Introduction

UK economic growth has weakened since the EU referendum in June 2016, in contrast to a pick-up in global growth. UK economic prospects hinge on the future relationship with the EU and, as before, our forecast assumes a soft Brexit where the UK maintains a high level of market access to the EU. Under that scenario, GDP is set to rise by 1.4 per cent this year and 1.7 per cent next year (figure 1). Our GDP growth forecast for 2018 has been revised down from 1.9 per cent partly because of the disruption caused by adverse weather conditions in the UK in late February and early March, which resulted in a sharp slowdown in first-quarter real GDP growth to just 0.1 per cent according to preliminary official data. The outturn was broadly in line with our monthly GDP estimate for Q1, published on 11 April, of 0.2 per cent.

Since our previous forecast in February, the UK government and the EU have made further progress by agreeing to a draft legal text of the Phase 1 agreement and alongside that a 21-month transition period after the UK exits the EU in March 2019 (see Box A). During this period the UK will have to comply with regulations of the single market and customs union, including free movement of labour, and also to maintain the budgetary contributions, but the UK is free to negotiate new trade deals. The agreement also includes a provision that helps prevent a hard border between the Republic of Ireland and Northern Ireland.

Although these developments represent a significant step forward, it is worth reminding ourselves that negotiations, that will help define the Withdrawal Agreement and are centred around a new trading relationship, are yet to begin and that nothing, including progress with Phase 1 and the transition period, is agreed until everything is agreed.

The UK government is looking to negotiate a new trading relationship outside the customs union and the single market that is likely to be more limited in scope. It is hard to know at this stage if parliament will accept a more restricted trading arrangement should that emerge. After all, the House of Lords voted in favour of a customs union (1) earlier this month and, what is more, the opposition Labour party also confirmed its preference for remaining in the customs union. (2)

Box A. The Brexit assumptions underpinning our forecasts

Recent developments in Brexit negotiations have not materially
changed the outlook for the UK's exit from the European Union. We
maintain our central forecast scenario of a 'soft' Brexit, with an
elevated level of downside risk. There remains a high degree of
uncertainty about the UK's future relationship with the EU. In
March 2018, EU and UK negotiators published a draft legal text of
the Phase I agreement, which will be part of the final withdrawal
treaty, under the provision that nothing is agreed until everything
is agreed. The text confirms that there will be a 21-month
transition period after the UK exits the EU in March 2019 during
which the country remains bound by regulations of the single market
and customs union, including free movement of labour and budgetary
contributions, but is free to negotiate new trade deals. To avoid a
hard border between the Republic of Ireland and Northern Ireland,
the draft text includes a backstop solution, which would
effectively keep Northern Ireland in the single market and customs
union should alternative, 'technical' solutions fail to
materialise. In our view, a 'soft' Brexit therefore is the most
likely outcome.

The specific assumptions in our central forecast are as follows:

* UK trade and investment: We assume the UK maintains a close but
not frictionless trading relationship with the EU. This also
reflects the Prime Minister's expectation that "people need to face
up to some hard facts" and "life is going to be different". That
less comprehensive relationship is reflected by negative residuals
to the export and import volume equations as well as to the
investment equation, given that less trade and higher uncertainty
will likely weigh down on investment spending by UK-based firms and
foreign direct investment.

* Productivity: The smaller degree of competition due to lower
trade volumes, less investment and a potential reduction in skilled
migration could drive productivity lower in the long run. Effects
on labour productivity are likely to materialise only with a long
lag and may be ambiguous in the short run if employment reduces as
a result of Brexit. We have not explicitly introduced a
Brexit-related productivity shock into our forecast, which
therefore constitutes a key downside risk to our forecast.

* Fiscal contributions: Regarding the UK's financial contributions
to the EU budget, a payments schedule is yet to be decided. The
British government has already announced that it would seek
associate membership in EU agencies, which would require financial
contributions to be made, in addition to payments towards the
'divorce bill'. We have, as a result, adopted the latest OBR fiscal
projections for EU contributions and assumed that the UK continues
to make contributions beyond 2020 as if it were a member of the EU.

The risk of a more pessimistic scenario remains high. In our last
Review we reported estimates for a case in which negotiations fail
and the UK moves to a WTO-style trading relationship on exit. Our
results show that this would cause a mild recession within one year
and real GDP per head would be some 2,000 [pounds sterling] lower
relative to our 'soft' Brexit case after a decade. In this Review,
Erken et al. (2018) provide a more pessimistic view: their headline
result for a 'hard' Brexit is that cumulative GDP growth could be 18
percentage points lower by 2030 compared to a scenario in which the
UK remains in the EU.

NOTES

(1) See also Hantzsche, A. and Kara, A. (2018), 'Deal, or no deal?
The 2,000 [pounds sterling] question', NIESR blog, 16 February 2018.

(2) Erken, H., Hayat, R., Prins, C., Heijmerikx and de Vreede I.
(2018), 'Measuring the permanent costs of Brexit', National
Institute Economic Review, 244, pp. 46-55.

This box was prepared by Arno Hantzsche and Amit Kara.

Put differently, the soft Brexit that underpins our central forecast is not an outcome that we believe will necessarily materialise, it is simply the one to which we assign a higher probability. As such the risk to our GDP growth forecast is skewed to the downside and the risk to inflation to the upside (figures 2 and 3) to represent the risk of a collapse in negotiations and trade that is based on WTO rules.

Important risks to our forecast are also coming from our supply-side judgements on productivity growth and the overall 'speed limit' of the economy. UK productivity has been particularly weak and disappointing since the financial crisis. So much so that the productivity gap relative to a pre-crisis trend is twice as big in the UK (18 per cent) as for the G7 (ex.UK) average (9 per cent).

More recently though, there have been some tentative signs of a recovery in hourly labour productivity in the second half of last year (see Supply Conditions section in this chapter). We have treated this recovery with caution for this forecast round and held our lower mediumterm productivity forecast unchanged, but there are some good reasons to be optimistic. To start with, higher minimum wages and the very rapid increase in the living wage, together with lower levels of net migration that create labour scarcity, may well trigger business investmentthatcan help raise labour productivity or raise total factor productivity (Riley and Bondibene, 2017). (3) The outlook for wages in the UK and in other G7 economies depends most crucially on labour productivity (Box B).

The Chancellor did not announce any new policies at the 2018 Spring Statement. The Office for Budget Responsibility (OBR) published an update of its fiscal and economic forecasts and the main message for fiscal policy remained unchanged--the government is on track to meet its fiscal targets mainly by spending less each year as a fraction of GDP.

Box B. Decomposing wages: the productivity gap persists

Ten years from the crisis, average real wages are growing
considerably below the pre-crisis average across the OECD and in
the UK in particular. We estimate that UK real wages are around 20
per cent below a continuation of their pre-crisis trend, similar to
the shortfall in productivity. This underperformance in real wages
is even more striking against a backdrop of record high employment
levels and a record low unemployment rate.

The gap has stirred a debate in the UK and elsewhere on the
relevance of the Phillips curve, which illustrates the relationship
between wages and unemployment. In this box we estimate a wage
equation for the G7 economies. We show that a wage curve that is
augmented with a measure of productivity helps explain the weakness
in wage growth. Productivity grew by an annual average of 1.5 per
cent in the five years before the crisis across the G7; the average
of the past five years is half of that. (1) This entails a shift in
the Phillips Curve--for an unchanged level of the unemployment rate
we expect a lower wage growth. Our regression estimates suggest
that other factors that contribute to wage developments in the G7
are labour market slack and inflation expectations. Taking all
these competing explanations together, we show that productivity is
by far the most important contributor to low wage growth in the G7
and also for the UK.

Data and model description

We use annual data for G7 countries between 1990 and 2016,
collected from the OECD (www.data.oecd.org). As the dependent
variable, we use the annual growth rate in nominal labour
compensation per hour worked in local currency, which includes
gross wages and salaries as well as employers' social security
contributions. For regressors, we use the deviation of the
unemployment rate from a five-year moving average. The inflation
measure is the year-on-year growth rate of the harmonised index of
consumer prices. The augmented model includes a productivity
measure which is expressed as output per hour worked. Another model
specification includes a labour market slack indicator, such as the
share of involuntary part-time workers out of total employees. We
perform the analysis at the aggregate level instead of
differentiating by sectors because of the concern that people
frequently move across sectors, preventing a clear separation
between sectors.

The baseline model is as below:

[[pi].sup.w.sub.i,t] = [[alpha].sub.i] +
[[beta].sub.1][[pi].sup.w.sub.i,t-1] +
[[beta].sub.2][[pi].sub.i,t-1] + [[beta].sub.3]
([U.sub.i,t] - [[bar.U].sub.i,t]) + [[epsilon].sub.it] (1)

where i is country and t is time, [[pi].sup.w] is year-on-year
growth in compensation per hour (wage inflation) (2), [pi] is price
inflation, and U is the unemployment rate and U is a five-year
moving average rate.

Our preferred specification augments the equation above with
productivity growth (prod):

[[pi].sup.w.sub.i,t] = [[alpha].sub.i] +
[[beta].sub.1][[pi].sup.w.sub.i,t-1] +
[[beta].sub.2][[pi].sub.i,t-1] + [[beta].sub.3] ([U.sub.i,t]
-[[bar.U].sub.i,t]) + [[beta].sub.4][prod.sub.i,t]
+[[epsilon].sub.it] (2)

Our results are shown in table Bl. Consistent with IMF (2017) and
Anderton et al. (2017), we find that an increase in unemployment by
I percentage point leads to a decrease in wage growth by around 0.4
percentage points ceteris paribus. An equivalent increase in
productivity growth leads to a rise in wage inflation of around I
according to our key model specification. Using the share of
involuntary workers for total workers in place of the unemployment
rate (3) yields a smaller decrease in wage inflation compared to
the unemployment rate. Finally, wages are relatively flexible and
do not show too much persistence as captured by the coefficient on
the lag of wages.

