non-EU countries in March provided the first sign that export growth might be about to slow, although recent monthly data have been volatile. The volume of merchandise exports to the non-EU countries rose by 1 3/4 per cent in the first quarter as a whole. Business surveys have revealed only a modest fall in expected orders to date. Chart 4 reveals one possible reason for this by decomposing the aggregate real effective exchange rate from Chart 3 into an EU and non-EU component. This shows that sterling does not appear to be particularly overvalued against the non-EU currencies at the present time, possibly helping to explain why UK exporters have so far been able to cope with the current downturn in world trade, which has been concentrated in North America and Asia. The real test may arrive later this year as growth in the European markets slows. Our forecast shows the annual rate of growth of merchandise export volumes slowing to 6 per cent by the end of this year, and ave raging 5 per cent next year. The trade deficit is expected to widen further and average 3 1/4 per cent of GDP this year and next.

 Exchange rates and
 interest rates
 UK exchange rates FT
 Effective Dollar Euro All-share
 index
1997 100.52 1.64 1.45 2235.8
1998 103.93 1.66 1.49 2626.2
1999 103.73 1.62 1.52 2918.2
2000 107.52 1.52 1.64 3045.8
2001 104.65 1.44 1.58 2844.3
2002 103.71 1.42 1.57 2951.7
2003 102.74 1.41 1.56 3102.1
2000 I 108.40 1.61 1.63 3048.4
2000 II 107.70 1.53 1.64 3011.9
2000 III 106.40 1.48 1.63 3104.3
2000 IV 107.60 1.45 1.66 3018.6
Forecast
2001 I 104.53 1.46 1.58 2885.4
2001 II 104.98 1.43 1.59 2804.8
2001 III 104.69 1.43 1.58 2825.9
2001 IV 104.40 1.43 1.58 2861.2
2002 I 104.12 1.42 1.58 2896.9
2002 II 103.84 1.42 1.57 2933.2
2002 III 103.57 1.42 1.57 2969.8
2002 IV 103.32 1.42 1.57 3006.9
Percentage changes
1998/97 3.4 1.2 2.7 17.5
1999/98 -0.2 -2.3 2.1 11.1
2000/99 3.7 -6.3 8.2 4.4
2001/00 -2.7 -5.2 -3.6 -6.6
2002/01 -0.9 -1.3 -0.8 3.8
2003/02 -0.9 -0.3 -1.0 5.1
2001IV/99IV 1.6 -11.3 6.0 0.5
2001IV/00IV -3.0 -1.3 -5.0 -5.2
2002IV/01IV -1.0 -0.8 -1.0 5.1
 Interest rates
 3-month Mortgage 10-year World
 rates interest gifts
1997 6.82 7.18 7.04 4.03
1998 7.33 7.71 5.52 3.91
1999 5.44 6.41 5.08 3.22
2000 6.10 6.80 5.31 4.46
2001 5.44 6.24 5.05 4.13
2002 5.25 6.05 5.05 4.06
2003 5.25 6.03 5.05 4.21
2000 I 6.12 6.87 5.60 3.77
2000 II 6.19 6.86 5.30 4.38
2000 III 6.12 6.82 5.28 4.75
2000 IV 5.99 6.65 5.05 4.94
Forecast
2001 I 5.75 6.50 5.05 4.49
2001 II 5.50 6.29 5.05 4.18
2001 III 5.25 6.09 5.05 3.93
2001 IV 5.25 6.07 5.05 3.94
2002 I 5.25 6.06 5.05 3.98
2002 II 5.25 6.05 5.05 4.03
2002 III 5.25 6.05 5.05 4.09
2002 IV 5.25 6.04 5.05 4.14
Percentage changes
1998/97
1999/98
2000/99
2001/00
2002/01
2003/02
2001IV/99IV
2001IV/00IV
2002IV/01IV
 Public sector financial balance and borrowing requirement
 [pound] billion, fiscal years
 1999-00
Current expenditure: Goods and services 166.8
 Net social benefits paid 110.7
 Debt interest 25.4
 Subsidies 5.3
 Other current expenditure 15.2
 Total 323.5
Gross investment 16.9
Net investment 3.4
(as a % of GDP) 0.4
Total managed expenditure 341.6
(as a % of GDP) 37.8
Current receipts: Taxes on income 147.5
 Taxes on expenditure 130.0
 Social security contributions 67.9
 Gross operating surplus [a] 12.7
 Other current receipts 1.1
 Total current receipts 359.1
 (as a % of GDP) 39.8
Public sector current balance 20.9
Public sector net borrowing -16.2
(as a % of GDP) -1.8
Financial transactions -7.6
Public sector net cash requirement -8.6
(as a % of GDP) -0.9
Public sector net debt (% of GDP) 37.2
GDP deflator at market prices (1995=100) 112.6
Money GDP 902.9
Govt deficit under Maastricht (calendar year, % of GDP) 1.3
Gross debt under Maastricht (calendar year, % of GDP) 45.7
 2000-1
Current expenditure: Goods and services 178.5
 Net social benefits paid 114.0
 Debt interest 26.5
 Subsidies 5.8
 Other current expenditure 20.2
 Total 345.1
Gross investment 17.3
Net investment 3.9
as a % of GDP) 0.4
Total managed expenditure 363.8
(as a % of GDP) 38.5
Current receipts: Taxes on income 155.1
 Taxes on expenditure 137.6
 Social security contributions 71.6
 Gross operating surplus [a] 12.5
 Other current receipts 5.6
 Total current receipts 382.3
 (as a % of GDP) 40.5
Public sector current balance 22.5
Public sector net borrowing -18.6
(as a % of GDP) -2.0
Financial transactions 19.9
Public sector net cash requirement -38.5
(as a % of GDP) -4.1
Public sector net debt (% of GDP) 32.5
GDP deflator at market prices (1995=100) 114.4
Money GDP 944.2
Govt deficit under Maastricht (calendar year, % of GDP) 1.9
Gross debt under Maastricht (calendar year, % of GDP) 42.9
 2001-2
Current expenditure: Goods and services 192.4
 Net social benefits paid 122.0
 Debt interest 22.5
 Subsidies 6.8
 Other current expenditure 17.7
 Total 361.4
Gross investment 22.6
Net investment 7.2
as a % of GDP) 0.7
Total managed expenditure 384.0
(as a % of GDP) 39.2
Current receipts: Taxes on income 164.1
 Taxes on expenditure 141.8
 Social security contributions 72.6
 Gross operating surplus [a] 12.6
 Other current receipts 4.1
 Total current receipts 395.1
 (as a % of GDP) 40.3
Public sector current balance 18.3
Public sector net borrowing -11.1
(as a % of GDP) -1.1
Financial transactions 0.0
Public sector net cash requirement -11.1
(as a % of GDP) -1.1
Public sector net debt (% of GDP) 30.1
GDP deflator at market prices (1995=100) 115.9
Money GDP 980.0
Govt deficit under Maastricht (calendar year, % of GDP) 1.9
Gross debt under Maastricht (calendar year, % of GDP) 40.5
 2002-3
Current expenditure: Goods and services 204.7
 Net social benefits paid 132.0
 Debt interest 20.0
 Subsidies 7.2
 Other current expenditure 16.7
 Total 380.5
Gross investment 27.7
Net investment 11.5
as a % of GDP) 1.1
Total managed expenditure 408.2
(as a % of GDP) 39.6
Current receipts: Taxes on income 170.8
 Taxes on expenditure 149.5
 Social security contributions 75.8
 Gross operating surplus [a] 12.7
 Other current receipts 4.2
 Total current receipts 413.1
 (as a % of GDP) 40.1
Public sector current balance 16.4
Public sector net borrowing -4.9
(as a % of GDP) -0.5
Financial transactions 0.0
Public sector net cash requirement -4.9
(as a % of GDP) -0.5
Public sector net debt (% of GDP) 28.2
GDP deflator at market prices (1995=100) 118.7
Money GDP 1030.1
Govt deficit under Maastricht (calendar year, % of GDP) 0.7
Gross debt under Maastricht (calendar year, % of GDP) 37.8
 2003-4
Current expenditure: Goods and services 217.7
 Net social benefits paid 141.7
 Debt interest 18.3
 Subsidies 7.6
 Other current expenditure 16.9
 Total 402.1
Gross investment 33.8
Net investment 16.7
as a % of GDP) 1.5
Total managed expenditure 436.0
(as a % of GDP) 40.1
Current receipts: Taxes on income 179.1
 Taxes on expenditure 157.2
 Social security contributions 80.0
 Gross operating surplus [a] 12.8
 Other current receipts 4.4
 Total current receipts 433.5
 (as a % of GDP) 39.9
Public sector current balance 14.3
Public sector net borrowing 2.5
(as a % of GDP) 0.2
Financial transactions 0.0
Public sector net cash requirement 2.5
(as a % of GDP) 0.2
Public sector net debt (% of GDP) 26.9
GDP deflator at market prices (1995=100) 121.9
Money GDP 1087.5
Govt deficit under Maastricht (calendar year, % of GDP) 0.0
Gross debt under Maastricht (calendar year, % of GDP) 35.6
 2004-5
Current expenditure: Goods and services 230.5
 Net social benefits paid 151.1
 Debt interest 18.1
 Subsidies 8.0
 Other current expenditure 17.5
 Total 425.2
Gross investment 37.9
Net investment 19.8
as a % of GDP) 1.7
Total managed expenditure 463.1
(as a % of GDP) 40.3
Current receipts: Taxes on income 190.5
 Taxes on expenditure 165.6
 Social security contributions 84.5
 Gross operating surplus [a] 13.0
 Other current receipts 4.6
 Total current receipts 458.1
 (as a % of GDP) 39.9
Public sector current balance 14.8
Public sector net borrowing 5.0
(as a % of GDP) 0.4
Financial transactions 0.0
Public sector net cash requirement 5.0
(as a % of GDP) 0.4
Public sector net debt (% of GDP) 25.9
GDP deflator at market prices (1995=100) 125.1
Money GDP 1147.9
Govt deficit under Maastricht (calendar year, % of GDP) -0.4
Gross debt under Maastricht (calendar year, % of GDP) 33.9
 2005-6
Current expenditure: Goods and services 243.9
 Net social benefits paid 160.6
 Debt interest 18.0
 Subsidies 8.4
 Other current expenditure 18.1
 Total 449.0
Gross investment 40.6
Net investment 21.5
as a % of GDP) 1.8
Total managed expenditure 489.6
(as a % of GDP) 40.4
Current receipts: Taxes on income 203.0
 Taxes on expenditure 174.7
 Social security contributions 89.2
 Gross operating surplus [a] 13.1
 Other current receipts 4.8
 Total current receipts 484.8
 (as a % of GDP) 40.0
Public sector current balance 16.7
Public sector net borrowing 4.8
(as a % of GDP) 0.4
Financial transactions 0.0
Public sector net cash requirement 4.8
(as a % of GDP) 0.4
Public sector net debt (% of GDP) 24.9
GDP deflator at market prices (1995=100) 128.5
Money GDP 1212.6
Govt deficit under Maastricht (calendar year, % of GDP) -0.3
Gross debt under Maastricht (calendar year, % of GDP) 32.3
Note: Public sector current balance is total current
receipts less total current expenditure and depreciation.
(a.) General government.

