THE UK ECONOMY.

Kneller, Richard ; Riley, Rebecca ; Young, Garry 等

Garry Young [*]

Section I. Recent developments and summary of the forecast

One of the unusual features of the British economy in recent years has been the remarkable stability of inflation. RPIX inflation has not moved by more than half a percentage point of its 2 1/2 per cent target since the end of 1996, suggesting that aggregate demand has been fairly close to supply throughout this period.

The supply potential of the economy is very difficult to estimate. In Chart 1 it is assumed that the output gap was zero in the third quarter of 1999, in line with Treasury estimates, and that the potential output of the economy had grown by 2 1/4 per cent per annum over the last fifteen years. This growth rate can be justified as the sum of the growth rate of the population of working age and labour productivity. The population is estimated to have grown at an annual average rate of 0.4 per cent per annum over this period while labour productivity grew by 1.85 per cent per annum.

While an obvious over-simplification, the prospects for inflation in the British economy depend on how close to zero the output gap can be kept on a year-by-year basis and the prospects for growth depend on whether the level of potential output and its growth rate can be raised. Simply projecting recent trends forward would suggest that growth in excess of 2 1/4 per cent per annum poses a threat to the stability of inflation.

However, it is possible to argue that this is too optimistic. To have any meaning, a zero output gap should be compatible with labour market equilibrium. On certain measures, the labour market currently looks very tight. At 4 per cent, the claimant unemployment rate is at its lowest level since the beginning of 1980. If this is already below its equilibrium rate, so that the economy is operating above its sustainable level, then a period of below trend growth will be necessary to prevent inflation rising.

One possible indicator of this is average earnings. In the first half of 1999, average earnings were growing at about 4 1/2 per cent per annum, the rate reckoned to be consistent with the inflation target. But growth picked up in the second half of the year and in the three months to January the headline rate was 5.9 per cent higher than a year earlier.

Growth in average earnings at this rate is incompatible with the inflation target unless it reflects one-off factors. There is some evidence that earnings have been inflated recently by higher bonuses to reflect profits earned in the City of London and special overtime working at the beginning of the year. Excluding bonuses, earnings were 4.8 per cent higher in January than a year earlier. But even this rate is high given that the RPI, the index on which many pay deals are based, was growing at only 1 1/2 per cent per annum at the turn of the year.

A more comforting picture is derived from the analysis of pay settlements. According to IRS, median pay settlements were growing at only 3 per cent per annum in January, lower than a year earlier when they were growing at 3 1/2 per cent per annum. A less worrying picture also comes from looking at other measures of labour market slack than the claimant count. The claimant count rate has diverged from the ILO unemployment rate in recent years as a consequence of changes to the benefit regime and this suggests a slightly less inflationary outlook. A different measure, the proportion of the population without work, has fallen substantially since its peak at the beginning of 1993, but is still above the low level it reached when the labour market was at its tightest in the first half of 1990. This too suggests that the low level of the claimant count exaggerates the degree of labour market tightness.

These comparisons of unemployment and other labour market indicators over time can also be misleading when the equilibrium unemployment rate has itself moved over time. Could the equilibrium unemployment rate have fallen so that it is now possible to sustain unemployment rates as low as those witnessed in the 1970s? To assess this, Chart 3 plots a Phillips curve showing the relationship between the change in consumer price inflation and the unemployment rate.

The equilibrium unemployment rate is that which can be sustained without inflation changing. It appears from this that the equilibrium unemployment rate in the late 1990s is lower than that seen in the 1980s and is closer to that of the late 1970s. There are many possible explanations for why equilibrium unemployment is lower now than it was in the late 1980s. These include a further reduction in the power of organised labour and a tougher regime for administering and paying unemployment related benefits. Another factor is the change in the composition of unemployment that has occurred over the past two years when much of the decline in claimant unemployment has come from a reduction in long-term unemployment. There is evidence to suggest that reducing long-term unemployment has a less inflationary impact than reducing short-term unemployment.

A further factor that could account for lower equilibrium unemployment is a reduction in the degree of 'mismatch' between unemployed workers and the types of jobs that firms have to offer. Mismatches can occur in a number of different dimensions including a mismatch between the skills that the unemployed workers have and those that employers want, a mismatch between the industries taking on workers and those in which the unemployed have experience and a mismatch between the regions where the unemployed are and those where there are job vacancies.

Greater mismatch raises equilibrium unemployment since wages tend to be difficult to reduce in areas where there is an excess supply of labour but easy to raise where there is an excess demand. This means that more mismatch raises wage pressure at any given level of unemployment.

The government has recently drawn attention to the degree of mismatch across the regions of the UK, claiming that there has been a reduction in regional mismatch since 1990 and that this should contribute to a sustained improvement in national labour market performance. [1]

Chart 5 shows regional unemployment rates relative to the national average. With the exception of London, there is a remarkable degree of consistency in the ranking of regions according to their unemployment rates. For the twenty-five years shown, the regions in the North and Wales have had relatively high unemployment rates while those in the South have had relatively low unemployment. Although significant differences remain, the spread across the country has narrowed since the late 1980s, and is now similar to what it was in the late 1970s. It had widened in the late 1980,s but then narrowed substantially in the early 1990s when unemployment rose, particularly in the South. Unemployment rates in the South are now 35 per cent lower than the national average, compared with 38 per cent in 1990, and in the North are now 25 per cent higher than the national average, compared with 36 per cent in 1990. In absolute terms this narrowing is even stronger due to the fall in the unemployment rate over this period.

But to some extent what matters for the overall level of mismatch is not so much the variability in unemployment rates across the country but how unemployment relative to vacancies varies across the country. There is some evidence, as shown in Chart 6, that unemployment is much better matched to vacancies than has been the case historically.

This suggests that while the unemployment rate might continue to be quite widely dispersed across the country, and to an extent similar to the late 1970s, the number of vacancies per claimant is much more evenly distributed. As the government has noted, this should be helpful in relieving wage pressure. However, it should also be observed that on this measure, regional mismatch was generally lower in the 1980s than the 1970s and did not prevent unemployment rising substantially.

As the government has stressed, there are even more significant differences in unemployment rates within regions. This can be seen by noting the position of Keswick and South Tyneside, both from the North East region, in Chart 7 and that half of the travel-to-work areas with unemployment rates above 10 per cent in 1999 were in London, traditionally seen as a low unemployment area.

Policies such as the New Deal for Communities and those announced in Budget 2000 aimed particularly at deprived areas, including Employment Zones and Action Teams, should assist in reducing mismatch at the local level.

Despite the emphasis on geographical mismatch at the regional and local level, there is evidence that other dimensions of mismatch are still important in Britain. Some indication of how the overall degree of mismatch has varied over time may be gained by comparing the unemployment rate with the number of vacancies per unemployed claimant.

The downward sloping relationship shown in Chart 8 indicates that low levels of unemployment are associated with a high number of vacancies per unemployed claimant. Thus it is not surprising that we now observe a high number of vacancies per claimant since this is only to be expected when unemployment is relatively low. But it is interesting to note that the ratio of vacancies to claimants now appears high relative to the position in the late 1970s when overall unemployment was at a similar rate. Assuming that this is not merely due to more reporting of vacancies to Jobcentres, this tends to suggest that there is now either more mismatch than there was in the late 1970s, since there needs to be more vacancies to maintain a similar unemployment rate, or that other factors, such as the search effectiveness of the unemployed, were more job friendly in the late 1970s. This would indicate that there is now more wage pressure at any given level of unemployment than was the case in the late 1970s. It is interesting to note that in contrast to Britain, the level of vacancies in the United States recently has been lower for any given amount of unemployment than was the case in the 1970s, suggesting that structural unemployment has improved there.

One of the important dimensions of mismatch now could be the disparity of prospects in different industries. It is possible that this is putting upward pressure on overall wages since those losing their jobs in manufacturing may not immediately be suitable for the jobs available in other industries.

Putting the various pieces of evidence together, we believe that the labour market is now very close to being in equilibrium with room for some further small falls in unemployment. Government policy is clearly operating in the right direction to reduce the equilibrium rate further through the extension of the New Deal to those who are 25 years old and older and have been unemployed for more than eighteen months.

While this and the measures aimed at deprived areas are helpful in reducing equilibrium unemployment they are only likely to have a relatively modest effect and we would not expect to see the rate fall substantially more. In this case faster growth in potential output will need to come from further increases in the labour force or from increases in underlying productivity.

The ONS have recently revised their estimates of UK population growth, but projected growth in the working age population over the next six years remains at about 0.4 per cent per annum. Some scope for increased employment can come from further rises in participation of those not currently in the labour force. Over the last twelve months the economic activity rate among the working age population has risen from 78.8 per cent to 79 per cent, with the increase concentrated among 25 to 34 year olds. There is probably most scope for increased participation among the older age groups, where only 70 per cent of over 50s are economically active. But if this occurs it is likely to be a gradual process with fewer people retiring early rather than those who have already retired re-entering the labour force.

This suggests that the main source of faster growth in potential output will have to come from more rapid productivity growth. This has been very sluggish since about 1995 as employment has expanded quickly relative to output growth. The slow growth of productivity over this period will to some extent reflect the absorption of people with lower than average productivity into the workforce. It is also due to the shift away from manufacturing, which has relatively high productivity, that has occurred over this period. The sharp slowdown in manufacturing productivity growth itself will also have had a significant effect on the aggregate.

The government has set itself the objective of improving productivity performance in Britain and is attempting to close the productivity gap that currently exists with other major industrial countries. Its measures, announced in Budget 2000, to promote competition, encourage enterprise and innovation, raise the skill base, increase investment in the economy and improve productivity in the public sector are steps in the right direction. However, the effect of these policies is likely to be felt, if at all, in the longer term and it is unlikely that they will bear much fruit in the short term.

Nevertheless, we do see considerable scope for productivity growth to pick up over the next few years, partly making up for the lacklustre performance of the past five years. A crucial component of this is that manufacturing productivity is expected to grow at an average annual rate of over 4 per cent as pressures from the high value of sterling encourage firms to make up for the slow productivity growth of the past five years. We see overall productivity growing at an average annual rate of about 21/4 per cent over the next five years.

Our assessment then is that overall economic growth of around 21/2 to 23/4 per cent per annum on a year-by-year basis should keep output close to potential over the medium term. Faster growth than this will threaten the inflation target.

Fiscal policy (Table I)

The changes in fiscal policy announced in Budget 2000 need have no effect on the growth rate of the economy over the medium term since in principle they can be offset by changes in monetary policy, but there does remain the question of whether interest rates need to be higher or lower as a consequence of Budget 2000. This depends mainly on the benchmark that is used to judge it and we can distinguish four possible different views.

The first looks at the Budget purely in terms of the announced policy measures. On this basis, Budget 2000 is undoubtedly expansionary and adding to upward pressure on interest rates. The addition to net borrowing of the announced policy measures is [pounds]4 billion in 2000-1, [pounds]11 billion in 2001-2, [pounds]13 billion in 2002-3, [pounds]16 billion in 2003-4 and [pounds]15 billion in 2004-05. The majority of this is due to additional spending. Current spending is now set to be [pounds]6 billion higher in 2004--5 than was projected in the Pre Budget Report and gross investment is projected to be [pounds]5 billion higher.

We have analysed in detail the effects of changes in spending of this magnitude in previous Fiscal Reports, the last being in January. Here we report a simulation where both current and capital spending are raised from the beginning of 2001-2 by [pounds]4 billion per annum at constant 1995 prices relative to the base case. This is similar in nominal terms to the spending increase announced in the Budget. Chart 10 shows the response of the interest rate and exchange rate to such a future increase in public consumption and investment.

An important effect of such an unanticipated fiscal relaxation is on the exchange rate which jumps up by 31/2 per cent on the news. This reflects the expectation of long-term upward pressure on interest rates because of the change. However when the announcement of extra spending is made in advance of its introduction, the initial impact on interest rates is shown to be negative. This is because the jump upwards in the exchange rate reduces short-term inflationary pressure and allows an interest rate reduction of half a percentage point relative to the base case.