UK wage growth story

Using the results from the G7 panel regression (model specification
II), Figure B2 shows the percentage point contributions of each of
the competing factors to UK wage dynamics. Productivity made a
large positive contribution to wage growth up until 2007 while it
has been almost nil ever since. The recent uptick in wages in the
second half of last year came hand in hand with productivity growth
reaching its highest reading in six years. Unemployment dragged
wage growth lower from 2008 until 2010 and added to wage inflation
since 2014. The negative residuals in the years from 2010 are
likely due to the cap on public sector wages introduced that year.
Recent NIESR research has estimated that public sector wages had
fallen more than 3 per cent below their equilibrium level in
2016-17 (Dolton et al, 2018). The period from 2017 onwards is based
on our newly published forecasts until 2022. Accordingly, we expect
a gentle rise in nominal wages, in line with a soft recovery in
productivity, while the unemployment rate stabilises at a slightly
higher level than where it currently stands.

NOTES

(1) For a detailed analysis of the underlying causes of the
productivity puzzle see e.g. Kazalova and Naisbitt (2018), Chadha
et al. (2017).

(2) We use nominal wage growth instead of real in line with other
studies such as IMF (2018), Mojon and Ragot (2018) and Bell and
Blanchflower (2018). We use lagged inflation as a regressor as a
proxy for inflation expectations, in line with adaptive
expectations.

(3) We also include the unemployment rate together with our proxy
for underemployment and the results are not significandy different.

REFERENCES

Anderton, R., Hantzsche, A., Savsek, S. and Toth, M. (2017),
'Sectoral wage rigidities and labour and product market
institutions in the Euro Area', Open Economies Review, 28, pp.
923-65.

Bell, D.N.F. and Blanchflower, D.G. (2018), 'Underemployment and
the lack of wage pressure in the UK', National Institute Economic
Review, 243.

Chadha, J., Kara, A. and Labonne, P. (2017), 'The financial
foundations of the productivity puzzle', National Institute
Economic Review, 241.

Dolton, P., Hantzsche, A. and Kara, A. (2018), 'Follow the Leader?
The interaction between public and private sector wage growth

in the UK', presented at Royal Economic Society annual conference,
March 2018. Gordon, R. (2012), 'Is US economic growth over?
Faltering innovation confronts the six headwinds', NBER Working
Paper No. 18315.

Kazalova, Y. and Naisbitt, B. (2018), 'Disappointing productivity
growth: an international dimension', National Institute Economic
Review, 243.

Mojon, B. and Ragot, X. (2018), The labor supply of baby-boomers
and low-flation', Sciences Po OFCE working paper, 09, 2018/01.
World Economic Outlook (2017), 'Seeking sustainable growth:
short-term recovery, long-term challenges, ch. 2, in Recent Wage
Dynamics in Advanced Economics: Drivers and Implications,
International Monetary Fund.

This box was prepared by Amit Kara, Marta Lopresto and Rebecca
Piggott.

Caption: Figure B1. UK real wage growth, productivity growth and unemployment rate

Caption: Figure B2. Contribution to UK wage growth (percentage points)

Table B1. Estimation of wage Phillips curves

                                 I            II

Lagged wage inflation            0.311 ***    0.205 **
Unemployment rate--deviations    -0.358 ***   -0.453 ***
  from trend
Lagged Inflation Rate            0.350 **     0.342 **
Trend productivity growth rate                0.972 **
Involuntary part-time workers
Error correction term
Constant                         0.186        -0.509
Adjusted R2                      0.4557       0.516
N                                155          150

                                 III         IV

Lagged wage inflation            0.303 ***   0.179 *
Unemployment rate--deviations                -0.449 ***
  from trend
Lagged Inflation Rate            0.261 *     -0.014
Trend productivity growth rate   0.541 ***   1.168 **
Involuntary part-time workers    -0.052 **   -0.142
Error correction term
Constant                         3.34 **     0.080
Adjusted R2                      0.504       0.402
N                                141         102

Notes: the sample is in annual frequency and includes
the G7 countries from 1990 to 2016. According to the Pesaran
(2007) and Maddala andWu (1999) Panel unit root tests--H0: the
series has one unit root--the dependent variable is stationary
as the tests yields a P-value of 0.00. Country and time fixed
effects are used throughout all model specifications. The
unemployment rate is expressed as the deviations from its
five-year moving average rate. Trend productivity growth is
computed as a five-year moving average. The error correction
term includes the lagged level of wages and productivity as
defined in NiGEM. * p < 0.10, ** p < 0.05, *** p < 0.01.

In an important departure from the standard NIESR forecasting process, we have deviated from official spending plans and assumed as our central case that the government will relax the fiscal straightjacket somewhat later this year and in the 2019 Spending Review. The government's quest to lower the total managed expenditure-to-GDP ratio to a level below its long-run average is unsustainable in our view. We have, therefore, built into this forecast a higher path for government consumption that includes higher public sector wage growth (see Public Finance section and Box C in this chapter and the Commentary earlier in this Review).

Inflation is set to continue falling from an average of 2.7 per cent in 2017 to 2.4 per cent this year, before settling close to the target rate of 2 per cent in 2019 and beyond. As discussed above, there are countervailing risks to that central forecast from the two major risks identified in this forecast, namely Brexit and productivity. Taking both together, we judge the overall risk to inflation to be skewed to the upside.

Figures 2 and 3 are generated from our structural model, NiGEM, that allows the forecaster to apply judgement and convey a complete narrative. The fan is achieved by bootstrapping historical forecast errors around the forward path of the variables. These forecasts can be benchmarked against those published by the Warwick Business School Forecasting System, which combines state-of-the-art statistical models weighted solely by the forecasting performance of each model (Box D). On their forecasts, real GDP growth for the final quarter of 2018 is most likely to be somewhere between 1-2 per cent (NIESR =1.4 per cent) but their forecast is skewed to the upside, while ours points to a downside risk mainly to allow for the possibility of a hard Brexit. The growth forecast for the final quarter of 2019 is expected to be between 2-3 per cent compared with the NIESR forecast of 2 per cent.

Similarly, the WBSFS model points to CPI inflation between 2-3 per cent as the most likely outcome for both the final quarters of 2018 and 2019 compared with our forecast of 2.1 per cent and 2.0 per cent respectively.

Monetary policy

As before, we maintain our recommendation that the Bank of England keeps interest rates on a path to normalisation (Chadha, 2017). We see the policy rate rising by 25bp every six months until Bank Rate reaches 2 per cent by the end of 2020. We have, however, pushed back the timing of the next rate increase by three months from May to August this year, in response to comments by the governor of the Bank of England and the soft preliminary estimate of 2018 first quarter GDP of 0.1 per cent. Inflation has also surprised to the downside in the UK.

Box C. The fiscal policy conditioning assumption

Selecting the path for fiscal expenditure and taxes is a critical
decision for a modeller when assessing the prospects for overall
(or aggregate) demand in the economy. Unlike the other main
components of demand: consumption, investment and net trade, fiscal
policy can be said to have a substantially autonomous component.
And so in modelling aggregate demand, decisions about the path of
public expenditure and the extent to which it is financed by debt
issuance or taxes can be set more or less exogenously with respect
to other developments in the economy. In the language of economics
it is a control rather than behavioural variable. The choice on
fiscal policy will have implications for overall demand and also
the path of monetary policy, as it may affect the balance between
aggregate demand and supply. To date the National Institute of
Economic and Social Research has used the same assumptions on
government spending as the OBR and the Bank of England by
conditioning on announced plans by the Chancellor for spending. But
we do not take the OBR tax revenue projections and instead allow
our fiscal solvency rule to determine tax revenue. The adoption of
the same fiscal expenditure assumption has meant that the
differences in judgements about the evolution of the economy have
largely derived from the response of behavioural variables to
changes in the domestic economy and key judgements about the rest
of the world. But we are now allowing another channel, that of
fiscal policy, to speak.

Work by the Institute (see Commentary in this Review) suggests that
government expenditure as both consumption and investment may have
fallen below the requirements of the economy. For this forecast we
have therefore assumed that public expenditure will be higher from
2019-21 and have focussed on a stronger path for government
consumption and its deflator but not on government investment. We
forecast an annual rate of growth of nominal government consumption
some 3 percentage points higher than in the OBR's forecast over the
next three years. This pick-up results from a larger increase in
real spending but also because we expect the cost of public
services to rise, in particular public sector pay. As a result, we
forecast total managed expenditure to remain stable as a share of
GDP over the forecast horizon, at just below its postwar average of
some 39 per cent. Given that we assume no adjustments to the
government's taxation plans and no substantial productivity
increases in the near term, our fiscal forecast implies that the
public sector deficit remains just above 2 per cent of GDP. As a
consequence, public sector net debt continues to stay above 85 per
cent of GDP and we therefore project a breach in the government's
current fiscal rules.

This box was prepared by Jagjit Chadha.

The decision to delay the next increase is finely balanced in our view but some caution might be warranted to allow for the fog of uncertainty around first quarter activity data to lift and for confirmation that economic growth has returned to its potential. Barwell and Chadha (2013) argue that the Bank of England must provide explicit guidance on the take-off path in much the same way as the Federal Reserve. That will help reduce money market volatility in the face of timing or tactics and at the same time allow the markets to trade its own information against the central bank path.