Fiscal policy, growth and the Budget balance

In the last fiscal year the public finances once again proved more robust than the government had anticipated. One explanation is that strong economic growth has raised tax revenues. Looking ahead there is some risk that economic conditions might deteriorate more quickly then either we or the government expect. At a time when the fiscal stance is being relaxed significantly, this could cause net borrowing to rise more rapidly than planned. We can use our econometric model of the UK economy to gauge the size of these potential effects.

There is no simple relationship between government deficits and growth, in part because the impact on the level of the deficit will depend on the composition of demand. If growth is strong because (revenue yielding) consumption spending is high, then the deficit will improve markedly. A simple simulation of a permanent increase in consumption relative to income of 1 per cent in a forward looking world in which the Bank of England operates monetary policy to keep inflation in check is estimated to improve the overall fiscal balance by 0.82 percentage points of GDP in the first year. A similar impulse from (revenue sparse) export demand would have a quarter of the effect.

One of the more significant problems forecasters have is to gauge the source and impact of positive and negative impulses to the economy. These can be expected to average out over time. Stochastic simulations can be used to obtain an aggregate measure of what might be expected to occur on average from different shocks. The simulations reported in Barrell, Dury and Hurst (2000) can be used to produce a summary measure of the relationship between growth and the government deficit. In this exercise random shocks to all equations in the macroeconometric model have been applied over 20 quarters, and the exercise has been repeated 200 times. A regression of the average change in the deficit in each quarter over 200 replications on the average change in growth in that quarter suggests that a 1 per cent increase in output will on average reduce the government deficit by 0.52 percentage points of GDP.

Our econometric model can also be used to analyse the short-term economic impact of the various tax and expenditure measures that have been announced by the government over the past year. The analysis involves a first year reduction in direct taxes of approximately [pound]4.7 billion, indirect tax reductions worth [pound]2.3 billion and increased expenditure of [pound]1.8 billion on net social benefits. We also take account of the impact of the Comprehensive Spending Review on the level of final expenditure, and examine the impact of the difference between planned expenditure on consumption and investment and the level that would have resulted if expenditure had been raised in line with the rate of growth in the economy as a whole. In the simulation the volume of government consumption is raised by 1.6 per cent in 2001-02 and the volume of government investment by 25 per cent.

In total these measures are estimated to reduce the fiscal surplus by 1.4 per cent of GDP in the first year, after taking into account their effect on the economy. This is smaller than might be expected, with output being raised by around 0.33 per cent in the first year. The expansionary impulse is offset in part by automatic stabilisers which raise revenues, and in part by 'leakages' into imports from higher demand and lost competitiveness. Short-term interest rates are initially raised by 25 basis points in order to reduce the inflationary pressure that such a package would have on an economy so near full capacity output. In turn this leads to an initial appreciation of 2 per cent in the exchange rate and a rise in long-term interest rates. This monetary policy response, along with the reactions of forward looking financial markets, serves to halve the impact of the fiscal package. If consumers are forward looking and take account of their future tax liabilities they would consume less now than otherwise. I n these circumstances this particular fiscal package would raise GDP by only 0.25 per cent in the first year.

Section II. The forecast in detail

The forecast in detail

The broad picture shown in our latest forecast is for a continuation of sustained non-inflationary output growth. Economic activity has clearly slowed in recent months, and the UK economy is beginning to be affected by developments in the United States and elsewhere. But a number of temporary factors that have acted to restrain activity should come to an end over the course of this year, and recent and prospective fiscal and monetary policy changes are likely to support activity over the next two years. We expect to see a continuation of the recent pick-up in labour productivity, which should help to contain cost pressures even if the rate of growth of average earnings rises back to around 5 per cent. Inflationary pressures are thus expected to remain quiescent unless the level of sterling falls more rapidly than presently seems likely.

However sectoral and regional imbalances may widen further. The rate of growth of manufacturing is expected to remain below that of the economy as a whole, in part because of the moderation in external demand.

The components of expenditure

In the fourth quarter of last year real GDP rose by 0.3 per cent measured at basic prices and by 0.4 per cent measured at market prices. These growth rates were well below those seen earlier in the year. GDP growth for the year as a whole was 3 per cent, somewhat above the annual growth rates in 1998 and 1999 (2.6 and 2.3 per cent respectively).

Our monthly GDP estimates, which include an arbitrary allowance for the impact of the foot and mouth epidemic on economic activity, suggest that GDP growth in the first quarter of this year remained at 0.3 per cent. Stronger growth in some service sectors is likely to have been offset by renewed weakness in the industrial sector and in agriculture. GDP growth is expected to recover to 0.7 per cent in the second quarter. For the year as a whole we expect GDP to be 2.4 per cent higher than last year. This is in line with the post-war average growth rate of 2 1/2 per cent per annum and above the Treasury's assumed trend growth rate of 2 1/4 per cent per annum. GDP growth is expected to rise above 2 1/2 per cent during the course of next year and strengthen further to 2.8 per cent in 2003.

Domestic demand has risen by an average 4 per cent per annum over the last three years, led by strong growth in household and public consumption expenditures. Private consumption rose by 3.7 per cent in 2000, although the quarterly growth rate slowed through the year to 0.6 per cent in the final quarter. Retail sales rose sharply in the first quarter of this year, suggesting that the quarterly growth of consumers expenditure may have picked up a little. However we expect expenditure growth to moderate gradually through the course of the year, so that for the year as a whole, growth in household consumption is 2.7 per cent.

We project public consumption expenditures in line with the numbers shown in the Budget. In volume terms expenditure is expected to rise by 4 1/4 per cent this year, 3 1/4 per cent in 2002 and 3 per cent in 2003. The Budget forecasts also included a substantial rise of 43 per cent in public investment this year, followed by further increases of 8 per cent next year and 11 per cent in 2003. At present it appears unlikely that expenditure can be increased at the rate projected, and we have incorporated a somewhat smoother path, with the volume of public investment rising by an average 20 per cent per annum over the next three years. In total our fiscal assumptions imply that government expenditure will raise domestic demand by 1 per cent both this year and next. This is an important factor behind our overall economic forecast.

Gross fixed capital formation rose by 2.6 per cent in the fourth quarter of 2000, after having declined by 0.5 per cent in the previous quarter. Business investment rose by 5.2 per cent, but housing and public sector investment both fell. Corporate expenditure is expected to remain comparatively subdued this year, with business investment projected to rise by 2.4 per cent, broadly in line with the growth seen last year. Although business survey evidence suggests that few firms are yet experiencing significant financial pressures, the decline in equity prices and slower growth of corporate profits can be expected to restrain expenditure. Excluding Continental Shelf companies, where profitability has recently been boosted by high oil prices, the net rate of return of private non-financial corporations has now declined to its lowest level since 1993. A lower level of inventory accumulation this year is also expected to reduce GDP by 0.25 per cent.

The counterpart to the strong growth in domestic demand has been a deterioration in the balance of net trade. Net imports reduced GDP growth by 1 1/2 percentage points in 1999 and by 0.9 percentage points last year. Whilst the growth rate of import volumes has started to slow, the moderation in external demand and the effects of the foot and mouth epidemic on agricultural and service exports mean that export growth is likely to slow even more rapidly. Our projections imply that net trade will reduce GDP growth by a further 0.7 percentage points this year and 0.8 percentage points in 2002.

Household sector (Table 4)

The recent declines in equity prices, combined with the uncertainty surrounding the impact of foot and mouth on the economy, has focused attention on the likely future path of household consumption. The stock market decline is certain to dampen the level of consumption relative to where it would have been in the long run, as there is a greater need to save in order to achieve a given level of wealth relative to income. Our estimates for the first quarter of this year suggest that household sector net financial wealth is now over 14 per cent lower than its peak level at the end of 1999. This does not yet appear to have led to a significant effect on expenditure, possibly because most equities are held indirectly through pension and investment funds. Our econometric model of consumers' expenditure implies that in the longer term it might eventually reduce the level of expenditure by 1 1/2-2 per cent. It should also be noted that house prices have continued to rise in real terms, limiting the impact of weaker eq uity prices on total net wealth. Enhanced competition in the mortgage and retail banking markets has also led to reductions in the nominal costs of household debt.

As we discussed above, the effect of the foot and mouth epidemic on economic activity is not yet clear. However we would not expect it to be large, with consumers being more likely to switch expenditure to other forms of goods and services and non-rural destinations rather than to forego consumption altogether.

Retail sales account for approximately 40 per cent of household consumption. In the first quarter the rate of growth of sales volumes accelerated to 1.5 per cent, to a level 4.7 per cent higher than a year earlier. This is well above the overall rate of growth of consumers' expenditure, suggesting that expenditure on goods is rising more rapidly than expenditure on services. Although caution is needed in interpreting the monthly retail sales figures, it is of interest to note that sales rose by only 0.1 per cent in March, possibly providing some evidence that expenditure may have begun to slow. The CBI Distributive Trades Survey for March provided a similar picture of strong recent growth which was not expected to persist.

Household consumption has risen more rapidly than real disposable incomes for several years, with the savings ratio having fallen considerably since 1997 to a level comparable to that at the end of the 1980s, as shown in Chart 6. But the much lower rate of inflation at the present time means that, at this savings rate, there is less erosion of the real value of financial assets than was the case then.