The actual response of interest rates and the exchange rate to the budget has been fairly similar to this. The effective exchange rate rose by around 3 per cent from 21 March, budget day, to its recent peak on 3 April.

Short-term interest rates were not raised by the MPG, as many had expected, partly as a consequence of the high exchange rate putting downwards pressure on inflation. Long term interest rates in the UK have risen relative to those in other countries over the past month.

While these extra spending measures are undoubtedly expansionary, it is much less clear that the overall fiscal position itself is expansionary. A second view set out in Budget 2000 claims that these policy measures are primarily offsetting forecasting changes which reflect an unanticipated tightening of the fiscal stance. Thus net borrowing in 1999-2000 has turned out to be about [pounds]15 billion less than was anticipated in Budget 1999, mainly because of lower spending on debt interest and unemployment and unanticipated tax revenues which are now expected to persist. Rather than locking in such a fiscal tightening the government has recycled most of the funds back into the economy.

The government therefore argues that the fiscal position should be judged against that which was anticipated at the time of Budget 1999. On this basis, the fiscal stance as measured by cyclically adjusted public sector net borrowing has been tightened by 1.2 per cent of GDP in 1999-2000, with further anticipated tightening of 0.3 and 0.2 per cent of GDP in 2000-1 and 2001-2 respectively. A loosening of 0.2 and 0.7 per cent of GDP is anticipated for 2002-3 and 2003-4 respectively. On these figures the average fiscal stance over the coming four years is as restrictive as in Budget 1999, but the tightening is being concentrated in the near future. Thus, short term prudence is being used for the purpose of subsequent fiscal relaxation.

A third view looks at the Budget in terms of the government's own fiscal rules. When judged against these rules the overall budgetary position is relatively restrictive. The most significant of the fiscal rules is the 'Golden Rule', that over the economic cycle the government will borrow only to invest. As specified, this rule is asymmetric and does not preclude current surpluses, but the government appears not to wish to build up such surpluses in the medium term. Given our assessment that the output gap is now close to zero, the surplus on current account of [pounds]14 billion that the government is expecting for this fiscal year represents a substantially tighter fiscal position than the government's own rules would allow. With cyclically adjusted current surpluses expected by the government in each of the following four years, it appears to be adopting a relatively tough fiscal stance. On this basis, the medium-term level of interest rates is probably slightly lower than it would have been if the governme nt had balanced the cyclically-adjusted current account.

A fourth, and the most sensible, view of the budget looks at the way the overall fiscal stance is set to change over time. The measure of the fiscal stance favoured by the government is cyclically adjusted public sector net borrowing. It has used this measure in claiming that there was a cumulative fiscal tightening of 4.2 per cent of GDP since 1996-7. But in terms of this measure, fiscal policy is clearly being loosened, moving by stages from -1.2 per cent of GDP in 1999-00 to 1.1 per cent of GDP by 2003-4; a cumulative fiscal loosening of 2.3 per cent of GDP. (This is shown by the chart on page 2.)

The IMF has described the budget as 'regrettably procyclical' because it is contributing to demand growth over the next couple of years in this way. This presupposes that output will be above trend over this period. Whether pro-cyclical or not, such a fiscal boost leads to a tighter monetary stance relative to an alternative policy of holding the cyclically adjusted deficit at its level in 1999-00. The cost of this is being borne currently by the traded sector of the economy.

There is a slightly different point which questions whether fiscal policy is being loosened as much as these figures suggest. In Table 1 we show our forecast of the fiscal position up to 2005-06. This builds in the government's plans for spending and all announced tax changes, we have also assumed that the government will make additional cuts in taxes worth [pounds]2 billion in 2002-3 and [pounds]4 billion in 2003-4. This shows a current surplus of more than 1 per cent of GDP throughout and public sector net borrowing rising from a surplus of [pounds]10 billion in 1999-00 to a deficit of [pounds]8 billion in 2004-5. This is slightly less than the government's own forecast of a deficit of [pounds]13 billion in 2004-5.

Without the assumption of tax cuts additional to those already announced, the forecast current surplus would become implausibly large given the government's targets. This contrasts with the government's own forecast where a range of 'cautious' assumptions have been made which have the effect of making the fiscal outlook appear less tight than is actually the case. Judged against our own forecast, these cautious assumptions could be worth around 1 per cent of GDP by 2004-5. If this is correct then the future fiscal loosening is worth around 1[frac{1}{2}] per cent of GDP, much less than is suggested by the government's own figures.

The government's cautious forecasting assumptions therefore give a misleading impression of the future fiscal stance. Nobody can deny that forecasting the budget deficit is prone to large errors, but a better way of representing this is by showing the uncertainty surrounding the central forecast rather than by producing a biased forecast. In Chart 10 we show a 70 per cent confidence interval for our forecast of the deficit to GDP ratio. This is derived by means of stochastic simulation around our central forecast. This shows how large is the uncertainty around our central forecast for the deficit going forwards. There is no particular reason why the Treasury forecast is not subject to the same degree of uncertainty, although their cautious assumption makes it more likely that the outcome will be better than their published forecast.

Monetary policy (Table 2)

As we have already discussed, Budget 2000 may have had the effect of easing upward pressure on interest rates in the short term while adding upward pressure in the medium term. Our expectation is that interest rates will be raised to 6[frac{1}{4}] per cent soon, having been held at 6 per cent for two months. But this decision now looks quite finely balanced with the strong pound offsetting the effects on inflation of booming domestic demand. A further rise in interest rates to 61/2 per cent is forecast for the beginning of next year as the expansionary effects of Budget 2000 begin to affect inflation within the MPG'S two-year forecast horizon.

The exchange rate against the euro has strengthened further since our last forecast. Market interest rate differentials imply that a fairly slender depreciation in the sterling rate against the euro is expected and that by the end of 2004 the rate will have fallen to [epsilon]1.56. We have assumed that sterling is fixed against the euro at this rate from this time. This implies that the exchange rate against the dollar remains at around $1.60 over the next two to three years.

Summary of forecast

It is estimated that output grew by 0.5 per cent in the first quarter of this year to a level 3.1 per cent higher than a year earlier. This is a weaker performance than we had previously expected and reflects a slowdown in manufacturing industry and the effects of a mild winter on energy production. We are expecting growth to continue at a slightly faster rate over the remainder of the year to give a rate of a little under 3 per cent for the year as a whole.

The main components of domestic demand are all expected to grow by around 3 to 4 per cent this year. In addition, stockbuilding is expected to recover after a period of destocking in 1999. Overall domestic demand is set to expand by about 4 per cent. This is likely to be offset by a further negative contribution from net trade with import growth of 8 per cent outstripping export growth of around S per cent.

This represents a further decline in the UK share of world exports since world trade is expected to be growing by over 8 per cent this year as the world economy gathers momentum. The loss in a share is a consequence of the loss of competitiveness of British exporters due to the strong pound and their need to protect their already slim margins.

Given the level of sterling, it is likely that the service sectors will continue to grow more quickly than manufacturing in 2000, although we do not expect that the contraction in manufacturing output in the first quarter will be repeated this year. Manufacturing is expected to grow by a little over 1 per cent in the year as a whole. Growth in public sector output is expected to pick up to around 2.5 per cent as increased public spending feeds through.

Faster economic growth is likely to reduce unemployment further, with the claimant rate expected to fall below 4 per cent in the first half of this year With little slack in the labour market, much of the expected growth in output will be met by increases in productivity. Productivity growth is expected to be particularly strong in manufacturing where it rose by 3.5 per cent in 1999 in difficult trading conditions. With little respite from the strong pound in prospect, we expect to see productivity growth in manufacturing of about 4 per cent this year. This will contribute to an increase in productivity growth in the whole economy to about 2 per cent, the fastest growth rate since 1994.

The combination of increasing aggregate demand and a relatively tight labour market is expected to put some upward pressure on wages. The most recent monthly figures suggest that average earnings are currently growing at an annual rate of 5.9 per cent. This high rate is almost certainly affected by bonuses. We are expecting earnings growth of 5.5 per cent this year. With price inflation expected to remain subdued this year, this represents an increase in real wages of over 3 per cent.

Household incomes are forecast to grow by 3.5 per cent in 2000, driven mainly by the growth in labour incomes. With household consumption forecast to grow at a similar rate, the saving ratio is projected to remain quite low at around 6.5 per cent in 2000, up from 6 per cent in 1999.

The various influences on household spending, including financial and housing wealth, interest rates and unemployment, are all supportive of a relatively low saving ratio, but it is unlikely that they will change in such a way as to encourage it to fall significantly in 2001. We are expecting the growth in household consumption to slow from 31/2 per cent in 2000 to 21/2 per cent in 2001 as the growth in household incomes slows. This is generated by an expected fall in the growth of earnings from this year's rate as this year's artificially high bonus payments are not repeated. The projected growth in real earnings in 2001 at a little over 2 per cent is broadly consistent with the expected growth in productivity for that year.

With household consumption growth slowing, the growth in domestic demand is forecast to fall to around 3 per cent in 2001. Government consumption is expected to grow at a similar rate, with fixed investment rising by 4 per cent. Net trade is expected to make a further negative contribution, as export growth of 6 per cent is exceeded by import growth of 61/2 per cent. The overall growth rate is expected to revert to around 21/2 per cent.

We expect that the sectoral pattern of output growth will be similar to this year with manufacturing remaining fairly weak. Continued pressure on profit margins is expected to lead to further productivity growth in manufacturing of about 4 per cent. Job losses in this sector will be more than made up for by employment gains in the rest of the economy. With productivity growth expected to continue at around 2 per cent per annum, aggregate employment is projected to rise at around the same rate as the workforce and this will reduce unemployment only modestly from current levels to about 51/2 per cent on the ILO definition by the end of next year.

Against this background, inflationary pressures are expected to remain muted. We are expecting inflation to remain at around 21/2 per cent over the next two years, with an expectation that it will fall below 2 per cent in the short term.

Section II The forecast in detail

The components of expenditure (Table 3)

Domestic demand is expected to continue to be the driving force behind growth in the economy in 2000, while net trade offers a negative contribution. Household expenditure is forecast to grow by 3 1/2 per cent, before slowing to 2 1/2 per cent thereafter. Both fixed investment and government consumption are expected to grow this year at similar rates. The forecast rate of growth of domestic demand in 2000 is slightly faster than the main components at 4 per cent because of the accumulation of stocks, which were run down last year. Export growth is forecast to pick up to 5 1/2 per cent against 3.9 per cent last year, rising further to 6 per cent in 2001. Imports on the other hand are forecast to grow at over 8 per cent this year, before slowing next year and in 2002.

Weak figures for the production sector in the first two months of this year suggest that GDP for the quarter as a whole grew by only 0.5 per cent on the last quarter of 1999. The forecast for growth through the whole of this year has therefore been revised down to below 3 per cent. This is expected to slow further in 2001 to 21/2 per cent before picking up in 2002. This pick-up in 2002 is accounted for by an improvement in the position of net trade along with strong growth in public spending.

Household sector (Table 4)

The growth in household consumption was one of the key factors driving domestic demand in 1999. In volume terms, it was 4.5 per cent higher in the fourth quarter of 1999 than it had been a year earlier. Its value was 6.5 per cent higher over the same period, indicating a rise of 2 per cent in the price of consumer goods, similar to the increase in RPIX. This pattern of strong growth in household spending with moderate price inflation seems at odds with the claims of many retailers that trading conditions are currently very tough.

The reason for this disparity is that the strongest growth in the value of spending has been on services which are typically not supplied through retail outlets. The consumption of services was 9.3 per cent higher in the fourth quarter of 1999 than a year earlier, with the volume of spending up by 5 per cent and prices up by 4.3 per cent. Among the largest increases here was spending on rent, water and sewage charges which rose by 12 per cent in value terms. In the retail sector, it appears that volume growth can only be achieved with falling prices. In the fourth quarter of 1999, the volume of spending on durable goods was over 6 per cent higher than a year earlier, but prices were down by 3 per cent. The volume of spending on non-durable goods was up by 3.5 per cent, but prices were down for all goods other than alcohol and tobacco and energy products.