Market expectations of Bank Rate have risen since our forecast in February (figure 4). Although market expectations have converged towards our view, our conditioning path remains more aggressive than market expectations. This is for three reasons.

First, our central forecast assumes a soft Brexit scenario where the UK maintains a high level of market access for both goods and services to the EU. Since our February forecast, talks with the EU have progressed and the government has reached a transition agreement but, of course, nothing is certain until the final agreement. The market view, by contrast, incorporates a spectrum of possibilities ranging from a soft to a hard Brexit.

Second, we assume that the recent downturn in hard data and leading indicators is temporary and largely attributable to adverse weather conditions in the UK and other parts of Europe in the first quarter of this year and the influenza epidemic in Northern Europe. Our forecast assumes that the UK economy recovers some of that lost output in the second quarter of this year.

Finally, in what is a major departure from standard NIESR forecasting process, we have assumed that the government will struggle to maintain the fiscal straightjacket that is embedded in the OBR's latest fiscal forecast (See Box C). Specifically, we have built into this forecast a higher path for government consumption. Crucially, from the perspective of monetary policy, some of that additional spending is to finance higher public sector wages which will raise the government consumption deflator with some spillover into the private sector (see Public Finance section below).

Box D. Forecasting with a benchmark: the Warwick Business School
forecasting system

We provide benchmark forecasts to help understand and contextualise
the forecasts presented in this Review. The box presents density
forecasts for UK GDP annual growth and inflation, and reports the
probabilities of a range of output and inflation events occurring,
as calculated using the Warwick Business School Forecasting System
(WBSFS). (1)

To reflect the uncertainties inherent in economic forecasting, and
following the practice of the NIESR and other forecasters such as
the Bank of England and OBR, the WBSFS provides probabilistic
forecasts. The WBSFS forecasts are produced by explicitly combining
density forecasts from a set of twenty four, statistically
motivated, univariate and multivariate econometric models commonly
used in the academic literature. The use of combination forecasts
or model averaging reflects the view, supported by research (e.g.,
see Bates and Granger, 1969, Wallis, 2011, Geweke and Amisano,
2012, Rossi, 2013), that because any single model may be
mis-specified there may be gains from the use of combination
forecasts for measuring probabilities.

Comparison of the Institute's forecasts with the probabilistic
forecasts from the WBSFS may be interpreted as providing an
approximate indicator of the importance of expert judgement, which
may include views on the underlying structure of the macroeconomy.
This is because the WBSFS forecasts are computed by exploiting
regularities in past data with the aid of automated time-series
models; they do not take an explicit, structural or theoretical
view about how the macroeconomy works; and they do not rely on
(subjective) expert judgement to the same degree as those presented
by the Institute. The forecasts from the WBSFS are not altered once
produced; they are deemed 'simply' to represent the data's view of
what will happen to the macroeconomy in the future.

Figure Dl presents WBSFS's latest (as of 19 April 2018)
probabilistic forecasts for real GDP growth and inflation--defined
as year-on-year growth rates for 2018Q4 and 2019Q4--as histograms.
The information set used to produce these forecasts includes
information on GDP growth up to 2017Q4 and the latest CPI inflation
estimate for March 2018.

Table Dl extracts from these histogram forecasts the probabilities
of specific output growth and inflation events. The events
considered are the probability of output growth being less than 0
per cent, I per cent and 2 per cent, and of inflation lying outside
the 1-3 per cent target range (i.e., the probability of the Bank of
England's Governor having to write a letter explaining how and why
inflation has breached its target range). Also reported are the
individual probabilities of inflation being less than I per cent
and greater than 3 per cent, to indicate which side of the target
range is most likely to be breached.

Inspection of the forecasts for output growth for 2018Q4 in table
Dl suggests that, compared with our forecasts made one quarter ago,
relatively little has changed. The most likely range for the
forecast remains for economic growth between I per cent and 2 per
cent in 2018Q4. But looking out further to 2019Q4, a higher growth
between 2 per cent and 3 per cent is now marginally more likely. As
table Dl shows, the difference between the forecasts for 20I8Q4 and
20I9Q4 is explained by modest downward revisions to the risk of
'low' growth (growth less than I per cent); the probability of
growth less than I per cent is 26 per cent for 2018Q4 and falls to
20 per cent for 2019Q4.

Similarly, for inflation, our forecasts are little changed relative
to those published in this Review one quarter ago. An inflation
rate between 2 per cent and 3 per cent is the most likely outcome
in the year ending 2018Q4, with a 38 per cent probability (up by
just I per cent from the previous estimate of 37 per cent). But the
WBSFS predicts that inflationary pressures marginally dissipate in
2019Q4, with a probability of around 27 per cent of inflation
falling in the I -2 per cent range and 31 per cent in the 2-3 per
cent range. In comparison with our previous forecasts, the
probability of inflation above 3 per cent has increased from 33 per
cent to 35 per cent in 2018Q4 and from 27 per cent to 30 per cent
for 2019Q4.

NOTE

(1) WBSFS forecasts for UK output growth and inflation have been
released every quarter since November 2014. Details of the releases
are available at
https://www2.warwick.ac.uk/fac/soc/wbs/subjects/emf/forecasting/
and a description of the models in the system and of the indicators
employed is available at
https://www2.warwick.ac.uk/fac/soc/wbs/subjects/emf/forecasting/
summary_of_wbs_forecastng_system.pdf.

REFERENCES

Bates, J.M. and Granger, C.W. (1969), 'The combination of
forecasts', Operational Research Quarterly, 20, pp. 451-68.

Geweke, J. and Amisano, G. (2012), 'Predictions with misspecified
models', American Economic Review, Papers and Proceedings, 102, pp.
482-6.

Rossi, B. (2013), 'Advances in forecasting under model instability'
in Elliott, G. and Timmermann, A. (eds), Handbook of Economic
Forecasting, Volume 28, Elsevier Publications, pp. 1203-324.

Wallis, K.F. (2011), 'Combining forecasts--forty years later',
Applied Financial Economics, 21, pp. 33-41.

Caption: Figure D1 WBSFS forecast probabilities for real GDP growth and inflation, year-on-year

Table D1. Probability event forecasts for 2018Q4 and
2019Q4 annualised % real GDP growth and CPI inflation
(extracted from the WBSFS forecast histograms)

              Real GDP growth (%, p.a.)

Year        Prob          Prob          Prob
         (growth<0%)   (growth<1%)   (growth<2%)

Updated Forecasts (April 2018)

2018Q4       7%            26%           58%
2019Q4       8%            20%           49%

Previous Forecasts (January 2018)

2018Q4       9%            27%           56%
2019Q4       8%            21%           48%

            CPI inflation (%, p.a.)

Year       Prob       Prob       Prob
         (letter)   (CPI<l%)   (CPI>3%)

Updated Forecasts (April 2018)

2018Q4     41%         6%        35%
2019Q4     43%        13%        30%

Previous Forecasts (January 2018)

2018Q4     41%         8%        33%
2019Q4     44%        17%        27%

The forecast update shifts the inflation distribution
marginally to the right, but where the probability of
being in the 1-3 per cent range stays the same at 59 per
cent, as the downside risks to inflation have decreased by
the same amount as the upside risks have increased.

The implication drawn is that the lower CPI inflation
estimate for March 2018 has made very little difference
to our inflation forecasts.

This Box was prepared by Ana Galvao,
Anthony Garratt and James Mitchell.

The MPC has long stated that it will continue to reinvest the proceeds from maturing bonds bought under its Asset Purchase Facility until the policy rate reaches the threshold of 2 per cent. That guidance has not changed and so we would expect the Bank's balance sheet to shrink only from mid-2021 as bonds mature, given that on our forecast the threshold is reached at that point. We assume that the Bank will not actively sell bonds back to the market. It is worth noting that this 2 per cent guidance was announced in November 2015 when the lower bound on the policy rate was thought to be 0.5 per cent. Since then the MPC cut Bank Rate to 0.25 per cent and also expanded the QE programme. The MPC should clarify its stance on the reinvestment threshold in light of the newer lower bound.

At its March meeting, the Financial Policy Committee (FPC) held the countercyclical capital buffer (CCyb) rate unchanged at 1 per cent. The CCyb rate was raised at the November 2017 meeting from 0.5 per cent to 1 per cent effective November 2018. Brexit remains a key risk for the FPC and in its judgement the UK banking system has the resilience to continue supporting the economy even through a disorderly Brexit.

Risks to monetary policy

As before, Brexit remains a key risk to our monetary policy forecast. Although the risks have dissipated somewhat because of the transition agreement, there is still the possibility of a cliff edge outcome next year if the next stage of the negotiations related to the final trading arrangements fails. Our central forecast is conditioned on a soft Brexit where the UK maintains a very high level of EU market access. If, instead, negotiations fail and the UK ends up trading on WTO terms, there is a heightened possibility that sterling depreciates again exerting upward pressure on inflation. Productivity prospects would also be damaged. This scenario is discussed more fully in the February 2018 Review. The monetary policy response will depend on the size of the shock to demand relative to the supply capacity. If uncertainty spikes higher and demand falls rapidly, the MPC should respond to the shock by easing monetary and credit policy provided inflation expectations remain anchored.