Quarterly movements in measured disposable incomes can be quite erratic, in part because they include adjustments for the change in the net equity held by households in pension funds and large one-off payments such as pensioners winter fuel allowances. This volatility in incomes is reflected in the savings ratio which fell from 5.1 per cent in the first quarter of last year to 3.4 per cent in the third, before jumping back to 5.5 per cent in the fourth quarter. However we do feel that the longer-term decline in the savings ratio has probably come to an end. The average savings ratio this year is expected to be around 1/4 percentage point higher than last year, and a further rise of 1 percentage point is expected next year.

We expect a continuation of this upward trend over the next few years as households attempt to improve their financial position, even though real income growth is expected to remain robust, helped by low inflation, and favourable tax effects stemming from the over-indexation of the lower earnings limit for employee National Insurance contributions and the starting rate band for income tax, the new Children's Tax Credit and expanded tax relief for stakeholder pensions.

Our forecast for household consumption growth this year is 2.7 per cent, with growth of 21/2 per cent projected for 2002. The rate of growth of expenditure on durable goods is expected to slow from 7.7 per cent last year to 6 per cent this year, 5 per cent in 2002 and 3 1/2 per cent in 2003.

Investment

In the fourth quarter of last year business investment grew by 5.2 per cent on the previous quarter while general government investment fell by 0.9 per cent. Housing investment declined by 6.9 per cent, although it remained 2 1/4 per cent higher than a year earlier. For the year as a whole, investment was just 2.7 per cent higher than in 1999. Investment growth slowed markedly over the course of last year, particularly in the non-manufacturing industries, possibly reflecting the extent to which the strong investment growth seen in previous years had already raised capacity to desired levels.

The sectoral pattern of investment seen over the last few years is quite different from the forecast pattern over the next few years, with strong growth in business investment being replaced by strong growth in public sector investment. Chart 7 shows the weighted contribution of manufacturing, non-manufacturing and general government investment to total growth in gross fixed capital formation since 1997.

The prospects for capital spending in the business sector are mixed. Domestic demand remains reasonably strong but there is uncertainty regarding the future prospects for the UK economy because of developments abroad. This may serve to lower expectations of future output levels for some firms and discourage investment. Falling equity prices and slower growth of profits will raise the cost of finance. However lower interest rates may support expenditure by raising the present discounted value of future returns. The overall rate of return on capital remains quite high by historical standards. But this is largely a consequence of the net rate of return for UK Continental Shelf companies rising from 16.9 per cent in 1999 to 33.8 per cent in 2000 helped by strong crude oil and gas prices. The net rate of return for the manufacturing sector fell from 7.1 to 5.3 per cent between 1999 and 2000 and that for service sector companies fell from 15.3 to 13.4 per cent.

The most recent CBI Quarterly Survey suggested that prospects for investment improved a little in the first quarter, with the number of firms planning to raise expenditure rising relative to the number planning to lower expenditure. However this survey was undertaken before the full extent of the potential economic slowdown became apparent. More timely information is available from the CBI monthly survey for March, which showed a downturn in future output expectations. This data could be perhaps interpreted as suggesting that investment growth is likely to remain weak.

Given this mixed picture we expect that business investment will grow between 2 1/4-2 1/2 per cent both this year and next. Slow growth in manufacturing output is reflected in manufacturing investment, which is forecast to grow by only 0.4 per cent on the year and 0.8 per cent next. Total investment is projected to rise by 3 3/4 per cent this year and 4 1/2 per cent in 2002, helped by growth of 20 per cent per annum in public investment.

Balance of payments

The appreciation of the real exchange rate has undoubtedly affected export growth over the past few years. Since 1996 world trade growth has on average exceeded merchandise export volume growth by 3 percentage points per annum. This has occurred despite cuts in the price of exports achieved largely by squeezing profit margins. Our world economy forecast shows that total world trade growth is expected to slow from 13 per cent last year to 7 1/4 per cent this year. The swing in UK-weighted export markets is less pronounced. This reflects the fact that to date the slowdown in world trade appears to have centred on American and South East Asian markets rather than on Europe where UK trade is concentrated. Therefore UK export markets might be expected to grow more quickly than the average. Secondly, sterling is forecast to depreciate modestly against both the euro and the US dollar over this year. Such an event should, ceteris paribus, make exports cheaper relative to foreign goods and services. Our forecast howev er, is that export volumes will grow by over 2 percentage points less than world trade this year. Total merchandise exports are expected to rise by 6 3/4 per cent, and total exports of goods and services by 5.6 per cent.

Part of the explanation for this is the belief that exporting firms will use the depreciation in sterling to reverse declines in profit margins, which have been very low compared to their historical average, rather than attempting to secure new markets.

In addition to this, service sector exports are forecast to grow more slowly than in previous years. The forecasts for exports of goods in Table 6 and total export volumes in Table 3 imply that service export levels grow only slowly this year. This view is based in part on an assessment of the maximum impact the foot-and-mouth crisis might have on tourism exports.

Chart 8 shows the numbers of foreign visitors to the UK and their total expenditure, based on data from the International Passenger Survey. The latest full year of data show that for 2000, total expenditure was [pound]12.8 billion, generated from 25.3 million visits. Around two-thirds of these visitors were from Western Europe. The longer-term trends indicate that visitor numbers do not appear to have been especially affected by other factors, such as the BSE crisis, which have generated adverse publicity for the UK.

Anecdotal evidence at this stage suggests that the number of bookings to come to the UK are below the numbers from last year, but it may be more likely that potential tourists have adopted a policy of 'wait-and-see' before deciding whether to visit the UK. As the number of new cases of foot-and-mouth is now receding, this may suggest that the final impact on tourism may not be as large as some of the worst-case scenarios have suggested. Even if there is no effect on tourism, which is treated as an export industry in the national accounts, service exports are likely to be affected by the slowdown in global demand. We assume that the total volume of service exports rises by only 2.0 per cent this year, following growth of 2 3/4 per cent last year.

Import volumes rose by 1.7 per cent in the fourth quarter of last year to a level 8.8 per cent higher than a year earlier. Although changes in import volumes are often volatile the recent slowdown in import growth accords with the slowdown in domestic demand in the economy. Imports of manufactured goods grew by over 10 per cent in 2000 and services by around 5 per cent. As domestic demand slows further and sterling depreciates, the growth of import volumes is expected to continue to slow through 2001 and 2002. Total import volumes are forecast to grow by 6.4 per cent per annum this year and 5.0 per cent next year. Imports of goods, which account for the bulk of total imports, are forecast to grow by 7.2 per cent and 5.1 per cent respectively.

The deficit on the balance of merchandise trade doubled between 1997 and 2000 to 3.1 per cent of GDP. This accounted for most of the swing in the current account during this period from a surplus of 0.9 per cent of GDP in 1997 to a deficit of 1 1/2 per cent of GDP in 2000. Overall, the trade balance is forecast to deteriorate further and average 3 1/4 per cent of GDP over this year and next. The current account deficit is forecast to rise to 1.9 per cent of GDP next year.

Output and employment

Over the past few years there has been a marked divergence in the pattern of sectoral output growth. Some sectors of the economy, most notably business services, have grown rapidly, whereas others, most notably manufacturing, have not. This is reflected in the March surveys by the Chartered Institute of Purchasing and Supply, with the manufacturing Purchasing Managers' Index declining to levels indicating marginal falls in both output and order books, whereas the services index continued to signal strong growth. In the near term the pattern of output will be affected by the general slowdown in domestic and foreign demand and the adverse shocks that have affected the economy since the latter part of last year.

Disruption to the railways has affected output in the distributive trades and the transport sector since the autumn of 2000; foot-and-mouth has affected the output from the agricultural sector and the tourism and leisure industries since March. While the worst of the disruption to the rail network has now clearly passed, the largely unknown effects from foot-and-mouth are only beginning to be felt.

Output growth in the category 'rest of industry' is expected to slow sharply this year to just 1.1 per cent, as this grouping includes both transport and communications and the agricultural sector. Although the level of output in the distribution sector, which includes hotels and catering, is forecast to be 21/2 per cent higher this year than in 2000, this largely reflects rapid growth through the course of last year. Output in the fourth quarter of this year is expected to be only 1 1/2 per cent higher than a year before.

Mining and Quarrying output (which includes output of oil and gas) declined by 9.2 per cent between quarters three and four of last year, largely as a result of maintenance work and reversal of gas flow in the 'Bacton-Zeebrugge interconnector pipeline'. We assume a modest recovery in oil and gas production levels from the second quarter of this year onwards.

Manufacturing output rose by 0.6 per cent in the fourth quarter of last year, down slightly from the 0.8 per cent growth achieved in the third quarter. For the year as a whole the growth rate was 1.6 per cent, a noticeable pick-up on the near stagnant output levels of the previous few years. However this growth was more than accounted for by higher levels of output in the chemicals and engineering sectors, which comprise 42 per cent of the aggregate manufacturing sector. The remaining parts of manufacturing industry have not seen any growth at all since 1995, and some, such as textiles have contracted sharply.

Output has weakened once more since the start of the year, with declines experienced in all parts of the manufacturing sector. The level of output is thought to have fallen back to the level in the third quarter of last year. As the most recent monthly trade data suggest that manufactured export volumes rose in January and February, it seems likely that the weakness reflects a decline in production for the domestic market. For the year a whole output growth is expected to be 1.3 per cent, with export growth slowing through the course of the year.

In contrast we expect to see output of business and public services rise more rapidly than output in the economy as a whole this year and next. Business services output has risen by over 6 per cent per annum since 1995, and whilst the present downturn in financial market business may moderate the annual rate of growth this year and next, there appear to be few reasons why the longer-term trend should come to an end. Public services output is likely to rise more rapidly this year and next because of the planned increases in the volume of final public consumption.

The number of people unemployed has continued to fall over the last few months, and in March the claimant count measure fell below 1 million for the first time for a quarter of a century. The ILO measure of unemployment also fell and now stands at 5.2 per cent of the workforce. The rate of decline in the level of unemployment has moderated over the past year and it may be that unemployment does not have much further to fall.

Our forecast shows the claimant count edging up above 1 million from the latter half of this year.