Retail sales figures for the first two months of the year suggest a continuation of this pattern. In the three months to February, the volume of sales was up by 5.5 per cent on a year earlier, with the value of sales up by 4.2 per cent. This indicates that shop prices were down by 1.3 per cent over the same period.

Recent strong growth in household spending has been financed mainly out of income growth, although the saving ratio has remained at a relatively low level. Income from employment is expected to continue to rise at a strong rate in 2000 as average earnings growth rises to 5 1/2 per cent per annum, about 3 per cent in real terms. This is the fastest growth rate in real earnings for a number of years and partly reflects the high level of bonuses paid out around the beginning of this year. This, together with employment growth of around 1 per cent, will boost pre-tax labour incomes by close to 4 per cent. Taxes on household incomes have risen substantially in recent years, by 17 per cent in 1998 and by 7 1/2 per cent in 1999. We are expecting growth of around 10 per cent in 2000, despite the modest tax reductions in the Budget. As a consequence, real disposable non-property income is forecast to rise by a little under 4 per cent in 2000.

There is expected to be some moderation in household income growth in 2001 as real earnings growth slows down slightly from this year's above trend rate. The overall rate of growth is expected to remain at around 2 1/2 to 3 per cent per annum.

This relatively fast growth in household incomes will provide a strong foundation for household consumption growth over the next two years or so. However, the saving ratio has reached a relatively low level by historical standards and might be expected to increase in the coming years. There are a number of factors that can account for the low level of saving. These include low nominal interest rates, low unemployment and increasing financial and housing wealth. While these factors are not expected to change for the worse, it is also unlikely that they will change in such a way as to encourage the saving ratio to fall much further.

We are expecting house prices to grow by 12 per cent this year, with the growth rate slowing towards the end of the year, and by 5 per cent in 2001. The household sector as a whole has recently moved into financial deficit. This means that it has begun to borrow from other sectors in contrast to its usual position of being a net lender. One effect of this has been a pick-up in borrowing on mortgages and consumer credit, with the stock of both rising by around 10 per cent in 1999. Despite this, the overall financial position of the household sector remains very strong with capital gains on existing asset holdings more than compensating for the increase in new borrowing.

Against this background, household spending is expected to grow by around 3 1/2 per cent this year, before falling back to 2 1/2 per cent in 2001 in line with the expected slowdown in income growth. Spending on durable goods is expected to grow by over 4 per cent this year, before slipping back to a little below 2 per cent in 2001. The household saving ratio is expected to rise back to around 6 1/2 per cent in 2000 and 2001.

Fixed investment and stockbuilding (Tables 5 and 6)

The forecast for fixed investment is for growth of 3 per cent this year, rising to 4 per cent in 2001 and S per cent in 2002. While this represents a further slowdown from the fast growth recorded in 1998, at 10.8 per cent, and 1999, at 5.0 per cent, it is still faster than the average annual growth rate of 2.5 per cent seen over the 1990s. This can be largely attributed to the robustness of UK economic growth over the recent period, the expectation of continued growth and a low level of the user cost of capital by historical standards.

The aggregate figure masks significant sectoral variation however. Investment in manufacturing, just over 10 per cent of total investment, fell by 13.8 per cent in 1999 and is expected to decline by a further 4 1/2 per cent this year. In contrast, investment in the non-manufacturing sector, which accounts for around 60 per cent of total investment, grew by 11.3 per cent in 1999 and is expected to grow by close to 3 per cent this year.

This seems a fairly anaemic performance given that the background for private investment would appear to be strong at present, but it is broadly in line with the expectations of other forecasters. The rate of return on capital has been at historically high levels in recent years and demand -- both domestic and external -- is now clearly picking up. The weakness of manufacturing investment stems from the difficult trading conditions that many firms in the industry are facing. While the industry is picking up, it is likely that much of any increased demand can be met though existing capacity. Positive, although still weak, manufacturing investment growth of about 2 per cent is expected in 2001 and 2002. The rate of investment in the non-manufacturing business sector is forecast to slow this year despite otherwise favourable investment conditions because the capital stock is likely to have reached firms' desired level. This decline in investment growth has already appeared in the most recently available data. Ov erall business investment growth is therefore forecast to slow this year from 11 to 3 per cent and rise by about 4 per cent per annum in 2001 and 2002.

Private sector housing investment has been weaker than one might expect given the strength of the housing market in general. This is best explained by strong investment growth in 1996 through to 1998, which should now be completed. This over-supply can be seen in the price of new housing relative to house prices in general, which have increased at a faster rate. As a consequence private sector housing investment is expected to grow by around 2.5 per cent this year, consistent with the relatively subdued rate of housing starts last year, before declining by 1.6 per cent next year. Over the medium term the market for new housing is expected to reach an equilibrium and investment rates become positive again.

Public sector housing investment is expected to pick up very sharply this year, rising by around 17 per cent, albeit from a low level. Other general government investment is expected to rise broadly in line with the government's plans. Public sector investment was up by 4.9 per cent in 1999 and is expected to grow by 54 per cent between 1999 and 2002 (17 per cent in 2000, 20 per cent in 2001 and 26 per cent in 2002).

Rather than the much predicted pre-millennial hoarding, the level of inventories is reported to have declined in 1999 rather than risen. Manufacturers stocks are predicted to have fallen by [pounds]1.6 billion and those in distribution by [pounds]0.1 billion. Given this we now expect stockbuilding of close to [pounds]2 billion in 2000 and 2001.

Balance of payments (Tables 7 and 8)

The strength of sterling and a slowdown in world trade growth in 1998 and 1999 has meant that the balance of trade has been a significant brake on GDP growth over the last few years. While world trade growth has since picked up sterling has further strengthened against the Euro offering exporters little respite.

Exports have been fairly resilient in the face of difficult trading conditions. Although export volumes in the fourth quarter fell back from the levels seen in the third quarter, the general picture continues to be fairly robust. The level of exports for the fourth quarter of 1999 was 5.9 per cent higher than a year earlier. The latest data, that for January, shows a rise of 1.6 per cent on the figure for December and a quarterly rise of 0.6 per cent in the latest three months.

This growth has been achieved by squeezing profit margins and cutting costs in order to reduce prices. But, unless the resulting price reduction matches the fall in world prices expressed in the same currency, then it suggests a worsening of competitiveness. As shown in Chart 12, both import and export prices have fallen sharply in recent years.

Chart 12 also shows the expected path of prices of exports and imports of manufactured goods for the next two years. The forecast is that export prices grow much more quickly than import prices over this period, even though in the forecast there is little variation in the sterling exchange rate and it is likely that spare capacity will be used to feed the more profitable domestic market. Profit margins in the traded manufactured sector are very low compared with domestic margins. The expectation is therefore that manufacturing firms will take advantage of increased demand (both domestic and external) to increase prices and profit margins and therefore sacrifice some volume growth. This leads to a loss of world export share this year, exports of manufactured goods are forecast to grow at 6 per cent compared with world trade growth of 8 1/2 per cent. Beyond this, export shares are expected to be fairly steady, but not making up the ground lost because of lower competitiveness.

Exports from the service sector have fared somewhat better than manufactures over the same period. Export volumes grew at an annual rate of 5.5 per cent in the last quarter of 1999 and 4.7 per cent for the year as a whole. Also, in contrast to the manufacturing traded sector, the relevant price indices for services show export prices to have fallen by only around 1 per cent since 1996, while import prices have fallen by around 10 per cent. The small effect on demand from this large loss of competitiveness would suggest a lower degree of substitution of UK service exports abroad compared with manufactured goods, hence the consequences of the rise of sterling have been less severely felt. Service exports are forecast to display robust growth through this year (3 1/2 per cent) and into next (3 per cent).

Falling import prices and the strength of the domestic economy have meant that the volume of imports has continued to rise. According to the data for January, imports were 7 1/2 per cent higher than a year earlier, although we expect the average of the first quarter as a whole to be 8.9 per cent, a similar rate to the last quarter of 1999. While import prices are expected to stop falling and begin rising again in the middle of this year, the level of imports is forecast to continue to grow strongly along with domestic demand. Manufacturing imports are forecast to grow by 9 per cent this year and 7 per cent next, while services imports are forecast to grow by 8 per cent in both 2000 and 2001.

This combination of events has meant that the current account will continue to worsen. In the last quarter of 1999 the deficit was [pounds]2.5 billion, down slightly on the deficit of [pounds]2.8 billion in the third quarter. The earliest indicators suggest that the deficit may have worsened again in the first quarter of this year to [pounds]3.5 billion. The goods balance is forecast to grow slightly to [pounds]32 billion in 2000 from [pounds]27 billion last year as the rise in imports outstrips that of exports. The surplus on the balance on services, transfers and income is expected to grow slightly from [pounds]14.6 billion in 1999 to [pounds]16 billion in 2000. The overall current balance deficit is forecast to widen to just under o16 billion in 2000, rising to [pounds]18 billion in 2001.

Output and employment (Tables 9 and 10)

The economy continues to grow at two or more speeds, with the private services sector expanding at a faster rate than the manufacturing and construction sectors. Little change in this pattern is expected this year, but some narrowing of growth differentials is expected for 2001 and beyond.

Manufacturing output grew at a disappointing 0.4 per cent in the fourth quarter of last year after rising by 1.4 per cent in the third. Data for January and February suggest that this weakness has spilt over into this year and output in the first quarter is now expected to decline by close to 0.6 per cent. This was against our earlier expectations and suggests that the adverse effects of the strong exchange rate may be present in the data. Indeed if firms have been holding out for a re-alignment of sterling, by cutting costs and profit margins, then it is possible that much of the delayed effects of sterling's strength may appear though this year (in which Rover was an early casualty). Clearly this offers a possible downside risk to the forecast and we have revised downward our forecast for manufacturing output for this year. Manufacturing output growth is now forecast to grow at an annual rate of 1 1/4 per cent this year and 1 1/2 per cent next.

Output in the construction sector picked up towards the end of 1999. Growth in the final quarter was 2.2 per cent against an average for the year of just 0.2 per cent. It is expected that this growth will continue to rise through this year to about 3 per cent at the end of the year.

In contrast to the manufacturing sector, the business and financial services industry has grown very strongly in recent years and continues to do so. Growth averaged 4.4 per cent in 1999 and is expected to grow at a similar level this year before slowing slightly in 2001 and 2002. The distribution sector is also forecast to grow strongly this year (2.8 per cent) and even more strongly beyond, at around 4 per cent.

The increased aggregate output in the forecast is not expected to be matched by increased employment. The number of workforce jobs is expected to increase at a similar rate to last year, by 0.7 per cent, to 28.11 million by the end of the year, its highest ever total. While there are differences across sectors, this implies that the increases in output discussed above must be generated by improvements in productivity.

This pattern of increasing output, improving productivity growth and stagnant employment growth has been generated by a combination of labour hoarding during the temporary slowdown in growth and a tight labour market. Firms which had expected the reduction in demand last year to be temporary might have retained employees in order to minimise hiring and firing costs. This would have led to a fall in measured productivity growth during the downturn. Labour productivity growth in the economy as a whole was only 1.0 per cent last year. But this also means that increases in demand can now be met out of existing employment allowing productivity to expand as demand picks up. Productivity growth is expected to be 2 per cent per annum for the next two years.

While this may be said to characterise the economy as a whole, it applies with much less force in the manufacturing sector. Here the competitiveness pressures of the strong pound has meant employment shedding rather than labour hoarding and labour productivity growth was strong last year. It is estimated that manufacturing productivity grew by 3.5 per cent in 1999 and this is expected to accelerate into 2000 as employment is reduced at the same time that output is increased.

As described above, the other main reason for the expectation of strong productivity growth in the economy is that there is now little scope for further employment, growth beyond that associated with increases in the population of working age. Further increases in the demand for labour are likely to bid up real wages, thus encouraging firms to economise on the number of workers they employ.

Data for January shows the ILO unemployment rate between November and January to have stabilised at the same rate on the three months. On the claimant count measure unemployment fell in both January and February to a rate of 4.0 (compared witho 4.1 per cent for the three months earlier), but the rate of decline was slower than in previous months. On the claimant count measure, unemployment now stands at 1.15 million, the lowest figure since 1980. The projected rise in employment is broadly equal to the increase in the working age population. Unemployment will then remain broadly steady over the next two years at about 51/2 per cent of the workforce on the ILO definition and a little under 4 per cent on the claimant count measure.