Another risk to our monetary policy view relates to the evolution of whole-economy productivity. After ten years of disappointing productivity performance and persistent downside surprises, we revised lower our forecast for long-term productivity growth in November last year of just over 2 per cent to under 1.5 per cent. At the time, we pointed to upside risks to that revised forecast. As it happens, the ONS has reported that upside surprise with output per hour worked rising by 1.0 per cent and 0.7 per cent in the final two quarters of last year, the sharpest six-month rise since 2011. There are many reasons to expect productivity to rise, but for now we are treating this uptick with some caution and holding our assumption on productivity growth unchanged (see Supply section for more details). All things equal, a quicker return of productivity growth to the pre-crisis average would require a lower policy rate in the short term to lift growth to its potential.

Another key domestic risk relates to wage growth. Unemployment has fallen to a 40-year low and employment is at a record high, yet wage growth remains subdued. The analysis presented in Box B shows that the low level of unemployment has started to exert an upward pressure on wages from 2017 and we expect that to continue over the next two years. Meanwhile, the 1 per cent cap on public sector pay that has been in place since 2010 will be lifted in 2018-19. A rapid convergence to private sector levels, that is not accompanied by gains in productivity, will raise inflationary pressures (Box B in the November 2017 Review). Separately, the National Living Wage is rising faster than productivity growth. Any material spillover from this into the next rung of wages, or wages more broadly, could lead to further inflationary pressure.

Our view on monetary policy is conditional on a benign global backdrop where growth averages around 4 per cent in 2018 and 2019, and a subdued outlook for inflation. Should prices rise faster than our forecast, central banks will respond with tighter monetary policy. Another important risk highlighted in the World section of the Review relates to trade policy. The US has imposed tariffs on a small number of goods and retaliation is relatively contained, but there is a risk that the tariff wars spread to other goods and services and also involve more countries. On the plus side, there is scope for stronger GDP growth and a continuation of the 'lowflation' backdrop in a number of Euro Area economies where unemployment is still high.

Prices

Consumer price inflation is falling faster than expected, reaching 2.5 per cent in March. This faster-than-expected drop is the latest signal that the inflationary effects of the depreciation of sterling in 2016 are waning.

Figure 3 shows recent movements in inflation as well as our forecast for the years ahead, which is conditional on our forecasted monetary policy path. In view of recent data outturns, we have revised down our forecast for CPI inflation in 2018 to 2.4 per cent, 0.3 percentage point lower than our previous forecast. Thereafter, our view is that inflation will remain close to the target from 2019 onwards.

There are a number of risks to this forecast. One upside risk is a continuation of the recent pick-up in oil prices in sterling terms from roughly 20 [pounds sterling] a barrel to 50 [pounds sterling], which is likely to add to inflationary pressure in the UK (Lennard and Theodoridis, 2018). Another is some cost-push pressure, emerging from a number of potential sources, such as from a further reduction in underemployment, a steepening of the Phillips curve, spillovers from a forecast easing of public sector pay restraint to the private sector, or from a trickle-up effect associated with the rising National Living Wage. A final upside risk is a hard Brexit, which might involve a repeat of the depreciation of sterling and the pass-through of 2016.

According to the Bank of England's Inflation Attitudes Survey, there has been little change recently in short-run inflation expectations. At the 12- and 24-month horizons, expected inflation was 2.9 per cent, unchanged in February from the November 2017 survey, while at the 5-year horizon, expectations fell from 3.5 to 3.4 per cent. Financial markets also expect inflation of roughly 3 per cent at the 1- to 5-year horizons (Bank of England, 2018). The Bank's survey of professional forecasters, on the other hand, expects inflation of 2 per cent at the 3-year horizon, which is more consistent with the Bank of England's target and our forecast.

Following the increase in Bank Rate in November, and the expectation that the Bank of England will continue on the path to interest rate normalisation (Chadha, 2017), the idiosyncrasies of British price indices will become an important issue. Historically, there has been a positive wedge of roughly 1 percentage point between RPI inflation and CPI inflation. This wedge arises for a number of reasons, such as the treatment of mortgage interest payments, other differences in the coverage of goods and services, formula effects and differences in weights. The ONS calculates that mortgage interest payments, which are included in RPI but not CPI, have accounted for a trivial fraction of the difference between the two in recent years. However, between 1998 and the financial crisis, when interest rates were more variable than since the crash, mortgage interest payments were an important driver of the wedge between the two indices. In this period, we estimate that a 1 percentage point increase in Bank Rate raised the RPI relative to the CPI by 0.5 percentage points. This is important as interest rate normalisation could once again thicken the wedge, which in turn has complex implications for the finances of households and the government. The CPI, for example, is used to index tax allowances and thresholds, benefits and public service pensions, while the RPI is used to calculate interest on index-linked gilts and student loans (OBR, 2018). On balance, an increase in RPI relative to CPI would have a net negative impact on the public finances in the short run but a more negligible effect thereafter (OBR, 2017).

Components of demand

We have revised down our GDP growth forecast for 2018 from 1.9 per cent to 1.4 per cent. One reason for this revision is the disruption caused by extreme weather conditions in the first quarter of this year. According to the ONS, the economy expanded by just 0.1 per cent over this period, which is broadly in line with our monthly nowcast and some 0.3 percentage points lower than our February forecast.

There is reason to be cautious about the preliminary GDP estimate published by the ONS, as it is based on relatively little firm information. Back in 2010, when the UK suffered from extensive flooding, the first estimate for final quarter GDP growth was -0.5 per cent. That estimate has since been revised up by +0.6 percentage point to +0.1 per cent in subsequent data vintages.

Available indicators of demand have been mixed, though the pattern partly reflects a continuation of the rebalancing of demand away from consumers since the EU referendum. Consumer confidence reported by the GfK survey has dipped, dented by rising prices, sluggish household income, and the prospect of interest rate hikes. Also, retailers have been badly affected by the March snows as reported by the CBI Distributive Trades survey, which revealed a harsh drop in the sales balance, although the BRC survey gathered later in the month was less pessimistic. Looking at the health of the housing market, the RICS survey on sales per surveyor tells a downbeat story. Sales peaked in 2014 and have been softening ever since, in line with the weakness of the construction PMI. On the other hand, business surveys, such as those from the CBI and Markit PMI, continue to paint a healthy picture of output growth, while official data on growth have been volatile, and, if anything, a little weaker, especially in the construction and services sectors.

Turning to the expenditure components, the most important change relates to the treatment of government spending in our forecast. Instead of our usual practice of adopting the OBR's forecast for government spending, this time we have built in a higher path for both nominal and real government consumption (see Box C). As a result, we see government spending adding 0.2 and 0.3 percentage points to real GDP growth over the next two years (figure 5).

Turning next to household spending, we see a modest slowdown this year in part because of the disruption to activity in the first quarter of this year and also because of the slowdown evident in surveys such as those from the Bank of England Agents and the British Retail Consortium. Real personal disposable income (RPDI), which tends to be the main driver of consumer spending, rose by 1.5 per cent year-on-year in the final quarter of 2017, the highest rate since early 2016. It is set to rise further over the course of this year as well as next year in part because of higher wages but also because inflation falls as the impact of the post-EU referendum currency depreciation fades. Against that, we expect the saving ratio to rise, from 5.3 per cent in the final quarter of last year to an average of 5.5 per cent this year and 5.7 per cent next year, as the unemployment rate nudges higher. Some of this recovery in the saving ratio is explained by the rolling out of auto-enrolment into workplace pensions.

House prices and consumption tend to move hand-in-hand. The Halifax and Nationwide price inflation measures are trending lower, while our preferred measure of prices, published by HM Land Registry, is still pointing to firm growth in house prices at around 5 per cent per year. As before, we expect house prices to start cooling off mainly on the back of the additional stamp duty on second homes, less generous tax allowance for buy-to-let properties and the squeeze in real incomes. Also, the gradual increase in Bank Rate, that we have in our forecast, will push up mortgage interest rates.

Business investment is expected to remain subdued over the forecast horizon mainly because of Brexit-related uncertainty. Historically, the investment-to-GDP ratio in the UK has been low relative to other G7 economies. Consistent with the view that uncertainty is holding down investment, that ratio was significantly below the three major Euro Area economies in 2017 (see figure 6). The Bank of England's Agents' score of Investment Intentions picked up from the second quarter of 2017 after a steep fall post-referendum but remains modest as a result of economic uncertainty. We expect business investment to grow by around 2 per cent this year and to stabilise at a growth rate of between 2 and 3 per cent in the medium term.

Net trade contributed 0.6 percentage points to real GDP growth last year and is set to make another positive contribution to growth this year. On average, we expect net trade to make a positive contribution of 0.2 percentage point to growth in the three-year period from 2017 through to next year. This is a significant improvement from the past as net trade has on average subtracted some 0.3 percentage points from UK GDP growth since 1997. The main driver for the positive contribution is weak domestic demand and robust export growth that has been triggered by a weaker currency and a strong recovery in the Euro Area.

Supply conditions

Employment and labour costs

The unemployment rate fell to 4.2 per cent in February, its lowest level since 1975, down from 4.3 per cent in January. The Bank of England's recruitment difficulties index, which measures the scale of general recruitment difficulties across the economy, has reached its highest level since records began in 2005 (figure 7). This tightening of the labour market does not seem to have put much upward pressure on wages until recently. This has prompted some economists (e.g. Farmer and Nicolo, 2018) to argue that the relationship between wage growth and unemployment, as summarised by the Phillips curve, has broken down. Box B in this Review presents evidence to suggest that it has not done so but that weak real wage growth has been caused by dismal productivity growth.

The Bank of England's Agents' scores for labour costs point to a moderate uptick in the three months to February compared with the same period one year earlier (figure 8), while employment intentions are indicative of modest increases in hiring. Pay settlement data from XpertHR show a 2.5 per cent mean and median annualised pay increase in the three months to March 2018. The assumption underlying our forecast is that real labour costs will continue to increase at a moderate rate throughout 2018 as firms find it increasingly difficult to recruit workers, especially with the appropriate skills.