The number of workforce jobs in the economy currently stands at just over 29 million. This is around 1 million higher than previously thought as a result of recent data revisions arising from the incorporation of information from the Annual Business Inquiry. On average the number of employee jobs has been revised up by 876,000 since 1978. This revision is inevitably going to affect international comparisons of labour productivity levels over time.

Employment growth has slowed over the last 18 months, with the average level of employment this year expected to be just 0.3 per cent higher than in 2000. Our expectation is that despite reductions in the rate at which the economy is growing, firms' will perceive any slowdown in the economy to be temporary. In an otherwise tight labour market, they will seek to retain rather than shed labour. Our forecast is that both employment and unemployment will flatten out over the coming quarters at around their current levels.

With much of the available slack in the economy having been used up, increases in output will have to be achieved by increasing productivity, although of course in the near-term the cyclical effect of labour-hoarding will reduce productivity growth relative to where it would have been without the slowdown in demand. Our forecast for this year is that labour productivity will grow by 2.1 per cent, compared to 2.3 per cent last year. This rate of growth is expected to increase slightly in 2002 and 2003 to between 2 1/2-2 3/4 per cent. We expect to see a continuation of strong productivity growth in the manufacturing sector, although as in the past, this is more likely to be associated with lower employment than with increased output.

Prices and wages

The estimates of average earnings shown in Table 4 are calculated from National Accounts data and are defined in terms of total labour compensation per employee. In the fourth quarter of last year earnings were 4.6 per cent higher than a year earlier. This is around 0.3 percentage points above the rate of increase for the comparable period shown by the 'headline' average earnings index which is released each month. The latter suggests that the annual rate of growth of earnings accelerated to 5 per cent in February this year from 4.5 per cent in January, primarily as a result of significant bonus payments in the private service sector. Other indicators of basic pay settlements have yet to show any increase. The latest figures from the Industrial Relations Service Pay Databank suggest that the median pay increase in the first quarter of this year (weighted by the number of employees) was close to 3 per cent, little changed from the level seen in the fourth quarter of last year.

The planned increases in the National Minimum Wage in October 2001, from [pound]3.70 to [pound]4.10, and again in October 2002, to [pound]4.20, will push up the growth of average earnings. According to the Low Pay Commission (LPC) the original introduction of the minimum wage in 1998 benefited an estimated 1.3 million workers and raised the national wage bill by 0.35 per cent (LPC, 2001). At that time a minimum wage of [pound]4.10 would have affected 2.25 million workers. However increases in general pay levels since that time means that the planned rise this October is now thought to affect between 1.3 and 1.5 million workers, adding 0.3 per cent to the total wage bill in the absence of any knock-on effect on the pay of those workers presently earning above the minimum wage. [3] It should be noted that the LPC also estimates that the previous and planned increases will prove to have had a broadly neutral effect on employment.

After taking account of this, average earnings are forecast to increase by 4.5 per cent this year and 4.8 per cent in 2002. Growth in average earnings at this rate over the next few years is unlikely to threaten the Bank of England's inflation target. After a period of almost a year in which interest rates had been held at 6 per cent, the base rate was lowered by 25 basis points in both February and April. Clearly the view among MPC members is that the balance of risks in the economy has shifted downward and that inflation is likely to be lower in a few months time than had been forecast just a few months earlier.

Retail prices rose by 2.3 per cent over the year to March, with the annual rate of inflation having fallen from a peak of 3.3 per cent in June and July last year. Underlying inflation, defined as the retail price index minus mortgage interest payments (RPIX), has slipped from 2.2 per cent to 1.9 per cent during this period. The annual rate of growth of the mortgage rate component has slowed from 27.1 per cent in the third quarter of 2000, reflecting the abolition of mortgage interest tax relief last year, to 9.1 per cent in March, helped by strong competition in mortgage markets.

Within the RPIX series there continues to be a marked divergence between goods and services inflation. Goods prices grew by 0.5 per cent over the year to March, whereas service prices rose by 2.8 per cent. Within the goods component strong rises in the price of food and alcohol and tobacco (3.3 per cent and 4.6 per cent respectively) were broadly offset by falls in the price of petrol and gas (-3.2 per cent) and other goods (-1.6 per cent). Of the service component large falls were recorded in the price of utilities (-5.9 per cent) whereas price rises of over 3 per cent were recorded in the remaining service categories.

Over the next few months the annual rate of inflation will be affected by the indirect tax changes made in the Budget, the impact of the foot-and-mouth crisis and removal of large reductions in utilities charges in 2000 from the annual comparison. The Budget cut duties on road fuel and vehicle excise tax, froze alcohol duties and uprated tobacco duties in line with inflation rather than over-indexing them as had been previously planned. These changes are likely to reduce inflation by 0.5-0.6 percentage points in the next few months.

Other measures of inflation suggest that it is both low and stable at the present time. One possible measure of. the underlying inflationary pressures in the economy at present is provided by RPIY, which removes indirect taxes from the RPIX series. As Chart 10 shows annual growth in this series has been around or below 2 per cent per annum since May 1998, and currently stands at 1.8 per cent. A second alternative is to use the Harmonised Consumer Price Index (HICP). Year-on-year growth in this series has also been below 2 per cent since May 1998 and currently stands at 1.0 per cent. This index differs from the RPIX index in terms of coverage and the formula by which the index is calculated. ONS estimates suggest that the use of a geometric average of prices for the HICP and an arithmetic average for the RPIX means that the HICP index is consistently 0.55 percentage points lower than the RPIX index. The exclusion of housing costs from the HICP series accounts for most of the remaining differences from RPIX.

Both of these inflation indices suggest that underlying inflationary pressures in the economy are weak at present. There is an even chance that RPIX inflation will fall below 1 1/2 per cent in the next few months, requiring a letter of explanation to the Chancellor of Exchequer. Our forecast is that RPIX inflation will end the year at an annual rate of 1.7 per cent, before picking up to an average of 2.3 per cent in 2002 and 2.4 per cent in 2003.

Other measures of inflation also imply a benign outlook for inflation over the coming years. Wholesale prices, which rose by 0.9 per cent in 2000, are forecast to grow by just 0.4 per cent in 2001. The primary source of inflationary pressure in the short-term remains a recovery in import prices. The level of import prices is expected to rise by 1 per cent this year and 2.7 per cent in 2002, helped by the modest depreciation we expect in the sterling effective exchange rate.

National and sectoral savings

The balance of the current account of the balance of payments is a reflection, subject to a statistical residual, of the balance of domestic savings and investment. Table 10 shows the saving and investment levels of the individual sectors of the economy and how their net effect is financed. Investment that cannot be financed by domestic saving needs to be financed from abroad.

The household sector is historically a net lender to the rest of the economy. But investment has exceeded savings since 1998. Last year, saving by households was equivalent to 3 per cent of GDP and investment 4.3 per cent. The anticipated increase in the savings ratio shown in Table 3 will help to narrow this gap over the forecast period although we expect the household sector to continue to be a net borrower. The company sector is also in deficit, with saving in 2000 some 2.7 per cent of GDP less than investment. Again, there has been a rapid deterioration in the net financial position of this sector since 1998, when savings and investment were almost in balance. The present deficit is expected to persist over the next few years despite some moderation in the rate of growth of new investment. The government sector is expected to continue to meet the Golden Rule; saving net of depreciation is positive.

There is therefore a deficit on saving among the individual sectors of the economy such that borrowing from overseas is required. The current account deficit was in deficit by 1.5 per cent of GDP in 2000. This deficit can be attributed in part to lower saving by the company and household sectors since 1999 and ultimately to the strength of sterling, which has encouraged spending to be switched away from domestic goods and towards foreign goods. The deficit is forecast to rise to just over 2 per cent of GDP by 2003. This is a sustainable level, although it should be noted that if the size of the government sector surplus is not maintained, household and company savings are likely to rise.

The medium term

The way in which the economy behaves over the medium term is determined in part by the shocks that hit the economy. These are inherently unpredictable. But there are other important influences that can be foreseen. These include the size and the composition of the population, forthcoming changes in the policy framework as well as adjustment to existing disequilibria.

Our assumptions regarding monetary and fiscal policy are discussed above. Short-term interest rates are assumed to average 51/4 per cent from the end of this year to 2005. This level serves to hold annual inflation at close to 21/2 per cent per annum on average. Thereafter they are set to 5 per cent, the average level in our separate forecasts for the Euro Area. The exchange rate is determined in the forecast such that the uncovered interest parity condition is satisfied. This ensures that the exchange rate depreciates slightly over the forecast period. The effective exchange rate index is forecast to decline from a high of 107.5 (1990 = 100) to 104.7 this year, 103.7 next and to 101.2 by 2005. In the medium term government sector spending, particularly investment, is assumed to remain high, consistent with the Budget plans. Public sector net borrowing is expected to stabilise at 1/2-1 per cent of GDP.

GDP growth is presently projected to average 23/4 per cent in the longer-term, with labour productivity rising by a little over 2 1/4 per cent per annum, and the ILO unemployment rate settling at around 51/4-51/2 per cent. The current account deficit stabilises at around 2 per cent of GDP, which given the scale of public sector net borrowing implies that the private sector continues to have a financial deficit of 1-1 1/2 per cent of GDP on average.

Forecast errors and probability distribution

Table 12 gives summary information on the accuracy of our published forecasts in the second 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 by constructing a 70 per cent confidence interval around the central forecast using plus and minus the average absolute forecast error reported in Table 12. For our forecast of 2.4 per cent GDP growth in 2001 this yields a range of 1.6 per cent to 3.2 per cent. This range rises considerably as the forecast horizon increases, so that the 70 per cent error band for

growth in 2002 is 1.2 per cent to 4.0 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 inherently mor e uncertain than those of consumers' expenditure for instance.

To calculate the probability distribution of our growth and inflation forecasts reported in Table 13 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, or the likelihood of the Governor of the Bank of England having 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 GDP growth rate and RPIX inflation falling within designated bands.

This suggests that there is presently a 63 per cent chance that real GDP growth will fall between 2.0 and 4.0 per cent per annum in 2001. The probability of growth below 2.0 per cent is less than 33 per cent and the chance of a fall in GDP is negligible. The downside risks for 2002 are similar. Our central forecast is for growth of 2.6 per cent, with a 70 per cent chance that it will exceed 2 per cent.