Earnings and prices (Tables 3 and 11)

We have discussed already the extent to which the current fast growth in earnings might be an early indicator that the labour market is excessively tight or simply reflect one-off factors like City bonuses and payments for overtime working over the new year. Our assessment is that the labour market is near to equilibrium and that underlying earnings growth is probably close to the 4 1/2 per cent rate consistent with the Bank of England's inflation target.

Unit labour costs are estimated to have grown by 4 1/2 per cent in 1999, reflecting growth of just under 5 per cent in average earnings and productivity growth of a little over 1 per cent (other influences on unit labour costs are employer contributions made to the national insurance scheme and other payments on behalf of employees). Against this, settlements are still growing at a reasonably low rate, with the latest data suggesting that average awards are growing at about 3 per cent per annum. Growth in average earnings is expected to reach 5 1/2 per cent in the year as a whole following strong growth in the first quarter, before slowing again in 2001. With productivity growth close to 2 per cent per annum, this translates into a slight slowdown in the growth of unit labour costs to around 4 per cent for this year. Further increases in productivity in 2001 and beyond should see the rate of growth of unit labour costs fall to 2.5 per cent per annum thereafter.

Competitive pressures generated from the effect of sterling on import prices should limit the extent to which the pick-up in domestic demand feeds through into higher prices. A good indicator of the level of competition that manufacturing firms face in the economy is indicated by their willingness to pass through increases in input prices (both in labour and in raw materials) into output prices. Increases in the price of labour have to a certain extent been offset by falls in the price of raw materials over the last few years, reducing this pressure but increases in the price of oil and the stabilisation of the exchange rate mean that input prices, which had been falling up until the third quarter of last year, are now beginning to rise again. Other things being equal, the effect of rising input costs would be expected to add to inflationary pressures in the economy. Manufacturing output prices (excluding FDTP) fell by 0.4 per cent last year, but were 0.6 per cent higher in March than a year earlier. This is expected to increase through 2000 to an annual rate of 2 1/4 per cent by the end of the year.

RPIX inflation was below the Bank of England's target of 2.5 per cent per annum in February (RPIX inflation was 2.2 per cent per annum), as it has been every month since March last year. This is a very slight rise on the figure for January (2.1 per cent) but a continuation of the benign inflationary conditions enjoyed for the past few years. The largest inflationary effects in the headline rate were generated by increases in mortgage interest payments because of recent rises in base rates. The annual rate of inflation in the RH increased from 2.0 to 2.3 per cent per annum between January and February. Inflation in the Harmonised Index of Consumer Prices (HICP) for February was 1.0 per cent per annum, up slightly on the figure recorded for January of 0.8 per cent per annum. On this measure, inflation in the UK is the lowest in the EU, where the average is 2.0 per cent per annum.

National and sectoral saving (Table 12)

The current account deficit of the economy as a whole is a reflection, subject to a statistical residual, of the financial position of the individual sectors in the economy. Table 12 shows how the imbalances between the saving and investment of the individual sectors is resolved. Ultimately, any investment that cannot be financed by domestic saving needs to be financed abroad.

Household sector saving is expected to be about 4 1/2 per cent of GDP this year, but picking up in the years ahead. At present saving is less than investment, meaning that the household sector is not a net lender to other sectors as is usually the case. Company sector saving is expected to remain below investment, such that the deficit of saving relative to investment is of the order of 2 per cent of GDP. The government sector is now meeting the Golden Rule so that its saving is positive and is forecast to remain in excess of its investment over the next three years.

The current account moved into deficit last year and is expected to remain at about 1[frac{1}{2}] per cent of GDP in the coming four or five years. The movement into deficit of the current account of the balance of payments is associated with the increased deficit of the private sector. For households, saving fell sharply in 1998 and has remained low since. For companies, the move into deficit can be partly traced back to the strength of the pound which has encouraged spending to be switched away from domestic goods and towards foreign goods, thereby reducing profits and company saving. If this situation were to continue then companies would at some stage need to adjust their saving or investment to prevent their indebtedness rising too quickly. This would feed through either directly, through lower spending on foreign investment goods, or indirectly through the effects of lower dividend payments on household spending on imports, to the current account. The process of adjustment would also affect prices in su ch a way that competitiveness is eventually restored. Through these channels, a current account deficit is ultimately corrected.

The economy in the medium term (Table 13)

The way in which the economy behaves over the medium term is determined partly by a range of shocks that are inherently unpredictable. But there are other important influences on its development that can be foreseen. These include trends in the size and composition of the population, forthcoming changes in the policy framework as well as adjustments to existing disequilibria. As we have noted, the economy as a whole is close to an equilibrium position at present, but there are a few imbalances that will be adjusted in the medium term. Among these is the current weakness of manufacturing due largely to the overvalued exchange rate.

We continue to assume that sterling will be fixed against the euro in the fairly near future, although it is doubtful that sterling will actually join the euro within the next five years. We have assumed that sterling will be fixed at [epsilon]1.56 (equivalent to DM3.05) from the end of 2004, a rate broadly consistent with market expectations. Many would regard this rate as being too high and it is certainly higher than our estimates of an equilibrium exchange rate. But since the end of 1996 the economy does appear to have been resilient to a high exchange rate. At first exports appeared not to be affected by the strong pound, but these then weakened sharply both in 1998 and in the first half of 1999. The contraction in the manufacturing sector was also a consequence of the high pound. But we now see grounds for expecting exports and manufacturing output to recover without a substantial depreciation of the nominal exchange rate. Partly, this will be achieved by a depreciation of the real exchange rate as manu facturers restore competitiveness by keeping their export prices down. However, the fall in profitability in manufacturing that this implies will reduce the size of the manufacturing sector relative to what it would have been with a lower exchange rate.

The increases in public spending announced in Budget 2000, especially with respect to investment, will have an expansionary impact on aggregate demand over the medium term. This will put some upward pressure on domestic inflation and the current account deficit which will however decline over the coming decade as households and firms bring saving and investment into line.

Inflation is forecast to remain low over this period. With the sterling exchange rate fixed, there will not be room for large differences in inflation across the Euro Area. So long as this is clearly understood, expectations, which are crucially important in the inflationary process, should help anchor inflation itself.

The outlook for interest rates and inflation is consistent with real interest rates of around 2 to 3 per cent. This is much lower than has been normal in the UK over the past twenty years, but is consistent with real yields on UK government index linked debt. Short-term interest rates are expected to rise slightly, reaching 61/2 per cent in 2001. They are then projected to fall, converging on euro rates by the end of 2003.

Unemployment, on the ILO definition, is forecast to fall to around 5 per cent of the working population. This is slightly lower than is the case now, and is a reasonable estimate of the sustainable rate of unemployment. The rate of real wage growth is sensitive to which deflator is used. Using the GDP deflator at basic prices, the real wage is forecast to grow at about 21/2 per cent per annum, similar to the rate of growth of productivity.

The government has identified slow productivity growth as one of the important problems of the UK economy and it is possible that policy action over the coming years will be successful in raising it. However, we have made no special allowance for this. Our forecast of productivity growth is consistent with long-term trends in the economy, although we are forecasting some above trend growth in the early part of the decade as productivity makes up some of the ground lost in the second half of the 1990s.

On this basis we would expect to see economic growth of between 21/2 to 3 per cent per annum over the next ten years. Among the expenditure components, household and government consumption are expected to grow by about 21/2 to 3 per cent per annum with slightly faster growth in fixed investment.

Forecast errors and probability distribution (Tables 14 and 15)

Table 14 provides a set of summary information as regards the accuracy of forecasts that have been published in the April Review. The latest complete National Accounts information available when these forecasts are constructed is for the fourth quarter of the previous year.

A rule of thumb is that a 70 per cent confidence interval for a variable of interest can be obtained by adding a range of one absolute average error around our central forecast. Thus we can be 70 per cent sure that GDP growth in 2000 will be between 1.9 and 3.5 per cent. The size of the average errors indicates that some variables are easier to forecast than others. For example, the errors in forecasting consumers' expenditure are smaller than those in forecasting fixed investment. It is also the case that the error in forecasting GDP growth is smaller than that made in forecasting its components. This arises because of offsetting movements among the components.

The probability distributions around the growth and inflation forecasts have been calculated assuming that the distributions are normal and are shown in table 15. The standard errors have been calculated from the historical forecast errors underlying table 14. These estimates of the probability distribution around our central forecasts provide a quantitative assessment of the limits of our forecasts.

Our estimates suggest that there is about a 60 per cent chance that growth this year will turn out to be in the range of 2 to 4 per cent, with only a 27 per cent chance of growth below 2 per cent. For next year, growth prospects are much more uncertain. There is approximately a one in five chance that it will be less than 1 per cent. There is a 41 per cent chance that it will be between 1 and 3 per cent and a one in three chance that it will be above that.

For inflation, there is an evens chance that it will end the year between 1.5 and 2.5 per cent. The risks are clearly larger looking ahead. In two years time, there is an evens chance that inflation will be above 2 1/2 per cent. However, the imprecision of the forecast is shown by the fact that there is a one in three chance that it will be below 1 1/2 per cent. The chances that it will be more than 1 per cent away from target in either direction is put at 62 per cent. The fact that it has stayed within this fairly narrow bound over the past two years is an indication of either the skill of the MPG or their good fortune.

Note

(1.) 'The Goal of Full Employment: Employment Opportunity for all Throughout Britain', HM Treasury, February 2000.

(*.) The forecast was compiled using the latest version of the National Institute Domestic Econometric Model. We are grateful to Andy Blake, Ray Barrell, Nigel Pain and Martin Weale for comment and discussion.