Productivity

The dismal productivity performance of the UK economy since the crisis means that the level of real GDP in the final quarter of 2017 was approximately 18 per cent below the level it would have been if pre-crisis trends had continued. This is twice the size of the equivalent gap for the average of the rest of the G7 countries (figure 9). However, there have been some tentative signs that productivity has started to accelerate. Output per hour picked up sharply in the final quarter of 2017, expanding by 1 per cent year-on-year which followed on from strong growth in the previous quarter. However, this was largely due to a fall in average hours worked in the second half of 2017, rather than stronger output growth. If hours worked data, which are sourced from the Labour Force Survey and can be erratic, were subject to an upward revision, this pick-up in productivity could be eradicated, as was the case in 2011. The ONS (2018) defends these data by highlighting that the industries that are experiencing higher employment growth tend to be those where average hours worked are already below average for the economy as a whole. Our underlying assumptions regarding productivity are unchanged since our February forecast and we expect modest growth in output per hour this year and an acceleration into the medium term. Thus, in the event that the most recent average hours data are in fact accurate, this presents an upside risk to our output forecast.

The National Living Wage (NLW), which applies to those aged 25 and over, and the National Minimum Wage (NMW) for those aged 21-24 both rose by 33p in April, reaching 7.83 [pounds sterling] and 7.38 [pounds sterling] per hour respectively. The NLW must rise to 60 per cent of median earnings in 2020 and for that to be achieved the Low Pay Commission projects the NLW to rise by around 10 per cent over the next two years to 8.62 [pounds sterling] per hour. Riley and Bondibene (2017) exploit the introduction of the NMW to Britain and subsequent increases to identify the effects of minimum wages on productivity. They find evidence to suggest that labour productivity rose in response to these changes, and this was associated with increases in total factor productivity rather than a reduction in employment or capital-labour substitution. If these results hold for the NLW, which is broader in scope, we could see a large positive effect on productivity. Forth and Rincon-Aznar (2018) show that raising productivity in the UK's low-wage, high-employment sectors, such as retail and hospitality, to levels seen in other advanced economies could eliminate around 20 per cent of the total productivity difference relative to countries like the Netherlands, Germany and France.

In our November 2017 Review, we highlighted that one factor contributing to the observed productivity puzzle could be that, in a weak wage growth environment, firms have substituted labour for capital and failed to undertake total factor productivity improving measures such as training and organisational change. This has held down productivity and thus wage growth in a self-reinforcing cycle. Chadha et al. (2017) also conclude that the financial crisis has led to a change in the mix of capital and labour employed and a sharp decline in total factor productivity. We expect that as labour costs rise due to increasing scarcity of workers, firms will be forced to increase labour productivity.

For further discussion of the productivity puzzle, see Lazarowicz (2018) who summarises the work presented at NIESR's 80th anniversary special session at the recent Royal Economic Society Conference. In addition, a recent virtual special issue of the National Institute Economic Review collects some of the best Review articles on the matter.

Public finances

The 2018 Spring Statement

In the 2018 Spring Statement, the Chancellor kept his promise and did not alter the government's fiscal policy stance. The Office for Budget Responsibility (OBR) did not substantially revise its economic forecasts and continues to expect weaker economic growth than we do, of around 1.5 per cent per annum until 2022, mainly due to more pessimistic assumptions about Brexit. Total managed expenditure is projected to carry on falling as a share of GDP, by around 1 percentage point from 38.4 per cent in 2018-19 to 37.6 per cent in 2022-3. The government has made clear that unless the OBR's growth forecasts are revised upwards, additional spending will remain limited. Continued spending restraint means that the OBR expects current fiscal targets to be met. The cyclically adjusted budget deficit falls to 1.3 per cent of GDP in 2020-21, leaving headroom of 0.7 per cent of GDP towards the fiscal mandate; public sector net debt as a percentage of GDP enters a downward path in the current financial year, i.e. two years before the supplementary target, primarily because the Bank of England's Asset Purchase Facility scheme will mature; and welfare spending is expected to fall below the 2022-3 cap. The preliminary outturn estimate from April 2018 for public sector net borrowing in 2017-18 is 42.6 billion [pounds sterling], 3.5 billion [pounds sterling] lower than in the previous year. This is 2.5 billion [pounds sterling] lower than the OBR's projection for the 2018 Spring Statement, but 3.8 billion [pounds sterling] higher than forecast two years ago and prone to further revisions.

Our fiscal forecast

Pressure to end fiscal austerity is high. We expect that the government will find it hard to resist lifting public sector wages to tackle elevated recruitment difficulties (see also Dolton et al., 2018). Extra funding would be needed to stop the fall in public service quality and to respond to population ageing, which will progressively lead to higher demand for public services (see also this Review's Commentary). We therefore deviate from our standard practice of taking official spending plans as given and assume a pick-up in government spending from 2019. In particular, we forecast an annual rate of growth of nominal government consumption some 2 percentage points higher than in the OBR's forecast over the next five years. Figure 10 illustrates that this is due to a larger increase in real spending but also because we expect the cost of public services to rise, in particular public sector pay. As a result, we forecast total managed expenditure to remain stable as a share of GDP over the forecast horizon, just below its postwar average of 39.3 per cent. Given that we assume no adjustments to the government's taxation plans and no substantial productivity increases in the near term, our fiscal forecast implies that the public sector deficit remains just above 2 per cent of GDP. As a consequence, public sector net debt continues to stay above 85 per cent of GDP (figure 11). This would lead to a breach of the government's current fiscal rules, something that previous governments avoided by changing the rules.

Fiscal risks

The risks around our fiscal forecast are balanced. If the Chancellor were to resist spending pressures, we would have to revise downwards our projections for public spending, deficit and debt. A hard Brexit continues to be a substantial negative risk to public finances. This is because recovering some of the current contributions to the EU budget is unlikely to be enough to offset increasing needs for public sector staff and infrastructure and to respond to the possibility of an economic downturn. An additional unknown is productivity growth, which has very recently surprised to the upside. In this forecast, we assume that this pick-up in output per hour, which is driven by a fall in average hours worked, will be revised away, as was the case in 2011, and have not adjusted our forecast for productivity growth since February. In the past, downward revisions to the OBR's productivity growth forecast were often accompanied by upward revisions to the employment growth forecast (figure 12). The opposite may hold if productivity indeed increases at the expense of employment (measured as total hours worked), leaving the effects on the public purse ambiguous: higher productivity could raise tax revenue but this may be offset by more welfare spending as a result of lower employment.

Saving and investment

Sectoral balance: triple deficit

Table A9 shows the financial position of the private and public sectors of the economy and the resulting balance with the rest of the world. The private sector is further split into a household and a corporate sector. If investment is greater than saving for a sector, then this sector is a net borrower. The aggregation of these three sectors is the current account balance, which, if in deficit, implies that borrowing from the rest of the world is required in order to fund domestic investment plans. It is not possible to infer the optimality of the levels of capital from the current account but rather just the immediate financing needs of the economy. In 2017, all three domestic sectors of the economy--households, companies and government--were in deficit for the first time since at least 1987 (figure 13), and we forecast this pattern to carry on into the medium term.

In the fourth quarter of 2017, household saving remained low, as we had forecast in the last Review: saving represented only 3.7 per cent of GDP, about the same level as the average over the whole year. Thus 2017 marked the year of lowest household saving to GDP since 1971. We expect households to continue to favour consuming over saving in 2018 and then gradually to increase saving as a proportion of GDP towards 5 per cent in the medium term as real personal disposable income recovers. An important driver of the increase in saving will be the ongoing auto-enrolment into workplace pensions. Household investment rose steadily from a trough of 2.9 per cent of GDP in 2009 to 4Vi per cent of GDP in 2017, reaching the same level as the pre-crisis high of 2006-7. With demand for housing still growing strongly, we project household investment to increase in each subsequent year and to reach 5 per cent of GDP in 2022. The saving and investment positions of the household sector imply that in 2017 households required 0.8 per cent of GDP in funding from the rest of the economy. This represents the first time since at least 1987 that the household sector was a net borrower. With both household saving and investment growing slowly, we expect households to return to a near-balanced net position in the medium term.

On the corporate side, saving rebounded strongly in 2017, rising to 8 1/2 percent of GDP from 6 1/2 per cent in 2016. This was driven by an increase in corporate profits both in manufacturing and in the oil and natural gas exploration and extraction sector. We forecast corporate saving to GDP to remain close to 9 per cent in the medium term as the headwinds from Brexit are balanced by stronger international growth. Similarly, corporate investment surprised on the upside reaching 10.3 per cent of GDP in the fourth quarter of 2017, up from a revised 10.1 per cent in the third quarter. Conditional on a 'soft Brexit' assumption, we forecast corporate investment to remain at about 10Vi per cent of GDP in the medium term, and therefore the corporate sector still to require about 1 1/2 to 2 per cent of GDP of net financing from the rest of the economy over the same time horizon.

Government sector dis-saving, which reached a peak in 2009 of around 5 1/2 per cent of GDP, has vanished in 2017 as a result of the ongoing fiscal consolidation. We have revised our forecast for government saving down; we now expect saving to be about 1 per cent of GDP from 2018 to 2022, as opposed to increasing to 3 per cent over the same period in our February forecast. This represents a deviation from the OBR forecast and reflects our belief that the government will slow the pace of fiscal consolidation from 2019 onwards. Government investment stayed stable in 2017 at 2 1/2 percent of GDP and we have maintained our estimate of 2 1/2 to 3 per cent of GDP over the forecast horizon. As a result of reduced saving and constant investment, we now expect the government to remain in a net borrowing position of 1 1/2 to 2 per cent of GDP until 2022, after having borrowed 1.7 per cent in 2017. This is in stark contrast to our previous forecast that assumed a return to balance in 2022.