Our central forecast for the annual inflation rate in the last quarter of 2001 is 1.7 per cent, generating a 42 per cent chance that the Governor of the Bank of England will have to write to the Chancellor of the Exchequer explaining how monetary policy will used to raise the inflation rate. There is an even stronger chance that he will have to do so during the course of this year. Our forecasts for 2002 suggest that he need not say very much, with a central projection of 2.4 per cent, and the probabilities concentrated in the 1.3 to 3.5 per cent range.

ACKNOWLEDGEMENTS

The forecast was completed on April 20, 2001. The text incorporates some additional information that subsequently became available. We are grateful to Ray Barrell, Andy Blake and Martin Weale for helpful comments.

REFERENCES

Barrell. R., Dury. K. and Hurst, I. (2000), 'An encompassing framework for evaluating simple monetary policy rules', revised from National Institute Discussion Paper No. 156.

BEA (2000), 'Us multinational companies: operations in 1998', Survey of Current Business, July, pp. 26-45.

BIS (2001). Consolidated Statistics on the Maturity, Sectoral and Nationality Distribution of International Bank Lending, February 2001. Bank for International Settlements.

LPC (2001). The National Minimum Wage: Making the Difference, Low Pay Commission, Third Report.

Pain, N. (ed.) (2000), Inward Investment, Technological Change and Growth: The Impact of Multinational Corporations on the UK Economy, Basingstoke, Palgrave.

 Gross domestic product
 and components ofexpenditure
 [pound] billion, 1995 prices, seasonally adjusted
 Gross capital
 Final consumption formation
 expenditure Gross
 Households General Gereral fixed in-
 & NPISH [a] gov't vestment [b]
1997 489.8 141.5 131.3
1998 509.5 143.1 144.9
1999 532.0 148.8 152.4
2000 551.6 152.7 156.6
2001 566.6 159.1 162.4
2002 581.0 164.4 169.8
2003 594.9 169.2 177.8
2000 I 136.1 37.4 38.4
2000 II 137.2 38.0 38.7
2000 III 138.8 38.6 39.2
2000 IV 139.6 38.7 40.2
Forecast
2001 I 140.6 39.0 39.6
2001 II 140.9 39.6 40.4
2001 III 142.1 40.1 40.9
2001 IV 143.0 40.5 41.5
2002 I 143.9 40.7 41.9
2002 II 144.8 41.0 42.3
2002 III 145.7 41.2 42.6
2002 IV 146.6 41.5 43.1
Percentage changes
1998/97 4.0 1.1 10.4
1999/98 4.4 4.0 5.2
2000/99 3.7 2.7 2.7
2001/00 2.7 4.2 3.7
2002/01 2.5 3.3 4.5
2003/02 2.4 3.0 4.7
2000IV/99IV 3.4 2.9 3.4
2000IIV/00IV 2.4 4.5 3.2
2002IV/01IV 2.5 2.6 3.7
 Total
 final
 Stock- Domestic Total expendi- Total
 building demand exports ture imports
1997 3.8 766.3 236.3 1002.6 244.6
1998 4.2 801.7 242.5 1044.2 266.2
1999 -1.4 831.8 252.1 1083.5 287.8
2000 1.9 862.9 273.4 1135.3 315.4
2001 0.0 888.2 288.6 1175.6 335.7
2002 1.1 916.3 299.2 1214.2 352.4
2003 1.2 943.1 315.4 1257.2 371.0
2000 I 0.3 212.3 66.2 278.2 75.7
2000 II 1.2 215.2 68.1 283.0 78.7
2000 III 0.9 217.4 68.8 285.9 79.8
2000 IV -0.5 218.0 70.4 288.1 81.2
Forecast
2001 I -0.5 218.7 71.0 289.4 81.7
2001 II 0.0 220.9 72.0 292.6 83.4
2001 III 0.3 223.4 72.6 295.6 84.9
2001 IV 0.3 225.2 73.0 297.9 85.8
2002 I 0.3 226.7 73.7 300.1 86.7
2002 II 0.3 228.3 74.3 302.2 87.6
2002 III 0.3 229.8 75.1 304.6 88.5
2002 IV 0.3 231.4 76.1 307.2 89.6
Percentage changes
1998/97 4.6 2.6 4.2 8.8
1999/98 3.8 4.0 3.8 8.1
2000/99 3.7 8.4 4.8 9.6
2001/00 2.9 5.6 3.5 6.4
2002/01 3.2 3.6 3.3 5.0
2003/02 2.9 5.4 3.5 5.3
2000IV/99IV 2.9 8.7 4.2 8.8
2000IIV/00IV 3.3 3.8 3.4 5.7
2002IV/01IV 2.8 4.2 3.1 4.4
 GDP Adjust- GDP
 at ment to at
 market basic basic
 Residual prices prices prices
1997 0.0 757.9 84.5 673.4
1998 0.0 777.9 84.4 693.6
1999 -0.4 795.7 87.1 708.7
2000 -0.9 819.9 90.6 729.3
2001 -1.2 839.9 93.4 746.5
2002 -1.3 861.8 96.1 765.7
2003 -1.4 886.2 98.9 787.3
2000 I -0.2 202.6 22.5 180.1
2000 II -0.2 204.4 22.6 181.8
2000 III -0.2 206.1 22.7 183.4
2000 IV -0.2 206.9 22.9 184.0
Forecast
2001 I -0.3 207.8 23.1 184.7
2001 II -0.3 209.2 23.2 186.0
2001 III -0.3 210.8 23.4 187.3
2001 IV -0.3 212.1 23.6 188.5
2002 I -0.3 213.4 23.8 189.6
2002 II -0.3 214.7 23.9 190.8
2002 III -0.3 216.1 24.1 192.0
2002 IV -0.3 217.6 24.3 193.3
Percentage changes
1998/97 3.0 2.6 -0.2 3.0
1999/98 2.2 2.3 3.2 2.2
2000/99 2.9 3.0 4.1 2.9
2001/00 2.4 2.4 3.0 2.4
2002/01 2.6 2.6 2.9 2.6
2003/02 2.8 2.8 3.0 2.8
2000IV/99IV 2.5 2.6 3.2 2.5
2000IIV/00IV 2.4 2.5 3.1 2.4
2002IV/01IV 2.6 2.6 2.8 2.6
Notes:
(a.)Non-profit institutions serving households.
(b.)Including acquisitions less disposals of valuables.
 Household income and expenditure
 Seasonally adjusted
 Compensation
 Average [a] Employees of employees
 earnings
 1995=100 millions [pound] billion,
 current prices
1997 104.2 24.1 432.4
1998 108.9 24.7 463.0
1999 114.2 25.1 492.4
2000 119.4 25.3 519.7
2001 124.8 25.4 545.1
2002 130.8 25.4 570.9
2003 136.9 25.4 598.6
2000 I 118.1 25.3 128.3
2000 II 118.3 25.3 128.6
2000 III 120.0 25.3 130.5
2000 IV 121.4 25.4 132.3
Forecast
2001 I 122.6 25.4 133.9
2001 II 124.0 25.4 135.4
2001 III 125.4 25.4 137.0
2001 IV 127.1 25.4 138.8
2002 I 128.6 25.4 140.3
2002 II 130.0 25.4 141.9
2002 III 131.5 25.4 143.5
2002 IV 133.1 25.4 145.2
Percentage changes
1998/97 4.5 2.5 7.1
1999/98 4.9 1.4 6.3
2000/99 4.6 0.9 5.6
2001/00 4.5 0.4 4.9
2002/01 4.8 -0.1 4.7
2003/02 4.7 0.2 4.9
2000IV/99IV 4.6 0.4 5.0
2001IV/00IV 4.8 0.2 5.0
2002IV/01IV 4.7 0.0 4.6
 Gross Real Final consumption
 disposable household expenditure
 income disposable
 income [b] Total
 [pound] billion,
 1995 prices
1997 555.4 525.3 489.8
1998 569.5 525.8 509.5
1999 599.0 544.3 532.0
2000 621.8 560.8 551.6
2001 647.3 575.7 566.6
2002 684.8 596.5 581.0
2003 720.9 612.0 594.9
2000 I 153.7 139.4 136.1
2000 II 153.4 138.7 137.2
2000 III 154.8 139.5 138.8