 Public sector financial balance and borrowing requirement
 [pounds] billion, fiscal years
 1999-00 2001-1 2001-2
Current expenditure: Goods and services 165.2 175.0 186.1
 Net social benefits paid 113.1 121.2 126.2
 Debt interest 29.7 28.3 27.1
 Subsidies 4.9 5.4 5.7
 Other current expenditure 12.6 18.1 21.0
 Total 325.6 348.0 366.0
Gross investment 20.8 22.7 25.9
Total managed expenditure 346.4 370.7 391.9
(as a % of GDP) 38.3 39.0 39.2
Memo items: GDP deflator at
 market prices (l995=100) 113.7 116.5 119.5
 Money GDP 903.8 950.6 1000.0
Current receipts: Taxes on income and oil royalties 147.0 151.9 158.0
 Taxes on expenditure 130.0 138.0 146.4
 Social security contributions 68.0 71.6 73.1
 Gross operating surplus 13.0 14.4 14.8
 Other current receipts -2.2 0.9 1.4
 Total current receipts 355.8 376.8 393.6
Public sector current balance 15.9 13.8 12.3
Net investment 6.5 7.7 10.6
Public sector net borrowing -9.6 -6.1 -1.8
Financial transactions -7.5 0.0 0.0
Public sector net cash requirement -2.1 -6.1 -1.8
(As a % of GDP) -0.2 -0.6 -0.2
Govt deficit under Maastsricht (calendar year) -1.2 -0.4 -0.3
Govt debt under Maastsricht (calendar year) 46.0 41.7 39.1
 2002-3 2003-4 2004-5
Current expenditure: Goods and services 198.0 210.3 222.0
 Net social benefits paid 131.8 138.9 147.4
 Debt interest 26.2 25.7 25.5
 Subsidies 5.9 6.2 6.6
 Other current expenditure 22.2 22.8 24.2
 Total 384.1 404.0 425.7
Gross investment 30.5 35.0 37.9
Total managed expenditure 414.6 439.0 463.6
(as a % of GDP) 39.2 39.2 39.0
Memo items: GDP deflator at
 market prices (l995=100) 122.7 126.1 129.8
 Money GDP 1057.5 1121.1 1187.6
Current receipts: Taxes on income and oil royalties 167.1 174.8 184.5
 Taxes on expenditure 153.8 162.0 171.0
 Social security contributions 77.4 82.2 87.3
 Gross operating surplus 15.2 15.8 16.6
 Other current receipts -0.2 -2.3 -3.3
 Total current receipts 413.2 432.4 456.0
Public sector current balance 13.3 11.9 12.9
Net investment 14.7 18.5 20.5
Public sector net borrowing 1.4 6.6 7.6
Financial transactions 0.0 0.0 0.0
Public sector net cash requirement 1.4 6.6 7.6
(As a % of GDP) 0.1 0.6 0.6
Govt deficit under Maastsricht (calendar year) 0.1 0.5 0.7
Govt debt under Maastsricht (calendar year) 36.8 34.9 33.5
 2005-6
Current expenditure: Goods and services 233.4
 Net social benefits paid 156.2
 Debt interest 25.3
 Subsidies 6.9
 Other current expenditure 25.7
 Total 447.6
Gross investment 39.7
Total managed expenditure 487.3
(as a % of GDP) 38.8
Memo items: GDP deflator at
 market prices (l995=100) 133.7
 Money GDP 1256.0
Current receipts: Taxes on income and oil royalties 194.3
 Taxes on expenditure 180.5
 Social security contributions 92.6
 Gross operating surplus 17.6
 Other current receipts -4.7
 Total current receipts 480.3
Public sector current balance 14.2
Net investment 21.3
Public sector net borrowing 7.0
Financial transactions 0.0
Public sector net cash requirement 7.0
(As a % of GDP) 0.6
Govt deficit under Maastsricht (calendar year) 0.6
Govt debt under Maastsricht (calendar year) 32.1
Note: Public sector current balance is total current receipts
less total current expenditure and depreciation. Depreciation
is the difference between gross and net investment.
 Exchange rates and interest rates
 UK exchange rates Oil FT
 price [b] All-share
 Effective [a] $ Euro $ index
1996 86.3 1.56 1.22 19.5 1895.
1997 100.5 1.64 1.45 18.6 2236.
1998 103.9 1.66 1.49 12.4 2626.
1999 103.7 1.62 1.52 17.5 2918.
2000 109.1 1.60 1.64 25.0 3099.
2001 107.7 1.60 1.61 23.0 3254.
2002 106.6 1.61 1.59 23.4 3439.
1999 I 101.1 1.63 1.49 11.2 2772.
1999 II 104.1 1.61 1.51 15.3 2965.
1999 III 103.8 1.60 1.53 20.1 2934.
1999 IV 105.9 1.63 1.55 23.3 3002.
Forecast
2000 I 108.5 1.60 1.63 27.0 3044.
2000 II 109.8 1.60 1.65 25.0 3082.
2000 III 109.3 1.60 1.64 25.0 3117.
2000 IV 108.7 1.60 1.63 23.0 3153.
2001 I 108.2 1.60 1.62 23.0 3189.
2001 II 108.0 1.60 1.62 23.0 3231.
2001 III 107.4 1.60 1.61 23.0 3274.
2001 IV 107.2 1.60 1.60 23.0 3321.
Percentage changes
1997/96 16.5 4.9 19.2 -4.5 18.0
1998/97 3.4 1.2 2.3 -33.3 17.5
1999/98 -0.2 -2.3 2.2 41.0 11.1
2000/99 5.2 -1.2 7.7 43.3 6.2
2001/00 -1.3 0.2 -1.6 -8.0 5.0
2002/2001 -1.1 0.2 -1.4 1.7 5.7
1999IV/98IV 5.3 -2.7 8.7 105.8 20.0
2000IV/99IV 2.7 -2.0 5.3 -1.2 5.0
2001IV/00IV -1.4 0.4 -1.9 0.0 5.3
 Interest rates
 UK base Mortgage 20-year World interest
 rate interest UK gilts [d] rates [e]
1996 6.0 6.7 8.3 4.2
1997 6.6 7.2 7.1 4.0
1998 7.2 7.7 5.3 3.9
1999 5.3 6.4 4.7 3.3
2000 6.1 7.0 5.0 4.2
2001 6.5 7.3 5.0 4.8
2002 6.1 7.0 5.0 5.0
1999 I 5.7 6.5 4.4 3.3
1999 II 5.2 6.4 4.7 3.0
1999 III 5.1 6.3 4.8 3.1
1999 IV 5.4 6.5 4.9 3.7
Forecast
2000 I 6.0 6.9 5.0 3.8
2000 II 6.0 6.9 5.0 4.1
2000 III 6.3 7.1 5.0 4.4
2000 IV 6.3 7.1 5.0 4.5
2001 I 6.5 7.3 5.0 4.7
2001 II 6.5 7.3 5.0 4.8
2001 III 6.5 7.3 5.0 4.8
2001 IV 6.5 7.3 5.0 4.9
Percentage changes
1997/96
1998/97
1999/98
2000/99
2000/100
2002/2001
1999IV/98IV
2000IV/99IV
2001IV/00IV
 Monetary
 aggregates [c]
 M4 M0
 ([pounds] billion)
1996 682. 25
1997 720. 26
1998 779. 28
1999 806. 31
2000 878. 33
2001 964. 34
2002 1053. 36
1999 I 788. 28
1999 II 795. 29
1999 III 795. 29
1999 IV 806. 31
Forecast
2000 I 822. 31
2000 II 839. 32
2000 III 858. 32
2000 IV 878. 33
2001 I 899. 33
2001 II 920. 34
2001 III 941. 34
2001 IV 964. 34
Percentage changes
1997/96 5.3 6.5
1998/97 8.3 5.2
1999/98 3.4 11.8
2000/99 9.0 5.6
2000/100 9.8 5.3
2002/2001 9.2 5.1
1999IV/98IV 3.4 11.8
2000IV/99IV 9.0 5.6
2001IV/00IV 9.8 5.3
Source: Economic Trends; Financial Statistics; NIESR estimates.
(a.)1990=100.
(b.)Per barrel, OPEC average.
(c.)Seasonally adjusted, end quarter figures.
(d.)Nominal zero coupon yields.
(e.)Average 3-month rates in G7 countries (excluding UK)
 Gross domestic product and components of expenditure
 [pounds], 1995 prices, seasonally adjusted
 Final consumption Gross capital
 expenditure formation
 Households General Gross Change in
 & NPISH [a] gov't fixed in- inventories
 vestment [b]
1996 470.6 142.8 121.9 1.8
1997 488.9 140.8 131.3 3.8
1998 504.5 141.8 146.3 3.5
1999 524.2 148.0 153.6 -1.6
2000 542.1 153.4 158.3 2.4
2001 555.7 158.0 164.5 3.2
2002 569.5 164.0 173.2 3.2
1999 I 129.4 36.5 37.8 0.4
1999 II 130.6 36.8 38.3 -1.5
1999 III 131.4 37.1 38.3 -0.8
1999 IV 132.8 37.5 39.2 0.3
Forecast
2000 I 134.0 38.0 39.0 0.4
2000 II 135.1 38.2 39.4 0.6
2000 III 136.0 38.5 39.8 0.6
2000 IV 137.0 38.7 40.1 0.7
2001 I 137.7 38.9 40.4 0.8
2001 II 138.5 39.3 40.9 0.8
2001 III 139.3 39.7 41.3 0.8
2001 IV 140.3 40.1 41.9 0.8
Percentage changes
1997/96 3.9 -1.4 7.7
1998/97 3.2 0.7 11.4
1999/98 3.9 4.4 5.0
2000/99 3.4 3.6 3.1
2001/00 2.5 3.0 3.9
2002/01 2.5 3.7 5.3
1999IV/98IV 4.4 4.7 3.9
2000IV/00IV 3.2 3.1 2.4
2001IV/00IV 2.4 3.6 4.4
 Domestic Total Total Total Residual GDP Adjust-
 demand exports final imports at ment to
 expendit- market basic
 ture prices prices
1996 737.1 217.6 954.7 224.0 0.0 730.8 80.5
1997 764.8 236.3 1001.1 244.6 0.0 756.4 84.5
1998 796.0 241.7 1037.7 266.2 1.2 772.8 84.6
1999 824.2 249.1 1073.3 286.3 1.7 788.7 88.1
2000 856.3 262.4 1118.7 309.7 1.8 810.8 91.6
2001 881.5 277.8 1159.3 330.1 1.9 831.1 94.3
2002 909.8 294.3 1204.1 350.3 1.9 855.7 97.3
1999 I 204.2 59.4 263.6 69.2 0.4 194.7 21.5
1999 II 204.2 61.2 265.4 69.7 0.4 196.2 21.9
1999 III 205.9 64.7 270.7 73.0 0.4 198.1 22.2
1999 IV 209.9 63.8 273.6 74.4 0.4 199.7 22.5
Forecast
2000 I 211.5 64.2 275.7 75.4 0.5 200.7 22.6
2000 II 213.3 65.2 278.6 76.8 0.5 202.2 22.8
2000 III 214.9 66.0 280.9 78.1 0.5 203.3 23.0
2000 IV 216.6 67.0 283.5 79.4 0.5 204.6 23.2
2001 I 217.8 68.0 285.8 80.6 0.5 205.6 23.3
2001 II 219.5 68.9 288.4 81.9 0.5 207.0 23.5
2001 III 221.2 69.9 291.1 83.1 0.5 208.4 23.7
2001 IV 223.0 71.0 294.0 84.4 0.5 210.0 23.9
Percentage changes
1997/96 3.8 8.6 4.9 9.2 3.5 5.0
1998/97 4.1 2.3 3.7 8.8 2.2 0.0
1999/98 3.5 3.1 3.4 7.6 2.1 4.2
2000/99 3.9 5.3 4.2 8.2 2.8 3.9
2001/00 2.9 5.9 3.6 6.6 2.5 3.0
2002/01 3.2 5.9 3.9 6.1 3.0 3.2
1999IV/98IV 4.1 5.9 4.5 9.0 3.0 6.5
2000IV/00IV 3.2 5.0 3.6 6.7 2.5 2.9
2001IV/00IV 3.0 6.0 3.7 6.3 2.7 3.0
 Gross
 value
 added
 at basic
 prices
1996 650.2
1997 671.9
1998 688.2
1999 700.6
2000 719.2
2001 736.7
2002 758.4
1999 I 173.3
1999 II 174.3
1999 III 175.9
1999 IV 177.2
Forecast
2000 I 178.1
2000 II 179.4
2000 III 180.3
2000 IV 181.4
2001 I 182.3
2001 II 183.5
2001 III 184.8
2001 IV 186.2
Percentage changes
1997/96 3.3
1998/97 2.4
1999/98 1.8
2000/99 2.7
2001/00 2.4
2002/01 2.9
1999IV/98IV 2.5
2000IV/00IV 2.4
2001IV/00IV 2.6
Source: Economic Trends; NIESR estimates.
(a.)Non-profit institutions serving households.
(b.)Including acquisitions less disposals of valuables.
 Household income and expenditure
 Seasonally adjusted
 Compen- Gross
 Average [a] Employees sation of disposable
 earnings employ- income
 ees [d]
 [pounds] billion,
 1995=100 millions current prices
1996 103.3 22.7 404.5 521.2
1997 107.8 23.3 432.4 554.6
1998 112.8 23.8 463.9 568.4
1999 118.6 24.1 493.0 600.4
2000 125.1 24.4 526.0 634.5
2001 130.6 24.6 552.0 665.1
2002 137.2 24.8 583.5 701.4
1999 I 116.6 24.0 120.7 145.0
1999 II 117.8 24.0 122.3 152.0
1999 III 119.0 24.2 123.9 149.8
1999 IV 120.8 24.2 126.1 153.7
Forecast
2000 I 123.4 24.3 129.3 156.6
2000 II 124.3 24.4 130.6 157.5
2000 III 125.7 24.4 132.2 158.9
2000 IV 127.0 24.4 133.8 161.4
2001 I 128.4 24.5 135.5 162.8
2001 II 129.9 24.5 136.8 165.3
2001 III 131.3 24.6 138.6 167.2
2001 IV 132.9 24.7 141.0 169.7
Percentage changes
1997/96 4.4 2.4 6.9 6.4
1998/97 4.6 2.4 7.3 2.5
1999/98 5.1 1.2 6.3 5.6
2000/99 5.5 1.1 6.7 5.7
2001/00 4.4 0.8 4.9 4.8
2002/01 5.1 0.7 5.7 5.5
1999IV/98IV 5.0 1.1 6.2 5.6
2000IV/99IV 5.2 0.9 6.1 5.0
2001IV/00IV 4.7 1.0 5.3 5.1
 Real Real Final consumption
 household non- expenditure
 disposable property
 income [b] income [f] Total Durable
 [pounds] billion,
 1995 prices
1996 505.4 370.3 470.6 42.7
1997 524.5 384.8 488.9 48.0
1998 524.3 389.1 504.5 51.1
1999 540.8 398.6 524.2 54.1
2000 559.7 413.7 542.1 56.4
2001 574.7 425.2 555.7 57.3
2002 591.6 438.1 569.5 59.2
1999 I 132.1 98.3 129.4 13.3
1999 II 137.2 98.8 130.6 13.5
1999 III 134.4 100.1 131.4 13.6
1999 IV 137.2 101.4 132.8 13.7
Forecast
2000 I 139.0 103.0 134.0 14.0
2000 II 139.3 102.8 135.1 14.1
2000 III 139.9 103.3 136.0 14.1
2000 IV 141.5 104.6 137.0 14.2
2001 I 141.9 105.0 137.7 14.2
2001 II 143.3 106.0 138.5 14.3
2001 III 144.1 106.6 139.3 14.4
2001 IV 145.4 107.6 140.3 14.5
Percentage changes
1997/96 3.8 3.9 3.9 12.3
1998/97 0.0 1.1 3.2 6.6
1999/98 3.1 2.4 3.9 5.9
2000/99 3.5 3.8 3.4 4.2
2001/00 2.7 2.8 2.5 1.6
2002/01 2.9 3.0 2.5 3.3
1999IV/98IV 3.4 2.6 4.4 6.3
2000IV/99IV 3.1 3.1 3.2 3.5
2001IV/00IV 2.8 3.0 2.4 2.3
 Savings House
 ration [c] price [e]
 per cent 1995=100
1996 9.5 103.7
1997 9.3 112.8
1998 6.1 125.7
1999 6.0 139.4
2000 6.4 156.1
2001 6.6 164.0
2002 7.0 167.5
1999 I 5.0 130.3
1999 II 7.6 135.9
1999 III 4.7 143.8
1999 IV 6.5 147.5
Forecast
2000 I 6.9 151.0
2000 II 6.3 155.0
2000 III 6.1 158.1
2000 IV 6.4 160.2
2001 I 6.3 162.2
2001 II 6.7 163.6
2001 III 6.6 164.7
2001 IV 6.8 165.5
Percentage changes
1997/96 8.8
1998/97 11.5
1999/98 10.9
2000/99 12.0
2001/00 5.0
2002/01 2.2
1999IV/98IV 13.8
2000IV/99IV 8.6
2001IV/00IV 3.3