To finance the triple deficit of the household, corporate and government sectors, the domestic economy had to borrow 4.1 per cent of GDP in 2017 from the rest of the world. This was half a per cent less than previously expected thanks to the vitality of the corporate sector, and the lowest ratio since 2011. With stronger sterling, lower inflation and higher government spending, we now expect the rebalancing of the economy from domestic demand to net trade to grind to a halt. Hence the current account balance is forecast to decline only marginally to 3Vz per cent of GDP in 2022, compared to 2Vi per cent in our previous forecast.

NOTES

(1) The House of Lords examined the EU (Withdrawal) Bill and voted 314 to 217 for a change to keep the UK in the customs union.

(2) See speech by Labour party leader Jeremy Corbyn on 26 February available at: https://labour.org.uk/press/jeremy-corbynfull-speech-britain-brexit/.

(3) See Productivity puzzles past and present: NIESR 80th anniversary special session.

REFERENCES

Barwell, R. and Chadha, J.S. (2013), 'Complete forward guidance', Forward Guidance: Perspectives from Central Bankers, Scholars and Market Participants, available at: https://voxeu.org/content/forward-guidance-perspectivescentral-bankers-scholars-and-market-participants.

Bank of England (2018), Inflation Report, February.

Chadha, J.S. (2017),'Commentary: Interest rate normalisation', National Institute Economic Review, 241, pp. F4-7.

Chadha, J.S., Kara, A. and Labonne, P. (2017), 'The financial foundations of the productivity puzzle', National Institute Economic Review, 241, pp. R48-57.

Dolton, P., Hantzsche, A. and Kara, A. (2018),'Follow the leader! The interaction between public and private sector wage growth in the UK', presented at Royal Economic Society annual conference, March 2018.

Farmer, R.E.A. and Nicolo, G. (2018),'Keynesian economics without the Phillips Curve', Journal of Economic Dynamics and Control.

Forth, J. and Rincon-Aznar. A. (2018),'Productivity in the UK's low-wage industries', Report for the Joseph Rowntree Foundation.

Lazarowicz. T. (2018),'Puzzling out productivity' https://www.mesr.ac.uk/blog/puzzling-out-productivity.

Lennard. J. and Theodoridis, K. (2018),'Oil and the macroeconomy', National Institute Economic Review, 243, pp. F48-9.

National Institute Economic Review, Productivity: special issue http://journals.sagepub.com/page/ner/ special-issues/productivity.

OBR (2017), Fiscal Risks Report, July.

--(2018), Economic and Fiscal Outlook, March.

Offer, A. (2001), 'Why has the public sector grown so large in market societies'The political economy of prudence in the UK, C. 1870-2000' based on an inaugural lecture for the Chichele Chair in Economic history, presented at University of Oxford.

ONS (20 18),'Labour market economic commentary: April 2018', available at https://www.ons.gov.uk/releases/labourmarketeconomiccommentaryapriQO 18.

Riley, R. and Bondibene, C. (2017),'Raising the standard: minimum wages and firm productivity', Labour Economics, 44(C), pp. 27-50.

Amit Kara, with Arno Hantzsche, Jason Lennard, Cyrille Lenoel, Marta Lopresto, Rebecca Piggott, Craig Thamotheram and Garry Young *

* NIESR. E-mail:a.kara@niesr.ac.uk.Thanks to Jagjit Chadha, lana Liadze andYanitsa Kazalova for helpful comments and suggestions. We also thankYanitsa Kazalova for compiling the database. Unless otherwise stated, the source of all data reported in the figures and tables is the NiGEM database and forecast baseline. The UK forecast was completed on 27 April 2018.

Appendix--Forecast details

Table A1. Exchange rates and interest rates

                            UK exchange rates

                     Effective    Dollar    Euro      FTSE
                     2011 = 100                     All-share
                                                      index

2012                   104.1        1.6      1.2      2617.7
2013                   102.6        1.6      1.2      3006.2
2014                   110.2        1.7      1.2      3136.6
2015                   116.3        1.5      1.4      3150.1
2016                   104.8        1.4      1.2      3102.0
2017                    99.3        1.3      1.1      3542.4
2018                   103.3        1.4      1.1      3497.5
2019                   103.9        1.4      1.1      3473.6
2020                   104.0        1.5      1.1      3508.3
2021                   104.1        1.5      1.1      3592.5
2022                   104.2        1.5      1.1      3704.8

2017 Q1                 98.9        1.2      1.2      3467.5
2017 Q2                100.0        1.3      1.2      3549.2
2017 Q3                 98.3        1.3      1.1      3548.3
2017 Q4                100.1        1.3      1.1      3604.5
2018 Q1                102.0        1.4      1.1      3552.5
2018 Q2                103.8        1.4      1.2      3456.4
2018 Q3                103.8        1.4      1.2      3478.6
2018 Q4                103.8        1.4      1.2      3502.5
2019 Q1                103.9        1.4      1.2      3487.4
2019 Q2                103.9        1.4      1.1      3470.3
2019 Q3                103.9        1.4      1.1      3465.1
2019 Q4                104.0        1.4      1.1      3471.7

Percentage changes
2012/2011                4.2       -1.1      7.0         1.2
2013/2012               -1.5       -1.3     -4.5        14.8
2014/2013                7.4        5.3      5.4         4.3
2015/2014                5.6       -7.2     11.1         0.4
2016/2015               -9.9      -11.4    -11.2        -1.5
2017/2016               -5.2       -4.9     -6.7        14.2
201812017                4.1        9.4      0.1        -1.3
2019/2018                0.6        1.4     -0.2        -0.7
2020/2019                0.1        1.6     -1.0         1.0
2021/2020                0.1        1.5     -1.1         2.4
2022/2021                0.0        1.4     -1.1         3.1
2017Q4/2016Q1            2.0        6.9     -2.1         9.2
2018Q4/2017Q1            3.7        6.8      1.7        -2.8
2019Q4/2018Q1            0.2        1.5     -0.9        -0.9

                                 Interest rates

                     3-month   10-year   World (a)     Bank
                      rates     gilts                Rate (b)

2012                   0.8       1.8        1.2        0.5
2013                   0.5       2.4        0.9        0.5
2014                   0.5       2.5        0.9        0.5
2015                   0.6       1.8        0.9        0.5
2016                   0.5       1.3        0.9        0.3
2017                   0.4       1.2        1.2        0.4
2018                   0.8       1.6        1.5        0.8
2019                   1.3       2.3        1.9        1.3
2020                   1.8       2.8        2.3        1.8
2021                   2.2       3.2        2.6        2.1
2022                   2.5       3.6        2.8        2.5

2017 Q1                0.4       1.3        1.0        0.3
2017 Q2                0.3       1.0        1.1        0.3
2017 Q3                0.3       1.2        1.2        0.3
2017 Q4                0.5       1.3        1.3        0.4
2018 Q1                0.6       1.5        1.4        0.5
2018 Q2                0.7       1.4        1.5        0.5
2018 Q3                0.8       1.6        1.6        0.7
2018 Q4                0.9       1.8        1.7        0.8
2019 Q1                1.1       2.0        1.7        0.9
2019 Q2                1.2       2.2        1.8        1.0
2019 Q3                1.3       2.3        1.9        1.2
2019 Q4                1.4       2.5        2.1        1.3

Percentage changes
2012/2011
2013/2012
2014/2013
2015/2014
2016/2015
2017/2016
201812017
2019/2018
2020/2019
2021/2020
2022/2021
2017Q4/2016Q1
2018Q4/2017Q1
2019Q4/2018Q1

Notes: We assume that bilateral exchange rates for
the first quarter of this year are the average of
information available to 12 January 2018. We then
assume that bilateral rates remain constant for the
following two quarters before moving in line with the
path implied by the backward-looking uncovered interest
rate parity condition based on interest rate differentials
relative to the US. (a) Weighted average of central bank
intervention rates in OECD economies, (b) End of period.

Table A2. Price indices

2015-100

                      Unit    Imports    Exports      World
                     labour   deflator   deflator   oil price
                     costs                           ($) (a)

2012                  98.3      110.1      105.3       112.5
2013                 100.2      111.0      108.3       109.1
2014                  99.3      106.3      105.3        99.6
2015                 100.0      100.0      100.0        52.8
2016                 102.2      103.3      104.8        43.4
2017                 104.5      109.4      111.3        53.5
2018                 106.9      111.2      109.8        64.8
2019                 109.9      112.9      111.9        67.6
2020                 112.5      114.4      114.0        70.5
2021                 114.7      116.3      116.1        70.7
2022                 116.6      118.8      118.6        71.0

Percentage changes
2012/2011              0.8       -0.7        0.2         1.8
2013/2012              1.9        0.8        2.9        -3.0
2014/2013             -0.9       -4.2       -2.7        -8.7
2015/2014              0.7       -5.9       -5.1       -47.0
2016/2015              2.2        3.3        4.8       -17.7
2017/2016              2.3        5.9        6.2        23.3
2018/2017              2.3        1.6       -1.3        21.0
2019/2018              2.7        1.6        1.9         4.4
2020/2019              2.4        1.3        1.8         4.2
2021/2020              2.0        1.7        1.9         0.4
2022/2021              1.6        2.2        2.1         0.4

                                  GDP
                     Consump-   deflator   Retail   Consumer
                       tion     (market    price     prices
                     deflator   prices)    index     index

2012                    95.3       96.0     93.9       96.1
2013                    97.5       97.9     96.7       98.5
2014                    99.4       99.5     99.0       99.9
2015                   100.0      100.0    100.0      100.0
2016                   101.4      102.0    101.7      100.7
2017                   103.4      104.0    105.4      103.4
2018                   105.6      105.3    109.5      105.9
2019                   108.1      107.9    113.8      108.1
2020                   110.5      110.6    117.8      110.2
2021                   112.9      113.2    122.0      112.4
2022                   115.5      115.8    126.1      114.7

Percentage changes                  1.6      3.2        2.9
2012/2011                2.1
2013/2012                2.4        1.9      3.0        2.6
2014/2013                1.9        1.7      2.4        1.4
2015/2014                0.6        0.5      1.0        0.1
2016/2015                1.4        2.0      1.7        0.7
2017/2016                2.0        2.0      3.6        2.7
2018/2017                2.2        1.2      3.9        2.4
2019/2018                2.4        2.5      3.9        2.1
2020/2019                2.2        2.4      3.5        2.0
2021/2020                2.2        2.3      3.6        2.0
2022/2021                2.3        2.3      3.4        2.0

Notes: (a) Per barrel, average of Dubai and Brent spot prices.