2000 IV 159.9 143.2 139.6
Forecast
2001 I 158.0 141.l 140.6
2001 II 160.9 143.6 140.9
2001 III 163.1 144.9 142.1
2001 IV 165.3 146.2 143.0
2002 I 167.7 147.5 143.9
2002 II 170.3 148.8 144.8
2002 III 172.3 149.7 145.7
2002 IV 174.5 150.6 146.6
Percentage changes
1998/97 2.5 0.1 4.0
1999/98 5.2 3.5 4.4
2000/99 3.8 3.0 3.7
2001/00 4.1 2.7 2.7
2002/01 5.8 3.6 2.5
2003/02 5.3 2.6 2.4
2000IV/99IV 4.2 3.5 3.4
2001IV/00IV 3.4 2.1 2.4
2002IV/01IV 5.6 3.0 2.5
 Net
 Savings House financial
 ratio [c] prices [d] assets
 Durable
 per cent 1995=100 [pound] billion
1997 48.0 9.3 112.8 1903.4
1998 51.8 5.8 125.7 2023.7
1999 55.0 5.1 139.4 2387.8
2000 59.2 4.4 160.2 2149.0
2001 62.8 4.6 172.8 2090.3
2002 66.0 5.6 182.8 2225.6
2003 68.3 5.8 192.7 2344.1
2000 I 14.4 5.1 151.3 2245.8
2000 II 14.6 3.7 159.5 2218.7
2000 III 15.0 3.4 162.5 2213.5
2000 IV 15.2 5.5 167.4 2149.0
Forecast
2001 I 15.5 3.5 169.5 2062.6
2001 II 15.5 4.8 171.4 2021.7
2001 III 15.8 5.0 173.9 2049.7
2001 IV 16.0 5.2 176.4 2090.3
2002 I 16.2 5.4 178.9 2129.1
2002 II 16.4 5.6 181.6 2164.1
2002 III 16.6 5.6 184.2 2195.8
2002 IV 16.7 5.6 186.6 2225.6
Percentage changes
1998/97 8.0 11.5 6.3
1999/98 6.2 10.9 18.0
2000/99 7.7 14.9 -10.0
2001/00 6.0 7.9 -2.7
2002/01 5.1 5.8 6.5
2003/02 3.6 5.4 5.3
2000IV/99IV 8.5 13.5 -10.0
2001IV/00IV 5.1 5.4 -2.7
2002IV/01IV 4.5 5.8 6.5
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 for change
in net equity of households in pension funds.
(d.)Department of Environment, mix adjusted.
 Forecasts of fixed invest
 [pound] billion, 1995 prices, seasonally adjusted
 Business investment Housing
 Manufact- Non-manu- Total Private
 uring facturing
1997 19.8 79.3 99.2 20.8
1998 20.7 91.0 111.7 21.5
1999 17.7 101.7 119.4 21.7
2000 18.0 104.0 122.1 22.1
2001 18.1 106.9 125.0 22.5
2002 18.2 109.5 127.8 23.8
2003 18.7 113.0 131.7 24.7
2000 I 4.7 25.0 29.7 5.7
2000 II 4.4 25.5 29.9 5.7
2000 III 4.5 26.0 30.5 5.6
2000 IV 4.5 27.5 32.0 5.1
Forecast
2001 I 4.5 26.5 31.0 5.4
2001 II 4.5 26.7 31.2 5.7
2001 III 4.5 26.8 31.3 5.7
2001 IV 4.5 27.0 31.5 5.7
2002 I 4.5 27.1 31.7 5.9
2002 II 4.6 27.3 31.8 5.9
2002 III 4.6 27.4 32.0 6.0
2002 IV 4.6 27.7 32.3 6.0
Percentage changes
1998/97 4.4 14.7 12.6 3.3
1999/98 -14.7 11.8 6.9 0.9
2000/99 2.1 2.3 2.3 1.6
2001/00 0.4 2.8 2.4 2.2
2002/01 0.8 2.4 2.2 5.7
2003/02 2.2 3.2 3.1 3.4
2000IV/99IV -0.3 6.0 5.0 -10.2
2001IV/00IV 1.8 -2.0 -1.5 12.4
2002IV/0IIV 1.0 2.7 2.5 5.3
 Total User cost Corporate
 General of capital profit share
 government (%) of GDP (%)
1997 11.3 131.3 14.5 26.3
1998 11.7 144.9 14.1 25.6
1999 11.3 152.4 13.5 24.5
2000 12.5 156.6 13.0 24.4
2001 14.9 162.4 12.7 23.9
2002 18.3 169.8 12.7 24.1
2003 21.5 177.8 12.7 24.4
2000 I 3.0 38.4 13.2 23.8
2000 II 3.2 38.7 13.0 24.7
2000 III 3.1 39.2 12.8 25.2
2000 IV 3.2 40.2 12.8 23.9
Forecast
2001 I 3.2 39.6 12.8 23.9
2001 II 3.5 40.4 12.7 23.9
2001 III 3.9 40.9 12.6 24.0
2001 IV 4.3 41.5 12.7 23.9
2002 I 4.4 41.9 12.7 24.0
2002 II 4.5 42.3 12.7 24.0
2002 III 4.6 42.6 12.7 24.1
2002 IV 4.8 43.1 12.7 24.2
Percentage changes
1998/97 3.7 10.4
1999/98 -2.8 5.2
2000/99 10.0 2.7
2001/00 19.3 3.7
2002/01 22.5 4.5
2003/02 17.8 4.7
2000IV/99IV 13.2 3.4
2001IV/00IV 35.9 3.2
2002IV/0IIV 10.5 3.7
 Balance of payments: current account
 Seasonally adjusted
 Exports Exports Imports
 of manu- of goods of manu-
 factures factures
 ([pound] billion at 1995
 prices) [a]
1997 152.9 179.1 165.0
1998 155.7 181.3 180.8
1999 162.2 187.6 196.2
2000 180.6 207.1 218.7
2001 194.1 220.9 235.1
2002 204.0 231.3 247.7
2003 216.6 244.6 261.6
2000 I 43.6 50.1 52.1
2000 II 44.9 51.7 54.8
2000 III 45.5 52.1 55.6
2000 IV 46.6 53.2 56.3
Forecast
2001 I 47.4 54.0 57.0
2001 II 48.3 55.0 58.3
2001 III 49.0 55.7 59.5
2001 IV 49.4 56.2 60.2
2002 I 50.1 56.9 60.9
2002 II 50.6 57.4 61.5
2002 III 51.3 58.1 62.2
2002 IV 52.1 58.9 63.0
Percentage changes
1998/97 1.8 1.2 9.6
1999/98 4.2 3.5 8.5
2000/99 11.4 10.4 11.5
2001/00 7.4 6.7 7.5
2002/01 5.1 4.7 5.3
2003/02 6.2 5.8 5.6
2000IV/99IV 11.5 9.6 9.7
2001IV/00IV 5.9 5.5 7.1
2002IV/0IIV 5.4 4.9 4.6
 Imports Terms of Export
 of goods trade [b] price
 competi-
 itiveness [d]
1997 196.8 103.7 109.6
1998 213.6 106.0 112.6
1999 229.4 107.2 114.9
2000 253.6 107.4 117.5
2001 271.8 106.9 115.3
2002 285.7 108.1 115.4
2003 301.1 108.6 115.7
2000 I 60.6 107.3 119.3
2000 II 63.4 107.6 118.0
2000 III 64.3 107.7 116.0
2000 IV 65.3 107.1 116.5
Forecast
2001 I 66.0 106.1 115.3
2001 II 67.5 106.6 115.4
2001 III 68.8 107.3 115.4
2001 IV 69.6 107.5 115.3
2002 I 70.3 107.8 115.4
2002 II 71.0 108.1 115.4
2002 III 71.8 108.2 115.4
2002 IV 72.6 108.3 115.5
Percentage changes
1998/97 8.5 2.2 2.7
1999/98 7.4 1.1 2.0
2000/99 10.6 0.2 2.3
2001/00 7.2 -0.5 -1.8
2002/01 5.1 1.1 0.1
2003/02 5.4 0.5 0.3
2000IV/99IV 9.2 -0.9 -0.6
2001IV/00IV 6.5 0.4 -1.0
2002IV/0IIV 4.4 0.7 0.1
 Goods Invisibles Current World
 balance balance trade [c]
 ([pound] billion) 1994=100
1997 -11.9 19.3 7.4 127.5
1998 -20.5 20.9 0.4 137.4
1999 -26.2 17.1 -9.1 145.5
2000 -28.8 14.6 -14.2 162.6
2001 -32.1 16.1 -15.9 175.7
2002 -32.7 13.4 -19.3 187.0
2003 -33.7 10.9 -22.8 201.3
2000 I -6.6 3.4 -3.2 155.3
2000 II -7.2 2.9 -4.2 160.2
2000 III -7.4 3.8 -3.6 166.5
2000 IV -7.6 4.4 -3.2 168.3
Forecast
2001 I -7.8 3.0 -4.8 171.9
2001 II -7.9 3.9 -4.0 174.4
2001 III -8.1 4.7 -3.4 177.0
2001 IV -8.3 4.5 -3.8 179.5
2002 I -8.2 4.0 -4.2 182.7
2002 II -8.2 3.4 -4.8 185.2
2002 III -8.1 3.1 -5.0 188.4
2002 IV -8.2 2.8 -5.3 191.7
Percentage changes
1998/97 7.8
1999/98 5.9
2000/99 11.8
2001/00 8.0
2002/01 6.5
2003/02 7.6
2000IV/99IV 10.9
2001IV/00IV 6.6
2002IV/0IIV 6.9
 World
 oil
 price [e]
 $
1997 18.6
1998 12.4
1999 17.4
2000 27.1
2001 25.4
2002 24.0
2003 24.4
2000 I 25.5
2000 II 25.7
2000 III 28.9
2000 IV 28.5
Forecast
2001 I 26.5
2001 II 25.5
2001 III 25.0
2001 IV 24.5
2002 I 24.0
2002 II 24.0
2002 III 24.0
2002 IV 24.0
Percentage changes
1998/97 -33.3
1999/98 40.5
2000/99 55.9
2001/00 -6.4
2002/01 -5.4
2003/02 1.7
2000IV/99IV 22.2
2001IV/00IV -13.9