Source: Economic Trends; NIESR estimates.

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

(b.)Deflated by consumers' expenditure deflator.

(c.)Ratio of savings to disposable income.

(d.)Includes employers' social contribution.

(e.)Department of Environment, mix adjusted.

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

 Forecasts of fixed investment
 [pounds] billion, 1995 prices, seasonally adjusted
 Business investment Housing
 Manufact- Non-manu- Total Private Public
 uring facturing
1996 17.8 65.4 83.2 19.9 2.3
1997 19.8 73.2 93.0 20.8 1.8
1998 20.7 85.4 106.1 22.1 1.7
1999 17.8 95.1 112.9 21.9 1.9
2000 17.1 97.9 114.9 22.4 2.2
2001 17.4 101.6 119.0 22.0 2.6
2002 17.8 105.7 123.5 22.2 3.3
1999 I 4.7 23.3 27.9 5.5 0.4
1999 II 4.5 23.9 28.4 5.5 0.4
1999 III 4.4 23.7 28.1 5.4 0.5
1999 IV 4.3 24.2 28.5 5.4 0.5
Forecast
2000 I 4.2 24.1 28.4 5.6 0.5
2000 II 4.3 24.4 28.6 5.6 0.5
2000 III 4.3 24.6 28.8 5.6 0.6
2000 IV 4.3 24.8 29.1 5.6 0.6
2001 I 4.3 25.0 29.4 5.5 0.6
2001 II 4.3 25.3 29.6 5.5 0.6
2001 III 4.4 25.5 29.9 5.5 0.7
2001 IV 4.4 25.8 30.5 5.5 0.7
Percentage changes
1997/96 11.3 11.9 11.8 4.6 -18.0
1998/97 4.2 16.8 14.1 6.1 -6.7
1999/98 -13.8 11.3 6.4 -1.1 9.3
2000/99 -4.3 2.9 1.8 2.4 16.7
2001/00 1.9 3.8 3.5 -1.6 19.8
2002/01 2.2 4.0 3.8 0.7 26.4
1999IV/98IV -17.6 6.6 2.1 2.7 26.7
2000IV/99IV 0.5 2.5 2.2 3.2 9.8
2001IV/00IV 2.1 3.9 3.6 -2.0 23.9
 General Total Real cost Corporate
 government [a] of capital profit share
 (excl. dwellings) (%) of GDP (%)
1996 10.3 121.9 4.3 27.1
1997 9.4 131.3 4.1 27.0
1998 10.4 146.3 3.8 25.9
1999 10.9 153.6 3.3 24.8
2000 12.0 158.3 3.4 25.0
2001 13.8 164.5 3.6 24.9
2002 16.8 173.2 3.6 25.0
1999 I 2.6 37.8 3.4 24.1
1999 II 2.5 38.3 3.5 24.6
1999 III 2.8 38.3 3.0 25.6
1999 IV 3.1 39.2 3.3 25.1
Forecast
2000 I 2.9 39.0 3.3 24.9
2000 II 3.0 39.4 3.3 25.1
2000 III 3.0 39.8 3.4 25.0
2000 IV 3.1 40.1 3.4 24.9
2001 I 3.2 40.4 3.5 24.9
2001 II 3.4 40.9 3.5 24.9
2001 III 3.5 41.3 3.6 25.0
2001 IV 3.7 41.9 3.6 24.9
Percentage changes
1997/96 -8.3 7.7
1998/97 10.8 11.4
1999/98 4.9 5.0
2000/99 10.1 3.1
2001/00 14.6 3.9
2002/01 21.6 5.3
1999IV/98IV 9.2 3.9
2000IV/99IV 2.1 2.4
2001IV/00IV 18.7 4.4
Source: Economic Trends; NIESR estimates.
(a.)Includes public corporations not included within business investment.
 Inventory accumulation
 Change in inventories,
 [pounds] billion at
 1995 prices
 Manufacturing Distribution Other [a] Total
1996 -0.3 1.3 0.8 1.8
1997 -0.6 2.3 2.1 3.8
1998 0.7 0.8 2.0 3.5
1999 -1.6 -0.1 0.1 -1.6
Forecast
2000 -0.3 1.8 0.9 2.4
2001 0.3 2.2 0.8 3.2
2002 0.4 2.1 0.7 3.2
 Stock-output
 ratios (1995=100) Cost of
 Manufacturing [b] Distribution [c] Other stocks (%)
1996 100.8 101.0 100.2 5.8
1997 99.5 103.2 98.4 10.2
1998 97.5 104.5 104.9 9.1
1999 96.2 103.8 104.0 0.5
Forecast
2000 94.5 102.7 102.1 5.7
2001 93.1 103.6 103.5 6.9
2002 91.8 103.9 104.0 5.8

Source: Economic Trends and NIESR estimates.

(a.)Includes National Accounts quarterly alignment adjustment.

(b.)Manufacturers' stocks to manufacturing production.

(c.)Distributors' stocks to distribution output.

 Balance of payments: current account
 Seasonally adjusted
 Export volume Import volume Terms of
 Total Total trade [b]
 Manufactures goods Manufactures goods
 ([pounds] billion at
 1995 prices) [a] 1995=100
1996 140.0 165.5 149.5 180.4 101.0
1997 152.9 179.1 165.0 196.8 103.7
1998 155.8 181.2 181.2 213.6 106.1
1999 161.1 185.7 195.3 228.8 107.6
2000 170.5 196.8 213.3 247.5 108.5
2001 182.7 210.3 228.5 262.7 108.9
2002 195.9 224.8 243.6 278.1 109.3
1999 I 38.1 44.0 47.1 55.1 106.5
1999 II 39.2 45.2 47.1 55.3 107.9
1999 III 42.5 48.8 50.0 58.6 108.0
1999 IV 41.3 47.7 51.1 59.7 108.1
Forecast
2000 I 41.5 48.0 51.8 60.4 108.5
2000 II 42.3 48.9 52.9 61.4 108.5
2000 III 43.0 49.6 53.8 62.4 108.6
2000 IV 43.7 50.4 54.8 63.4 108.5
2001 I 44.5 51.3 55.7 64.3 108.7
2001 II 45.2 52.1 56.6 65.2 108.8
2001 III 46.1 53.0 57.6 66.1 108.9
2001 IV 46.9 53.9 58.5 67.1 109.1
Percentage changes
1997/96 9.2 8.2 10.4 9.1 2.7
1998/97 1.9 1.2 9.8 8.5 2.3
1999/98 3.4 2.5 7.8 7.1 1.4
2000/99 5.8 6.0 9.2 8.2 0.8
2001/00 7.2 6.8 7.1 6.1 0.4
2002/01 7.2 6.9 6.6 5.9 0.4
1999IV/98IV 6.3 6.1 9.2 9.3 1.2
2000IV/99IV 5.7 5.6 7.3 6.1 0.4
200/IV/00IV 7.3 7.0 6.8 5.9 0.5
 Export Good Services Current
 price com- balance transfers & balance
 etitiveness [e] income
 balance
 ([pounds] billion) [c]
1996 102.0 -13.1 13.2 0.1
1997 111.1 -11.9 19.3 7.4
1998 109.8 -20.5 20.4 -0.2
1999 105.3 -26.6 14.6 -12.0
2000 103.3 -32.1 16.3 -15.8
2001 103.0 -32.6 14.3 -18.3
2002 103.1 -31.8 12.7 -19.1
1999 I 105.9 -7.5 3.3 -4.2
1999 II 106.6 -6.1 3.7 -2.5
1999 III 104.6 -5.5 2.6 -2.8
1999 IV 104.0 -7.5 5.0 -2.5
Forecast
2000 I 103.2 -7.8 4.3 -3.5
2000 II 103.8 -7.9 4.2 -3.8
2000 III 103.2 -8.1 4.0 -4.1
2000 IV 103.0 -8.3 3.9 -4.4
2001 I 102.8 -8.2 3.8 -4.4
2001 II 103.0 -8.2 3.6 -4.5
2001 III 102.9 -8.1 3.5 -4.6
2001 IV 103.1 -8.1 3.4 -4.7
Percentage changes
1997/96 9.0
1998/97 -1.2
1999/98 -4.1
2000/99 -1.9
2001/00 -0.3
2002/01 0.1
1999IV/98IV -2.8
2000IV/99IV -1.0
200/IV/00IV 0.1
 World
 trade [d]
 1995=100
1996 105.5
1997 117.1
1998 124.5
1999 132.5
2000 143.6
2001 154.3
2002 165.6
1999 I 127.1
1999 II 131.2
1999 III 134.5
1999 IV 137.2
Forecast
2000 I 139.9
2000 II 142.4
2000 III 144.9
2000 IV 147.0
2001 I 150.3
2001 II 152.6
2001 III 155.7
2001 IV 158.6
Percentage changes
1997/96 11.0
1998/97 6.3
1999/98 6.4
2000/99 8.4
2001/00 7.5
2002/01 7.3
1999IV/98IV 9.6
2000IV/99IV 7.1
200/IV/00IV 7.9

Source: Economic Trends; NIESR estimates.

(a.)Balance of payments basis.

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

(c.)Balance of payments basis.

(d.)UK export market weights.