Table A3. Gross domestic product and components of expenditure

billion [pounds sterling], 2015 prices

               Final consumption        Gross capital
                  expenditure             formation

            Households    General   Gross fixed   Changes in
            & NPISH (a)    govt.    investment    inventories
                                                      (b)

2012            1162.4     350.4         275.2          -0.4
2013            1182.5     351.1         284.6           3.0
2014            1207.6     359.9         304.7           5.5
2015            1238.5     362.1         313.2           7.4
2016            1274.9     365.1         318.8           4.8
2017            1296.0     365.6         331.7          -2.8
2018            1310.0     369.4         337.4           1.5
20/9            1331.0     374.6         348.6           1.5
2020            1350.8     383.1         361.4           1.5
2021            1370.9     393.3         370.3           1.5
2022            1390.0     404.5         378.3           1.5

Percentage changes
2012/2011          1.6       1.3           2.1
2013/2012          1.7       0.2           3.4
2014/2013          2.1       2.5           7.1
2015/2014          2.6       0.6           2.8
2016/2015          2.9       0.8           1.8
2017/2016          1.7       0.1           4.0
2018/2017          1.1       1.0           1.7
2019/2018          1.6       1.4           3.3
2020/2019          1.5       2.3           3.7
2021/2020          1.5       2.7           2.5
2022/2021          1.4       2.8           2.1

Decomposition of growth in GDP
2012               1.1       0.3           0.3           0.2
2013               1.1       0.0           0.5           0.2
2014               1.4       0.5           1.1           0.1
2015               1.7       0.1           0.5           0.1
2016               1.9       0.2           0.3          -0.1
2017               1.0       0.1           0.5          -0.4
2018               0.8       0.2           0.4           0.0
2019               0.7       0.1           0.6           0.0
2020               0.8       0.1           0.6           0.0
2021               0.9       0.2           0.5           0.0
2022               0.9       0.2           0.4           0.0

            Domestic    Total    Total final
             demand    exports   expenditure
                         (c)

2012         1761.7     475.9        2238.0
2013         1810.0     479.9        2289.8
2014         1875.4     492.7        2367.5
2015         1921.1     517.2        2438.3
2016         1963.6     529.2        2492.8
2017         1990.5     559.1        2549.6
2018         2018.2     573.0        2591.2
20/9         2055.6     590.0        2645.7
2020         2096.8     607.7        2704.5
2021         2136.1     625.8        2761.9
2022         2174.2     644.2        2818.5

Percentage changes
2012/2011       2.3       0.2           1.8
2013/2012       2.7       0.8           2.3
2014/2013       3.6       2.7           3.4
2015/2014       2.4       5.0           3.0
2016/2015       2.2       2.3           2.2
2017/2016       1.4       5.7           2.3
2018/2017       1.4       2.5           1.6
2019/2018       1.9       3.0           2.1
2020/2019       2.0       3.0           2.2
2021/2020       1.9       3.0           2.1
2022/2021       1.8       2.9           2.0

Decomposition of growth in GDP
2012            2.2       0.1           2.3
2013            2.8       0.3           3.0
2014            3.6       0.8           4.3
2015            2.5       1.3           3.8
2016            2.2       0.6           2.9
2017            1.2       1.6           2.8
2018            1.4       1.1           2.6
2019            1.5       1.1           2.5
2020            1.6       0.9           2.5
2021            1.6       0.9           2.5
2022            1.5       0.9           2.3

             Total     Net     GDP at
            imports   trade    market
              (c)              prices

2012         485.2     -9.3    1754.7
2013         500.5    -20.5    1790.8
2014         522.8    -30.1    1845.4
2015         549.5    -32.4    1888.7
2016         576.1    -46.9    1925.3
2017         594.6    -35.5    1959.7
2018         606.6    -33.6    1987.5
20/9         624.7    -34.7    2021.0
2020         648.1    -40.4    2056.4
2021         671.1    -45.3    2090.8
2022         691.7    -47.4    2126.8

Percentage changes
2012/2011      2.7                1.5
2013/2012      3.1                2.1
2014/2013      4.5                3.1
2015/2014      5.1                2.3
2016/2015      4.8                1.9
2017/2016      3.2                1.8
2018/2017      2.0                1.4
2019/2018      3.0                1.7
2020/2019      3.7                1.8
2021/2020      3.5                1.7
2022/2021      3.1                1.7

Decomposition of growth in GDP
2012          -0.8     -0.7       1.5
2013          -0.9     -0.6       2.1
2014          -1.3     -0.5       3.1
2015          -1.5     -0.1       2.3
2016          -1.4     -0.8       1.9
2017          -0.9      0.7       1.8
2018          -0.7      0.5       1.9
2019          -0.7      0.4       1.9
2020          -0.8      0.1       1.7
2021          -0.9      0.1       1.6
2022          -0.7      0.2       1.6

Notes: (a) Non-profit institutions serving
households, (b) Including acquisitions less
disposals of valuables and quarterly alignment
adjustment, (c) Includes Missing Trader Intra-
Community Fraud, (d) Components may not add up
to total GDP growth due to rounding and the
statistical discrepancy included in GDP

Table A4. External sector

            Exports of   Imports of      Net
            goods (a)    goods (a)    trade in
                                      goods (a)

            billion [billion], 2015 prices (b)

2012            266.9        365.6       -98.7
2013            264.1        375.3      -111.2
2014            272.9        392.0      -119.1
2015            288.8        407.4      -118.6
2016            286.2        425.7      -139.4
2017            306.6        439.9      -133.3
2018            3/9.7        448.8      -129.2
2019            339.2        465.5      -126.3
2020            354.3        485.4      -131.2
2021            367.6        504.6      -137.0
2022            379.8        521.3      -141.4

Percentage changes
2012/2011        -1.7          2.4
2013/2012        -1.0          2.7
2014/2013         3.3          4.4
2015/2014         5.8          3.9
2016/2015        -0.9          4.5
2017/2016         7.1          3.3
2018/2017         4.2          2.0
2019/2018         6.1          3.7
2020/2019         4.5          4.3
2021/2020         3.7          3.9
2022/2021         3.3          3.3

             Exports      Imports        Net
               of           of        trade in
            services     services     services

            billion [billion], 2015 prices (b)

2012           208.5        119.3         89.2
2013           216.2        125.0         91.2
2014           220.0        130.7         89.3
2015           228.4        142.1         86.3
2016           242.9        150.4         92.5
2017           252.5        154.7         97.8
2018           253.3        157.7         95.6
2019           250.9        159.2         91.7
2020           253.4        162.7         90.8
2021           258.3        166.5         91.7
2022           264.4        170.4         94.0

Percentage changes
2012/2011        3.3          4.0
2013/2012        3.7          4.8
2014/2013        1.7          4.5
2015/2014        3.8          8.8
2016/2015        6.4          5.8
2017/2016        3.9          2.9
2018/2017        0.3          1.9
2019/2018       -1.0          0.9
2020/2019        1.0          2.2
2021/2020        1.9          2.4
2022/2021        2.4          2.3

               Export        World     Terms of   Current
               price       trade (d)   traded)    balance
            competitive-
              ness (c)

                           2015=100               % of GDP

2012               96.4        88.8       95.6       -4.2
2013               97.2        91.2       97.6       -5.5
2014              100.5        95.4       99.1       -5.3
2015              100.0       100.0      100.0       -5.2
2016               95.9       103.8      101.4       -5.8
2017               93.2       107.4      101.7       -4.1
2018               93.2       112.9       98.7       -4.0
2019               92.3       118.2       99.1       -3.8
2020               91.8       123.0       99.6       -3.9
2021               91.3       127.5       99.8       -3.7
2022               90.9       131.8       99.8       -3.4

Percentage changes
2012/2011           1.6         1.6        0.9
2013/2012           0.8         2.8        2.1
2014/2013           3.4         4.6        1.5
2015/2014          -0.5         4.8        0.9
2016/2015          -4.1         3.8        1.4
2017/2016          -2.8         3.5        0.3
2018/2017           0.0         5.1       -2.9
2019/2018          -0.9         4.8        0.4
2020/2019          -0.6         4.1        0.5
2021/2020          -0.6         3.6        0.2
2022/2021          -0.4         3.4       -0.1

Notes: (a) Includes Missing Trader Intra-Community
Fraud, (b) Balance of payments basis, (c) A rise denotes
a loss in UK competitiveness, (d) Weighted by import shares
in UK export markets, (e) Ratio of average value of exports
to imports.