2002IV/0IIV -2.0
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.
(e.)Per barrel, OPEC average.
 Output and productivity
 Seasonally adjusted, 1995=100
 Sectoral output [a]
 Manufac- Public Distri- Business
 turing bution services
 (0.216) (0.225) (0.146) (0.138)
1997 101.7 103.5 106.5 114.7
1998 102.2 105.6 109.2 123.1
1999 102.2 106.6 111.0 128.6
2000 103.8 108.5 113.2 136.5
2001 105.2 112.0 116.0 143.4
2002 107.4 115.7 118.5 151.2
2003 110.4 119.1 121.2 158.0
2000 I 102.9 107.7 111.5 133.1
2000 II 103.4 108.4 112.5 135.7
2000 III 104.2 108.7 114.0 138.8
2000 IV 104.8 109.2 115.0 138.5
Forecast
2001 I 104.2 109.8 115.6 140.1
2001 II 104.8 111.5 115.6 142.3
2001 III 105.6 112.9 116.0 144.6
2001 IV 106.1 113.9 116.7 146.7
2002 I 106.6 114.6 117.4 148.6
2002 II 107.0 115.3 118.2 150.5
2002 III 107.6 116.0 118.9 152.1
2002 IV 108.3 116.8 119.5 153.7
Percentage changes
1998/97 0.5 2.0 2.5 7.3
1999/98 0.0 1.0 1.7 4.5
2000/99 1.6 1.8 2.0 6.1
2001/00 1.3 3.2 2.5 5.1
2002/01 2.1 3.3 2.1 5.4
2003/02 2.8 3.0 2.3 4.5
2000IV/99IV 1.5 1.8 2.9 4.7
2001IIV/00IV 1.2 4.3 1.5 6.0
2002IV/01IV 2.0 2.6 2.4 4.8
 GDP [b]
 Construct- Oil Rest Total Per
 ion worker
 (0.052) (0.021) (0.202)
1997 104.7 104.7 109.4 106.0 103.1
1998 106.1 107.5 114.3 109.1 104.4
1999 107.0 112.1 120.3 111.5 105.7
2000 108.7 111.0 127.0 114.8 108.1
2001 108.5 103.6 128.4 117.5 110.3
2002 110.1 107.0 129.3 120.5 113.2
2003 111.6 109.4 132.0 123.9 116.2
2000 I 111.2 111.0 124.6 113.4 106.9
2000 II 108.8 115.2 126.4 114.4 107.8
2000 III 106.8 115.0 127.6 115.4 108.8
2000 IV 107.8 102.8 129.4 115.8 109.0
Forecast
2001 I 108.1 100.8 128.7 116.2 109.2
2001 II 108.0 103.0 128.7 117.1 110.0
2001 III 108.7 105.0 128.2 117.9 110.7
2001 IV 109.2 105.6 128.2 118.6 111.4
2002 I 109.6 106.2 128.5 119.3 112.1
2002 II 110.0 106.7 128.8 120.1 112.8
2002 III 110.2 I07.3 129.6 120.9 113.5
2002 IV 110.5 107.9 130.4 121.7 114.3
Percentage changes
1998/97 1.3 2.6 4.5 3.0 1.3
1999/98 0.8 4.3 5.2 2.2 1.2
2000/99 1.6 -1.0 5.6 2.9 2.3
2001/00 -0.1 -6.7 1.1 2.4 2.1
2002/01 1.4 3.3 0.7 2.6 2.6
2003/02 1.4 2.2 2.1 2.8 2.6
2000IV/99IV -0.6 -8.2 4.9 2.5 2.3
2001IIV/00IV 1.3 2.7 -0.9 2.4 2.2
2002IV/01IV 1.2 2.2 1.8 2.6 2.6
 Manufact-
 uring pro-
 ductivity [c]
1997 99.6
1998 99.5
1999 103.1
2000 108.2
2001 114.3
2002 119.0
2003 124.0
2000 I 105.7
2000 II 107.0
2000 III 109.1
2000 IV 111.0
Forecast
2001 I 112.1
2001 II 113.7
2001 III 115.1
2001 IV 116.3
2002 I 117.3
2002 II 118.4
2002 III 119.5
2002 IV 120.7
Percentage changes
1998/97 -0.1
1999/98 3.6
2000/99 4.9
2001/00 5.6
2002/01 4.1
2003/02 4.2
2000IV/99IV 5.0
2001IIV/00IV 4.8
2002IV/01IV 3.8
Notes: (a.)1995 share of output in parentheses.
(b.)Gross value added at constant 1995 basic prices.
(c.)Including self-employment.
 The UK labour market
 Employment, thousands [a]
 Self Training
 Employees employment schemes
1997 24139 3613 382
1998 24745 3515 346
1999 25087 3463 334
2000 25314 3410 324
2001 25416 3399 319
2002 25395 3417 319
2003 25433 3432 319
2000 I 25273 3425 329
2000 II 25304 3423 327
2000 III 25318 3399 323
2000 IV 25360 3393 319
Forecast
2001 I 25415 3393 319
2001 II 25421 3397 319
2001 III 25419 3401 319
2001 IV 25410 3406 319
2002 I 25398 3411 319
2002 II 25391 3415 319
2002 III 25392 3419 319
2002 IV 25399 3423 319
Percentage changes
1998/97 2.5 -2.7 -9.4
1999/98 1.4 -1.5 -3.4
2000/99 0.9 -1.5 -3.0
2001/00 0.4 -0.3 -1.7
2002/01 -0.1 0.5 0.0
2003/02 0.2 0.4 0.0
2000IV/99IV 0.4 -1.0 -4.2
2001IV/100IV 0.2 0.4 0.0
2002IV/01IV 0.0 0.5 0.0
 Unemployment, thousands
 ILO
 Total definition Claimant
1997 28134 2088 1586
1998 28606 1900 1347
1999 28885 1834 1250
2000 29048 1673 1090
2001 29135 1572 10ll
2002 29131 1650 1110
2003 29184 1704 1176
2000 I 29027 1772 1158
2000 II 29053 1680 1107
2000 III 29039 1634 1055
2000 IV 29072 1605 1041
Forecast
2001 I 29128 1566 994
2001 II 29137 1564 999
2001 III 29140 1570 1012
2001 IV 29135 1589 1038
2002 I 29127 1617 1070
2002 II 29125 1642 1099
2002 III 29129 1663 1125
2002 IV 29140 1679 1144
Percentage changes
1998/97 1.7 -9.0 -15.1
1999/98 1.0 -3.5 -7.2
2000/99 0.6 -8.8 -12.8
2001/00 0.3 -6.0 -7.3
2002/01 0.0 4.9 9.8
2003/02 0.2 3.3 6.0
2000IV/99IV 0.2 -11.0 -12.2
2001IV/100IV 0.2 -1.0 -0.3
2002IV/01IV 0.0 5.7 10.3
 Participation, thousands
 Civilian
 Longterm [c] workforce [d] Inactive
1997 781 29720 6015
1998 593 29953 5923
1999 518 30135 5939
2000 413 30138 6170
2001 370 30145 6404
2002 406 30240 6518
2003 431 30360 6599
2000 I 438 30185 6004
2000 II 430 30160 6128
2000 III 382 30094 6247
2000 IV 401 30113 6301
Forecast
2001 I 364 30122 6346
2001 II 366 30135 6402
2001 III 371 30152 6424
2001 IV 380 30173 6442
2002 I 392 30197 6484
2002 II 402 30224 6524
2002 III 412 30254 6529
2002 IV 419 30285 6534
Percentage changes
1998/97 -24.1 0.8 -1.5
1999/98 -12.7 0.6 0.3
2000/99 -20.2 0.0 3.9
2001/00 -10.4 0.0 3.8
2002/01 9.8 0.3 1.8
2003/02 6.0 0.4 1.2
2000IV/99IV -18.0 -0.3 6.2
2001IV/100IV -5.3 0.2 2.2
2002IV/01IV 10.3 0.4 1.4
 Underutilisation % [b]
 Population ILO Claimant
 of working unemployment unemployment
 age rate rate
1997 36236 7.0 5.3
1998 36429 6.3 4.5
1999 36658 6.1 4.1
2000 36891 5.5 3.6
2001 37111 5.2 3.4
2002 37299 5.5 3.7
2003 37486 5.6 3.9
2000 I 36803 5.9 3.8
2000 II 36861 5.6 3.7
2000 III 36920 5.4 3.5
2000 IV 36978 5.3 3.5
Forecast
2001 I 37040 5.2 3.3
2001 II 37102 5.2 3.3
2001 III 37134 5.2 3.4
2001 IV 37166 5.3 3.4
2002 I 37228 5.4 3.5
2002 II 37290 5.4 3.6
2002 III 37322 5.5 3.7
2002 IV 37354 5.5 3.8
Percentage changes
1998/97 0.5
1999/98 0.6
2000/99 0.6
2001/00 0.6
2002/01 0.5
2003/02 0.5
2000IV/99IV 0.6
2001IV/100IV 0.5
2002IV/01IV 0.5
 Population
 not employed
 rate
1997 22.4
1998 21.5
1999 21.2
2000 21.3
2001 21.5
2002 21.9
2003 22.1
2000 I 21.1
2000 II 21.2
2000 III 21.3
2000 IV 21.4
Forecast
2001 I 21.4
2001 II 21.5
2001 III 21.5
2001 IV 21.6
2002 I 21.8
2002 II 21.9
2002 III 22.0
2002 IV 22.0
Percentage changes
1998/97
1999/98
2000/99
2001/00
2002/01
2003/02
2000IV/99IV
2001IV/100IV
2002IV/01IV