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

 Financial account
 [pounds] billion
 Basic Current Net direct Net portfolio Other investment
 balance [a] account investment [b] investment abroad [b,c]
1996 -21.4 0.1 -6.0 -15.6 -137.9
1997 -33.6 7.4 -16.3 -24.8 -170.8
1998 -51.1 -0.2 -33.4 -17.5 -16.1
1999 18.7 -12.0 -72.4 103.1 -48.9
Forecast
2000 -42.2 -15.8 -14.2 -12.1 -40.0
2001 -13.0 -18.3 -15.0 20.2 -40.0
2002 -29.6 -19.1 -15.8 5.3 -40.0
 Other investment Balancing
 in the UK [b,c] item
1996 51.6 -107.7
1997 210.2 5.8
1998 79.9 12.7
1999 17.9 -12.2
Forecast
2000 79.4 -2.8
2001 52.8 -0.2
2002 69.6 0.0

Source: Economic Trends; NIESR estimates.

(a.)Current account plus net direct and portfolio investments.

(b.)A negative sign implies a capital outflow.

(c.)'Other' investment includes international lank loans and deposits.

 Output and productivity
 Seasonally adjusted, 1995=100
 Sectoral output [a]
 Manufacturing Public Distribution Business
 services
 (0.216) (0.225) (0.146) (0.138)
1996 100.4 102.0 103.2 105.6
1996 100.4 102.0 103.2 105.6
1997 101.7 103.5 106.5 114.7
1998 102.0 105.6 108.7 122.6
1999 101.9 107.0 110.3 128.0
2000 103.1 109.6 113.4 133.8
2001 104.7 112.5 117.8 138.9
2002 107.0 116.3 122.8 144.8
1999 I 100.9 106.7 109.7 124.8
1999 II 101.2 106.7 109.5 127.3
1999 III 102.6 107.1 110.8 128.7
1999 IV 103.0 107.6 111.1 131.1
Forecast
2000 I 102.4 108.8 111.7 131.8
2000 II 103.0 109.4 112.9 133.2
2000 III 103.3 109.9 113.9 134.4
2000 IV 103.8 110.5 115.0 135.7
2001 I 104.1 111.0 116.0 136.9
2001 II 104.5 112.0 117.1 138.2
2001 III 104.9 113.0 118.3 139.6
2001 IV 105.5 114.0 119.6 141.1
Percentage changes
1997/96 1.3 1.5 3.2 8.6
1998/97 0.3 2.1 2.0 6.9
1999/98 -0.1 1.3 1.4 4.4
2000/99 1.2 2.4 2.8 4.5
2001/00 1.6 2.6 3.9 3.9
2002/01 2.1 3.3 4.3 4.3
1999IV/98IV 1.7 1.1 2.0 5.0
2000IV/99IV 0.7 2.6 3.5 3.5
2001IV/00IV 1.7 3.2 3.9 3.9
 GDP [b]
 Consturction Oil Rest Total Per
 worker
 (0.052) (0.021) (0.202)
1996 101.5 105.6 102.8 102.5 101.5
1996 101.5 105.6 102.8 102.5 101.5
1997 104.7 104.7 107.3 106.0 103.0
1998 106.0 107.5 109.8 108.6 104.0
1999 106.3 112.2 112.7 110.5 105.1
2000 108.7 113.5 116.2 113.5 107.1
2001 111.9 115.8 117.2 116.2 109.1
2002 115.4 118.1 118.7 119.6 111.7
1999 I 105.4 109.1 111.3 109.3 104.3
1999 II 105.9 113.2 111.8 109.9 104.6
1999 III 106.5 114.4 113.2 111.0 105.5
1999 IV 107.2 112.1 114.3 111.8 106.0
Forecast
2000 I 107.4 112.7 115.6 112.4 106.3
2000 II 108.4 113.2 116.1 113.4 106.9
2000 III 109.2 113.8 116.3 113.8 107.4
2000 IV 110.0 114.4 116.6 114.5 107.9
2001 I 110.6 114.9 116.7 115.0 108.3
2001 II 111.4 115.5 117.0 115.8 108.9
2001 III 112.2 116.1 117.3 116.6 109.5
2001 IV 113.2 116.7 117.7 117.5 109.8
Percentage changes
1997/96 3.2 -0.8 4.4 3.3 1.5
1998/97 1.2 2.6 2.4 2.5 0.9
1999/98 0.2 4.4 2.6 1.8 1.0
2000/99 2.3 1.2 3.1 2.7 1.9
2001/00 2.9 2.0 0.9 2.4 1.9
2002/01 3.2 2.0 1.3 2.9 2.4
1999IV/98IV 2.2 2.6 3.6 2.6 1.8
2000IV/99IV 2.6 2.0 2.0 2.4 1.7

2001IV/00IV 2.9 2.0 1.0 2.6 1.8
 Manufacturing
 productivity [c]
1996 99.0
1996 99.0
1997 99.9
1998 99.6
1999 103.1
2000 107.2
2001 111.4
2002 116.1
1999 I 100.8
1999 II 102.0
1999 III 104.4
1999 IV 105.4
Forecast
2000 I 105.4
2000 II 106.7
2000 III 107.7
2000 IV 108.8
2001 I 109.9
2001 II 111.0
2001 III 112.2
2001 IV 112.7
Percentage changes
1997/96 0.9
1998/97 -0.3
1999/98 3.5
2000/99 3.9
2001/00 4.0
2002/01 4.2
1999IV/98IV 5.4
2000IV/99IV 3.3
2001IV/00IV 3.5
Source: Economic Trends; Labour Market Trends; NIESR estimates.
(a.)1995 share of output inparentheses.
(b.)Gross value addedat constant 1995 baiscprices.
(c.)Includingself-employment.
 The UK labour market
 Seasonally adjusted, millions
 Employment, thousands [a]
 Self Training
 Employees employment schemes Total
1996 22736 3613 418 26768
1997 23275 3592 381 27248
1998 23823 3487 339 27649
1999 24106 3438 312 27856
2000 24381 3372 303 28056
2001 24569 3343 303 28215
2002 24752 3318 303 28372
1999 I 24001 3451 317 27768
1999 II 24049 3479 318 27847
1999 III 24150 3421 312 27882
1999 IV 24226 3401 303 27929
Forecast
2000 I 24305 3388 303 27995
2000 II 24364 3377 303 28043
2000 III 24408 3366 303 28077
2000 IV 24449 3358 303 28109
2001 I 24484 3350 303 28136
2001 II 24528 3344 303 28174
2001 III 24575 3338 303 28216
2001 IV 24689 3342 303 28333
Percentage changes
1997/96 2.4 -0.6 -8.7 1.8
1998/97 2.4 -2.9 -11.2 1.5
1999/98 1.2 -1.4 -7.7 0.8
2000/99 1.1 -1.9 -3.1 0.7
2001/00 0.8 -0.9 0.0 0.6
2002/01 0.7 -0.8 0.0 0.6
1991IV/98IV 1.1 -1.7 -5.6 0.7
2000IV/99IV 0.9 -1.3 0.0 0.6
2001IV/00IV 1.0 -0.5 0.0 0.8
 Unemployment, thousands
 ILO
 definition Claimant Longterm [c]
1996 2336 2103 1135
1997 2025 1586 776
1998 1821 1347 585
1999 1757 1250 522
2000 1683 1148 442
2001 1649 1135 422
2002 1610 1110 108
1999 I 1823 1311 566
1999 II 1762 1282 539
1999 III 1717 1220 477
1999 IV 1727 1186 505
Forecast
2000 I 1701 1158 456
2000 II 1685 1147 440
2000 III 1677 1145 436
2000 IV 1671 1145 435
2001 I 1668 1149 437
2001 II 1662 1148 426
2001 III 1655 1145 422
2001 IV 1613 1100 405
Percentage changes
1997/96 -13.3 -24.6 -31.7
1998/97 -10.1 -15.1 -24.6
1999/98 -3.5 -7.2 -10.8
2000/99 -4.2 -8.1 -15.3
2001/00 -2.0 -1.1 -4.4
2002/01 -2.4 -2.2 -3.4
1991IV/98IV -4.7 -10.1 -17.2
2000IV/99IV -3.3 -3.4 -13.8
2001IV/00IV -3.5 -3.9 -7.1
 Participation, thousands
 Civilian Population of
 workforce [d] Inactive working age
1996 29104 6964 36067
1997 29273 6963 36236
1998 29470 6959 36429
1999 29614 7044 36658
2000 29739 7151 36891
2001 29864 7262 37126
2002 29982 7338 37320
1999 I 29591 6980 36570
1999 II 29609 7020 36628
1999 III 29599 7087 36687
1999 IV 29656 7089 36745
Forecast
2000 I 29696 7107 36803
2000 II 29728 7134 36861
2000 III 29754 7166 36920
2000 IV 29780 7199 36978
2001 I 29804 7233 37037
2001 II 29836 7260 37096
2001 III 29871 7284 37155
2001 IV 29946 7269 37215
Percentage changes
1997/96 0.6 0.0 0.5
1998/97 0.7 -0.1 0.5
1999/98 0.5 1.2 0.6
2000/99 0.4 1.5 0.6
2001/00 0.4 1.5 0.6
2002/01 0.4 1.1 0.5
1991IV/98IV 0.4 1.8 0.6
2000IV/99IV 0.4 1.6 0.6
2001IV/00IV 0.6 1.0 0.6
 Underutilization % [b]
 ILO Claimant Population
 unemployment unemployment not employed
 rate rate rate
1996 8.0 7.3 25.8
1997 6.9 5.5 24.8
1998 6.2 4.6 24.1
1999 5.9 4.3 24.0
2000 5.7 3.9 23.9
2001 5.5 3.9 24.0
2002 5.4 3.8 24.0
1999 I 6.2 4.5 24.1
1999 II 5.9 4.4 24.0
1999 III 5.8 4.2 24.0
1999 IV 5.8 4.1 24.0
Forecast
2000 I 5.7 4.0 23.9
2000 II 5.7 3.9 23.9
2000 III 5.6 3.9 24.0
2000 IV 5.6 3.9 24.0
2001 I 5.6 3.9 24.0
2001 II 5.6 3.9 24.1
2001 III 5.5 3.9 24.1
2001 IV 5.4 3.7 23.9
Percentage changes
1997/96
1998/97
1999/98
2000/99
2001/00
2002/01
1991IV/98IV
2000IV/99IV
2001IV/00IV

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

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

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

(c.)Over six months.

(d.)Employment plus ILO unemployment.