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.

 Price indices
 Seasonally adjusted, 1995=100
 Whole- Harmon-
 Unit sale Consumer ised
 labour Imports price price index of
 costs deflator index [b] index consumer
 prices
1997 105.6 93.6 102.2 105.7 101.8
1998 110.2 87.7 102.1 108.3 103.4
1999 114.5 85.5 101.7 110.0 104.8
2000 117.3 85.8 102.6 110.9 105.6
2001 120.1 86.7 103.0 112.4 106.4
2002 122.6 89.0 104.9 114.8 108.3
2003 125.0 91.2 107.4 117.8 110.7
2000 I 117.2 85.3 102.2 110.3 104.8
2000 II 116.5 85.3 102.5 110.6 105.7
2000 III 117.2 86.1 102.7 111.0 105.7
2000 IV 118.3 86.5 102.9 111.7 106.3
Forecast
2001 I 119.3 86.1 102.7 112.0 105.7
2001 II 119.8 86.3 102.8 112.1 106.3
2001 III 120.3 86.8 103.1 112.5 106.6
2001 IV 121.2 87.5 103.6 113.1 107.0
2002 I 121.7 88.1 104.1 113.7 107.5
2002 II 122.3 88.7 104.6 114.4 108.1
2002 III 122.9 89.3 105.2 115.1 108.6
2002 IV 123.5 89.8 105.8 115.9 109.2
Percentage changes
1998/97 4.3 -6.3 -0.1 2.4 1.6
1999/98 4.0 -2.5 -0.4 1.6 1.4
2000/99 2.4 0.4 0.9 0.8 0.8
2001/00 2.4 1.0 0.4 1.4 0.7
2002/01 2.1 2.7 1.9 2.1 1.8
2003/02 2.0 2.4 2.4 2.6 2.2
20001V/99IV 2.4 1.7 0.9 0.7 0.9
2001IV/00IV 2.4 1.2 0.6 1.3 0.7
2002IV/OlIV 2.0 2.7 2.2 2.5 2.1
 Retail price index [a]
 Excluding Excluding
 All mortgage mortgage
 items interest interest &
 indirect taxes
1997 105.6 105.8 104.8
1998 109.3 108.6 107.0
1999 110.9 111.1 108.7
2000 114.1 113.4 110.7
2001 116.0 115.3 112.5
2002 118.6 117.9 115.1
2003 121.6 120.8 117.8
2000 I 112.3 112.1 109.8
2000 II 114.3 113.6 110.7
2000 III 114.6 113.7 110.8
2000 IV 115.2 114.3 111.5
Forecast
2001 I 115.1 114.2 111.6
2001 II 115.8 115.3 112.4
2001 III 116.1 115.5 112.7
2001 IV 116.8 116.2 113.4
2002 I 117.2 116.5 113.8
2002 II 118.5 117.8 114.9
2002 III 119.0 118.3 115.4
2002 IV 119.8 119.0 116.1
Percentage changes
1998/97 3.4 2.7 2.0
1999/98 1.5 2.3 1.6
2000/99 2.9 2.1 1.8
2001/00 1.6 1.7 1.6
2002/01 2.3 2.3 2.2
2003/02 2.5 2.4 2.4
20001V/99IV 3.1 2.1 1.8
2001IV/00IV 1.4 1.7 1.7
2002IV/OlIV 2.5 2.4 2.3
 GDP GDP Manufac-
 deflator deflator turing
 (basic (market capacity
 prices) prices) utilisation
1997 106.2 106.3 98.3
1998 108.9 109.5 98.2
1999 111.0 112.0 96.7
200 112.9 114.0 97.0
2001 114.4 115.4 96.3
2002 117.1 118.0 96.4
2003 120.2 121.1 97.1
2000 I 111.8 112.9 96.5
2000 II 112.6 113.7 96.7
2000 III 113.3 114.4 97.1
2000 IV 113.7 114.8 97.6
Forecast
2001 I 113.5 114.8 96.6
2001 II 114.2 115.0 96.3
2001 III 114.8 115.6 96.2
2001 IV 115.3 116.1 96.3
2002 I 116.0 116.8 96.3
2002 II 116.7 117.6 96.3
2002 III 117.4 118.3 96.5
2002 IV 118.2 119.1 96.6
Percentage changes
1998/97 2.5 3.0 -0.1
1999/98 1.9 2.3 -1.5
2000/99 1.7 1.8 0.2
2001/00 1.4 1.3 -0.7
2002/01 2.3 2.2 0.1
2003/02 2.7 2.6 0.7
20001V/99IV 1.3 1.3 0.2
2001IV/00IV 1.4 1.2 -1.4
2002IV/OlIV 2.5 2.5 0.4
Notes: (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
2000 3.0 4.3 9.7 12.4
2001 3.2 4.5 9.3 11.8
2002 3.9 4.8 9.4 11.6
2003 4.0 5.0 9.6 11.4
2000 I 3.5 4.6 8.6 12.3
2000 II 2.5 4.5 9.3 12.4
2000 III 2.3 4.2 10.4 12.6
2000 IV 3.8 4.1 10.6 12.2
Forecast
2001 I 2.4 4.3 7.9 11.8
2001 II 3.3 4.6 9.5 11.8
2001 III 3.4 4.6 10.0 11.8
2001 IV 3.6 4.6 9.8 11.8
2002 I 3.7 4.7 9.6 11.7
2002 II 3.9 4.8 9.3 11.6
2002 III 3.9 4.8 9.4 11.5
2002 IV 3.9 4.9 9.4 11.5
 Government sector Whole economy
 Saving Investment Saving Investment
1997 -0.4 1.2 18.1 17.2
1998 2.0 1.2 18.0 18.0
1999 2.7 1.0 16.5 17.5
2000 3.3 1.1 16.3 17.8
2001 3.6 1.3 16.0 17.7
2002 2.9 1.6 16.1 18.0
2003 2.6 1.9 16.2 18.3
2000 I 4.1 1.0 16.4 17.8
2000 II 4.1 1.2 16.3 18.1
2000 III 3.4 1.1 16.4 17.9
2000 IV 1.5 1.1 16.1 17.5
Forecast
2001 I 5.0 1.1 15.3 17.3
2001 II 3.2 1.3 16.0 17.6
2001 III 3.0 1.4 16.4 17.8
2001 IV 3.0 1.5 16.4 18.0
2002 I 3.0 1.6 16.3 18.0
2002 II 2.9 1.6 16.1 18.0
2002 III 2.8 1.6 16.1 18.0
2002 IV 2.8 1.7 16.0 18.1
 Finance
 from
 overseas
1997 -0.9
1998 0.0
1999 1.0
2000 1.5
2001 1.6
2002 1.9
2003 2.1
2000 I 1.4
2000 II 1.8
2000 III 1.5
2000 IV 1.3
Forecast
2001 I 2.0
2001 II 1.7
2001 III 1.4
2001 IV 1.5
2002 I 1.7
2002 II 1.9
2002 III 2.0
2002 IV 2.1
 Long-term projections
 All figures percentage change
 unless otherwise stated
 1999 2000 2001 2002 2003 2004
GDP (basic prices) 2.2 2.9 2.4 2.6 2.8 2.8
Average earnings 4.9 4.6 4.5 4.8 4.7 4.7
GDP deflator (basic prices) 1.9 1.7 1.4 2.3 2.7 2.8
RPIX 2.3 2.1 1.7 2.3 2.4 2.4
Manufacturing productivity 3.6 4.9 5.6 4.1 4.2 4.5
Whole economy productivity 1.2 2.3 2.1 2.6 2.6 2.4
Workforce jobs 1.0 0.6 0.3 0.0 0.2 0.4
ILO unemployment rate (%) 6.1 5.5 5.2 5.5 5.6 5.6
Current account
 (% of GDP) -1.0 -1.5 -1.6 -1.9 -2.1 -2.0
Total managed expenditure
 (% of GDP) 37.8 38.7 38.9 39.5 40.0 40.3
Public sector net borrowing
 (% GDP) -1.2 -1.8 -1.8 -0.6 0.1 0.4
Effective exchange rate
 (1990=100) 103.7 107.5 104.7 103.7 102.7 101.9
3 month interest rates (%) 5.4 6.1 5.4 5.3 5.3 5.3
10 year interest rates (%) 5.1 5.3 5.1 5.1 5.1 5.1
 2005 2006-10
GDP (basic prices) 2.8 2.7
Average earnings 4.9 5.1
GDP deflator (basic prices) 2.8 2.7
RPIX 2.5 2.4
Manufacturing productivity 4.4 4.1
Whole economy productivity 2.3 2.3
Workforce jobs 0.5 0.4
ILO unemployment rate (%) 5.5 5.3
Current account
 (% of GDP) -2.0 -2.1
Total managed expenditure
 (% of GDP) 40.4 40.4
Public sector net borrowing
 (% GDP) 0.4 0.6
Effective exchange rate
 (1990=100) 101.2 101.0
3 month interest rates (%) 5.3 5.0
10 year interest rates (%) 5.1 5.1
 Average absolute errors, NIESR
 forecasts made in April/May [*]
 All figures per cent unless otherwise indicated
 Current year
 Average error
Real GDP growth 0.8
Domestic demand growth 0.9
Consumers expenditure growth 1.3
Investment growth 2.6
Export volume growth 2.1
Import volume growth 3.2
Real personal disposable income growth 1.1
Current account ([pound]bn) 5.5
Public sector borrowing requirement ([pound]bn) [a] 6.0
Retail price inflation (Q4) 0.9
 Error range
Real GDP growth 0.0 - 2.1
Domestic demand growth 0.0 - 2.9
Consumers expenditure growth 0.3 - 3.7
Investment growth 0.0 - 7.1
Export volume growth 0.2 - 5.0
Import volume growth 0.3 - 6.6
Real personal disposable income growth 0.1 - 2.6
Current account ([pound]bn) 0.3 - 12.6
Public sector borrowing requirement ([pound]bn) [a] 0.3 - 20.3
Retail price inflation (Q4) 0.2 - 3.0
 Year ahead
 Average error
Real GDP growth 1.4
Domestic demand growth 1.8
Consumers expenditure growth 1.7
Investment growth 3.9
Export volume growth 2.3
Import volume growth 3.7
Real personal disposable income growth 1.6
Current account ([pound]bn) 6.5
Public sector borrowing requirement ([pound]bn) [a] 11.3
Retail price inflation (Q4) 1.5
 Error range
Real GDP growth 0.1 - 3.9
Domestic demand growth 0.2 - 4.7
Consumers expenditure growth 0.1 - 4.5
Investment growth 0.2 - 10.8
Export volume growth 0.2 - 6.5
Import volume growth 0.2 - 8.5
Real personal disposable income growth 0.1 - 4.2
Current account ([pound]bn) 0.1 - 18.2
Public sector borrowing requirement ([pound]bn) [a] 2.6 - 27.1
Retail price inflation (Q4) 0.2 - 3.2
 Average
 outturn
 1982-2000
Real GDP growth 2.6
Domestic demand growth 3.0
Consumers expenditure growth 3.1
Investment growth 4.5
Export volume growth 4.6
Import volume growth 6.1
Real personal disposable income growth 2.9
Current account ([pound]bn) -5.7
Public sector borrowing requirement ([pound]bn) [a] 10.7
Retail price inflation (Q4) 4.5
(*.)All errors defined by subtracting the
forecast from the outturns for 1982-2000.
 Probability distribution of growth
 and inflation forecasts
 Inflation: probability of 12 month RPIX
 inflation falling in the following ranges
 2001Q4 2002Q4
less than 1.5 per cent 42 23
1.5 to 2.5 per cent 38 30
2.5 to 3.5 per cent 17 28
more than 3.5 per cent 3 18
 100 100
 Growth: probability of annual growth
 rate falling in the following ranges
 2001 2002
less than 0 per cent 0 1
0 to 1 per cent 6 7
1 to 2 per cent 27 22
2 to 3 per cent 42 33
3 to 4 per cent 21 25
more than 4 per cent 4 12
 100 100

NOTES

(1.)Paragraph 40. The Inflation Target and Remit for the Monetary Policy Committee, HM Treasury, June 1997.

(2.)The capital expenditure data are for majority-owned foreign affiliates (MOFAs) only. The gross product estimate for all non-bank affiliates was obtained by taking gross product in MOFAs ($90.7 billion) and scaling by the ratio of total sales by all affiliates to total sales by MOFAs.

(3.)The overall effect on earnings reflects the increases in the earnings of particular groups weighted by their share in the total wage bill. Hence the impact of the minimum wage is smaller than might at first be thought given the proportion of employees affected. This is because the wage bill share of those paid the minimum wage is less than their employment share.

[Graph omitted]

[Graph omitted]

[Graph omitted]

[Graph omitted]

[Graph omitted]

[Graph omitted]

[Graph omitted]

[Graph omitted]

[Graph omitted]

[Graph omitted]