 Price indices
 Seasonally adjusted, 1995=100
 Whole- Harmonised
 Unit sale Consumer index of
 labour Imports price price consumer
 costs deflator index [b] index prices
1996 102.5 100.3 102.0 103.1 102.5
1997 106.0 93.6 102.2 105.7 104.3
1998 111.0 87.7 102.1 108.4 106.0
1999 115.9 85.5 101.7 111.0 107.4
2000 120.4 85.6 103.0 113.4 108.7
2001 123.3 87.0 105.3 115.7 110.5
2002 126.6 88.9 107.7 118.6 112.8
1999 I 114.8 86.1 101.6 109.8 106.6
1999 II 115.6 85.4 101.5 110.8 107.7
1999 III 115.9 85.2 101.6 111.5 107.4
1999 IV 117.2 85.1 102.0 112.0 107.9
Forecast
2000 I 119.5 85.5 102.1 112.6 107.6
2000 II 119.8 85.4 102.6 113.1 109.1
2000 III 120.7 85.7 103.2 113.6 109.0
2000 IV 121.4 86.0 103.8 114.1 109.0
2001 I 122.3 86.4 104.4 114.7 109.2
2001 II 122.8 86.8 105.0 115.4 110.9
2001 III 123.5 87.3 105.6 116.0 111.0
2001 IV 124.6 87.7 106.2 116.7 111.0
Percentage changes
1997/96 3.4 -6.7 0.2 2.5 1.8
1998/97 4.7 -6.3 -0.1 2.5 1.6
1999/98 4.4 -2.6 -0.4 2.4 1.4
2000/99 3.9 0.2 1.2 2.1 1.2
2001/00 2.4 1.6 2.3 2.1 1.7
2002/01 2.7 2.2 2.3 2.4 2.0
1999IV/98IV 3.5 -1.4 0.2 2.1 1.2
2000IV/99IV 3.7 1.0 1.8 1.9 1.1
2001IV/00IV 2.6 2.0 2.3 2.3 1.8
 Retail price index [a]
 Excluding
 mortgage GDP
 Excluding interest & deflator
 All mortgage indirect (basic
 items interest taxes prices)
1996 102.4 103.0 102.6 103.4
1997 105.6 105.8 104.8 106.2
1998 109.3 108.6 107.0 109.1
1999 110.9 111.1 108.7 112.1
2000 114.6 113.5 110.1 114.7
2001 117.9 115.9 111.1 117.6
2002 120.7 118.7 113.3 120.9
1999 I 109.8 109.8 107.7 110.6
1999 II 111.0 111.3 108.8 111.9
1999 III 111.0 111.3 108.8 112.6
1999 IV 111.8 112.0 109.6 113.0
Forecast
2000 I 112.3 112.2 109.7 113.8
2000 II 115.0 113.9 110.1 114.4
2000 III 115.3 113.9 109.9 115.0
2000 IV 115.6 114.0 110.5 115.7
2001 I 116.2 114.3 109.8 116.4
2001 II 118.2 116.3 111.1 117.2
2001 III 118.5 116.5 111.2 118.0
2001 IV 118.7 116.5 112.2 118.8
Percentage changes
1997/96 3.1 2.8 2.2 2.7
1998/97 3.4 2.7 2.0 2.7
1999/98 1.5 2.3 1.6 2.7
2000/99 3.3 2.2 1.2 2.4
2001/00 2.9 2.1 0.9 2.5
2002/01 2.4 2.4 2.0 2.8
1999IV/98IV 1.4 2.2 1.7 2.5
2000IV/99IV 3.4 1.8 0.8 2.3
2001IV/00IV 2.7 2.2 1.5 2.7
 GDP Manufac-
 deflator turing
 (market capacity
 prices) utilisation
1996 103.3 98.8
1997 106.3 98.3
1998 109.6 98.2
1999 112.8 95.8
2000 115.9 96.0
2001 118.7 96.7
2002 121.8 97.5
1999 I 111.4 95.2
1999 II 112.6 95.2
1999 III 113.4 96.4
1999 IV 114.0 96.4
Forecast
2000 I 114.9 95.7
2000 II 115.5 96.0
2000 III 116.2 96.2
2000 IV 116.8 96.3
2001 I 117.6 96.4
2001 II 118.3 96.5
2001 III 119.1 96.7
2001 IV 119.8 97.0
Percentage changes
1997/96 2.9 -0.5
1998/97 3.2 -0.1
1999/98 2.9 -2.5
2000/99 2.7 0.3
2001/00 2.4 0.6
2002/01 2.6 0.9
1999IV/98IV 2.6 1.8
2000IV/99IV 2.5 -0.1
2001IV/00IV 2.6 0.7
Source: Economic Trends; NIESR estimates.
(a.)Not seasonally adjusted.
(b.)Excluding food, drink, tobacco and petroleum.
 National and sectoral savings
 As a percentage of GDP
 Household sector Company sector
 Saving Investment Saving Investment
1996 6.7 4.2 12.3 11.2
1997 6.6 4.2 11.8 11.8
1998 4.2 4.2 12.1 12.7
1999 4.2 4.4 9.7 12.2
Forecast
2000 4.5 4.7 10.3 12.3
2001 4.6 4.7 10.2 12.2
2002 4.9 4.7 10.2 12.2
2003 5.4 4.7 10.3 12.2
2004 5.7 4.8 10.3 12.2
 Government sector Whole economy Finance
 from
 Saving Investment Saving Investment overseas
1996 -2.2 1.5 16.8 16.9 0.0
1997 -0.4 1.2 18.1 17.2 -0.9
1998 1.9 1.2 18.1 18.1 0.0
1999 2.7 1.2 16.6 17.8 1.4
Forecast
2000 2.2 1.3 17.0 18.3 1.7
2001 2.2 1.5 17.0 18.5 1.9
2002 2.2 1.9 17.3 18.8 1.8
2003 2.1 2.2 17.8 19.1 1.7
2004 2.1 2.3 18.1 19.3 1.6
 Residual
1996 0.1
1997 0.1
1998 -0.1
1999 -0.1
Forecast
2000 -0.4
2001 -0.4
2002 -0.4
2003 -0.4
2004 -0.4
 Medium-term projections
 Seasonally adjusted
 1999 2000 2001 2002 2003 2004 2005
Growth rate of expenditure and
output (per cent)
 Household spending 3.9 3.4 2.5 2.5 2.6 2.8 2.8
 Govt spending 4.4 3.6 3.0 3.7 3.2 2.8 2.0
 Fixed investment 5.0 3.1 3.9 5.3 5.5 4.4 3.4
 Exports of goods and
 services 3.1 5.3 5.9 5.9 5.9 5.8 5.6
 Imports of goods and
 services 7.6 8.2 6.6 6.1 5.8 5.5 5.2
 GDP at market prices 2.1 2.8 2.5 3.0 3.1 3.0 2.7
Manufacturing output -0.1 1.2 1.6 2.1 2.6 2.8 2.5
Growth rate of costs and
prices (per cent)
 Average earnings 5.1 5.5 4.4 5.1 5.6 5.6 5.4
 RPI 1.5 3.3 2.9 2.4 2.3 2.4 2.8
 RPIX 2.3 2.2 2.1 2.4 2.6 2.6 2.6
 Consumer price index 2.4 2.1 2.1 2.4 2.6 2.7 2.7
 GDP deflator (basic prices) 2.7 2.4 2.5 2.8 2.9 3.0 3.0
Productivity growth 1.0 2.0 1.9 2.4 2.7 2.6 2.3
ILO unemployment rate 5.9 5.7 5.5 5.4 5.3 5.3 5.3
Manufacturing capacity
 utilisation 0.9 0.9 0.9 0.9 0.9 0.9 0.9
Base rates 5.3 6.1 6.5 6.1 5.6 5.3 5.3
Effective exchange rate 103.7 109.1 107.7 106.6 105.8 105.4 105.6
Current account deficit
 (as % of GDP) 1.4 1.7 1.9 1.8 1.7 1.6 1.4
PSNCR (as a % of GDP) -0.4 -0.5 -0.3 0.1 0.5 0.7 0.6
Government debt
 (as %of GDP) 45.0 41.7 39.1 36.8 35.0 33.5 32.1
 2006 2007 2008 2009
Growth rate of expenditure and
output (per cent)
 Household spending 2.6 2.7 2.6 2.5
 Govt spending 2.0 2.0 2.0 2.0
 Fixed investment 3.2 3.1 3.0 2.9
 Exports of goods and
 services 5.4 5.2 5.1 5.0
 Imports of goods and
 services 5.0 4.9 4.8 4.6
 GDP at market prices 2.7 2.6 2.5 2.5
Manufacturing output 2.1 1.7 1.3 1.3
Growth rate of costs and
prices (per cent)
 Average earnings 5.3 5.4 5.5 5.5
 RPI 2.9 3.0 3.1 3.2
 RPIX 2.7 2.8 2.8 2.9
 Consumer price index 2.8 2.9 3.0 3.0
 GDP deflator (basic prices) 3.0 3.2 3.3 3.3
Productivity growth 2.2 2.1 2.0 1.9
ILO unemployment rate 5.3 5.2 5.1 4.9
Manufacturing capacity
 utilisation 0.9 0.9 0.9 0.9
Base rates 5.3 5.3 5.3 5.3
Effective exchange rate 105.8 106.0 106.2 106.4
Current account deficit
 (as % of GDP) 1.2 1.0 0.8 0.5
PSNCR (as a % of GDP) 0.5 0.4 0.3 0.2
Government debt
 (as %of GDP) 30.8 29.4 28.0 26.6
 Average absolute errosr, 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 ([pounds]bn) 5.5
Public sector borrowing requirement ([pounds]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 ([pounds]bn) 0.3 - 12.6
Public sector borrowing requirement ([pounds]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 ([pounds]bn) 6.5
Public sector borrowing requirement ([pounds]bn) [a] 11.3
Retail price inflation (Q4) 1.5
 Average
 outturn
 Error range 1982-98
Real GDP growth 0.1 - 3.9 2.6
Domestic demand growth 0.2 - 4.7 3.0
Consumers expenditure growth 0.1 - 4.5 3.1
Investment growth 0.2 - 10.8 4.5
Export volume growth 0.2 - 6.5 4.6
Import volume growth 0.2 - 8.5 6.1
Real personal disposable income growth 0.1 - 4.2 2.9
Current account ([pounds]bn) 0.1 - 18.2 -5.7
Public sector borrowing requirement ([pounds]bn) [a] 2.6 - 27.1 10.7
Retail price inflation (Q4) 0.2 - 3.2 4.5
(*.)All errors defined by subtracting the
forecast from the outturns for 1982-98.
(a.)Financial year.
 Probability distribution of
 growth and inflation forecasts
 Inflation: probability of 12 month RPIX
 inflation falling in the following ranges
 2000Q4 2001Q4 2002Q4
less than 1.5 per cent 36 35 33
1.5 to 2.5 per cent 44 21 19
2.5 to 3.5 per cent 18 20 19
more than 3.5 per cent 2 24 29
 100 100 100
 Growth: probability of annual growth
 rate falling in the follawing ranges
 2000 2001
less than 0 per cent 1 9
O to 1 percent 6 13
1 to 2 percent 20 19
2 to 3 percent 33 22
3 to 4 percent 27 18
more than 4 per cent 13 19
 100 100

AT A GLANCE

The UK economy

* The budget was expansionary, bringing about a cumulative fiscal loosening of 1.5--2 per cent of GDP over the next four years.

* As a consequence, the pound and long-term interest rates will be higher, while immediate pressure to raise short-term rates is reduced.

* After a further quarter point increase in the repo rate to 6.25 per cent, we expect a pause in monetary tightening for the rest of the year.

* Sterling's strength will hit manufacturing which will grow by only 1.2 per cent in 2000, compared with overall GDP growth of 2.8 per cent.

* Despite continuing low claimant unemployment and earnings growth of 5.5 per cent in 2000, the labour market is not over-stretched.

The March budget loosened fiscal policy mainly by raising spending over the next four years. While the government meets its fiscal rules, the additions to net borrowing from the announced policy measures are substantial, rising to around 1.5 per cent of GDP by 2003-4. The fiscal stance is admittedly tighter this year and next than had been anticipated in the 1999 budget. But cyclically adjusted public sector net borrowing moves from a surplus of 1.2 per cent of GDP in 1999-00 to a deficit of 1.1 per cent by 2003-4, a cumulative fiscal loosening of over 2 per cent.

The loosening of fiscal policy keeps the pound higher; this means that pressure for further short-term interest rate rises is less than it might be. A simulation on our model suggests that an unanticipated fiscal relaxation has the biggest effect on the exchange rate which jumps on the news, reflecting higher expected long-term and future short-term rates. The rise in the pound reduces pressure to raise rates in the immediate future. We now expect the Bank of England to raise the base rate to 6.25 rather than 6.5 per cent this year.

While the economy is set to expand quite strongly this yea1, the pattern of growth will be marked by continuing imbalances. The recovery in manufacturing output will be muted, at little over 1 per cent following a small decline in 1999. Domestic demand will increase by almost 4 per cent while net trade will again be contractionary. Even though the outlook for world trade has improved, exports will grow by only 5 per cent in 2000 while imports will rise by 8 per cent.

The inflation target will be comfortably met, with RPIX inflation less than 2 per cent in the final quarter of 2000.

This occurs despite fears that the labour market is over-stretched on at least two counts, claimant unemployment and earnings growth. However a more rigorous analysis of the labour market based on alternative measures suggests that these fears are misplaced. The share of the working age population not in work remains above the low level it reached in 1990, recent reductions in claimant unemployment have been concentrated among the long-term unemployed, and the number of vacancies per claimant is more evenly distributed around the country.