Table A5. Household sector

            Average (a)    Compen-     Total       Gross
             earnings     sation of   personal   disposable
                          employees    income      income

             2015=100        billion [pounds sterling],
                                  current prices

2012              96.0       849.4     1484.0       1166.3
2013              98.7       883.5     1535.1       1208.2
2014              99.0       902.3     1577.9       1243.5
2015             100.0       930.2     1669.0       1317.3
2016             103.2       968.9     1707.1       1338.4
2017             106.2      1008.6     1756.8       1367.9
2018             109.1      1046.8     1823.2       1417.7
2019             112.5      1093.5     1901.5       1477.3
2020             116.2      1139.1     1984.5       1540.5
2021             120.0      1181.3     2068.1       1603.7
2022             123.8      1221.1     2150.6       1666.4

Percentage changes
2012/2011          1.9         2.3        3.8          4.9
2013/2012          2.8         4.0        3.4          3.6
2014/2013          0.4         2.1        2.8          2.9
2015/2014          1.0         3.1        5.8          5.9
2016/2015          3.2         4.2        2.3          1.6
2017/2016          2.9         4.1        2.9          2.2
2018/2017          2.7         3.8        3.8          3.6
2019/2018          3.1         4.5        4.3          4.2
2020/2019          3.3         4.2        4.4          4.3
2021/2020          3.2         3.7        4.2          4.1
2022/2021          3.2         3.4        4.0          3.9

               Real           Final       Saving
            disposable     consumption   ratio (c)
            income (b)     expenditure

            billion [pounds sterling],   per cent
                    2015 prices

2012            1224.2         1162.4         9.3
2013            1238.9         1182.5         8.6
2014            1250.8         1207.6         8.4
2015            1317.2         1238.5         9.2
2016            1320.5         1274.9         7.1
2017            1323.3         1296.0         5.1
2018            1342.5         1310.0         5.5
2019            1366.7         1331.0         5.8
2020            1394.4         1350.8         6.3
2021            1420.2         1370.9         6.6
2022            1443.1         1390.0         6.8

Percentage changes
2012/2011          2.7            1.6
2013/2012          1.2            1.7
2014/2013          1.0            2.1
2015/2014          5.3            2.6
2016/2015          0.2            2.9
2017/2016          0.2            1.7
2018/2017          1.5            1.1
2019/2018          1.8            1.6
2020/2019          2.0            1.5
2021/2020          1.8            1.5
2022/2021          1.6            1.4

              House         Net
            prices (d)   worth to
                          income
                         ratio (e)

2012             87.6         6.3
2013             89.9         6.2
2014             97.1         6.7
2015            102.9         6.8
2016            110.1         7.3
2017            115.2         7.4
2018            120.4         7.2
2019            123.4         7.0
2020            124.8         6.8
2021            125.7         6.7
2022            126.2         6.6

Percentage changes
2012/2011         0.4
2013/2012         2.6
2014/2013         8.0
2015/2014         6.0
2016/2015         7.0
2017/2016         4.7
2018/2017         4.5
2019/2018         2.5
2020/2019         1.2
2021/2020         0.7
2022/2021         0.4

Notes: (a) Average earnings equals total labour compensation
divided by the number of employees, (b) Deflated by consumers'
expenditure deflator, (c) Includes adjustment for change in net
equity of households in pension funds, (d) Office for National
Statistics, mix-adjusted, (e) Net worth is defined as housing
wealth plus net financial assets.

Table A6. Fixed investment and capital

billion [pounds sterling], 2015 prices

                           Gross fixed investment

             Business      Private      General
            investment   housing (a)   government   Total

2012            160.0          58.5         56.7    275.2
2013            164.8          65.2         54.7    284.6
2014            173.2          71.5         60.0    304.7
2015            179.7          75.0         58.5    313.2
2016            178.8          80.7         59.3    318.8
2017            183.2          86.8         61.6    331.7
2018            187.1          88.3         61.9    337.4
2019            193.2          92.1         63.2    348.6
2020            198.3          96.0         67.1    361.4
2021            202.7          99.9         67.8    370.3
2022            205.9         103.8         68.6    378.3

Percentage changes
2012/2011         7.3          -1.6         -7.6      2.1
2013/2012         3.0          11.4         -3.6      3.4
2014/2013         5.1           9.7          9.8      7.1
2015/2014         3.7           4.9         -2.6      2.8
2016/2015        -0.5           7.6          1.3      1.8
2017/2016         2.4           7.6          4.0      4.0
2018/2017         2.1           1.7          0.5      1.7
2019/2018         3.3           4.2          2.1      3.3
2020/2019         2.6           4.2          6.1      3.7
2021/2020         2.2           4.1          1.1      2.5
2022/2021         1.6           3.9          1.2      2.1

                          Corporate
               User         prone        Capital stock
              cost of     share of
            capital (%)    GDP (%)    Private   Public (b)

2012              13.1        24.0    3226.1       1002.4
2013              12.2        24.0    3176.9       1009.2
2014              12.2        25.1    3216.2       1051.4
2015              11.0        24.5    3251.6       1066.4
2016              10.8        24.2    3304.7       1078.8
2017              11.9        24.2    3349.6       1108.2
2018              12.2        24.5    3396.8       1137.5
2019              12.7        25.2    3450.6       1167.0
2020              12.8        26.1    3509.5       1199.6
2021              13.0        26.7    3572.6       1233.7
2022              13.1        27.3    3638.6       1269.3

Percentage changes
2012/2011         -3.4        -1.0       0.7          0.4
2013/2012         -6.8         0.0      -1.5          0.7
2014/2013         -0.2         4.6       1.2          4.2
2015/2014         -9.8        -2.4       1.1          1.4
2016/2015         -1.8        -1.3       1.6          1.2
2017/2016         10.4         0.0       1.4          2.7
2018/2017          2.1         1.2       1.4          2.6
2019/2018          3.9         3.0       1.6          2.6
2020/2019          0.8         3.3       1.7          2.8
2021/2020          1.8         2.6       1.8          2.8
2022/2021          1.0         2.1       1.8          2.9

Notes: (a) Includes private sector transfer costs of non-produced
assets, (b) Including public sector non-financial corporations.

Table A7. Productivity and the labour market

Thousands

                   Employment

            Employees   Total (a)      ILO       Labour
                                    unemploy-   force (b)
                                      ment

2012           25213       29697        2572       32269
2013           25515       30045        2474       32519
2014           25962       30755        2026       32781
2015           26505       31284        1781       33064
2016           26760       31727        1633       33360
2017           27068       32057        1480       33537
2018           27341       32326        1396       33721
2019           27694       32470        1413       33883
2020           27930       32535        1514       34050
2021           28057       32613        1604       34216
2022           28102       32758        1626       34383

Percentage changes
2012/2011        0.4         1.1        -0.8         0.9
2013/2012        1.2         1.2        -3.8         0.8
2014/2013        1.7         2.4       -18.1         0.8
2015/2014        2.1         1.7       -12.1         0.9
2016/2015        1.0         1.4        -8.3         0.9
2017/2016        1.2         1.0        -9.4         0.5
2018/2017        1.0         0.8        -5.7         0.6
2019/2018        1.3         0.4         1.2         0.5
2020/2019        0.9         0.2         7.2         0.5
2021/2020        0.5         0.2         5.9         0.5
2022/2021        0.2         0.4         1.3         0.5

                               Productivity
                                (2015=100)

            Population   Per hour   Manufacturing       ILO
            of working                              unemployment
             age (c)                                    rate

2012            40507       98.7           100.3        8.0
2013            40552       98.3           100.0        7.6
2014            40683       99.1           100.8        6.2
2015            40873      100.0           100.0        5.4
2016            41031      100.3           100.6        4.9
2017            41156      101.0           102.2        4.4
2018            41275      101.8           106.8        4.1
2019            41396      103.0           112.3        4.2
2020            4/5/7      104.5           116.9        4.4
2021            41638      106.0           121.2        4.7
2022            41760      107.3           125.1        4.7

Percentage changes
2012/2011        -0.1       -0.7            -2.2
2013/2012         0.1       -0.4            -0.4
2014/2013         0.3        0.7             0.9
2015/2014         0.5        1.0            -0.8
2016/2015         0.4        0.3             0.6
2017/2016         0.3        0.6             1.5
2018/2017         0.3        0.8             4.6
2019/2018         0.3        1.2             5.1
2020/2019         0.3        1.5             4.2
2021/2020         0.3        1.4             3.6
2022/2021         0.3        1.3             3.2

Notes: (a) Includes self-employed, government-supported
trainees and unpaid family members, (b) Employment plus
ILO unemployment, (c) Population projections are based
on annual rates of growth from 2014-based population
projections by the ONS.

Table A8. Public sector financial balance and borrowing requirement

billion [pounds sterling], fiscal years

                                                    2014-15    2015-16

Current receipts:       Taxes on income               385.3      400.7
                        Taxes on expenditure          232.3      242.6
                        Other current receipts         37.8       36.2

                        Total                         655.4      679.5
                        (as a % of GDP)                35.4       35.7

Current expenditure:    Goods and services            359.6      363.9
                        Net social benefits paid      230.6      232.8
                        Debt interest                  37.0       38.3
                        Other current expenditure      50.2       49.4

                        Total                         677.3      684.3
                        (as a % of GDP)                36.6       35.9

Depreciation                                           39.0       40.1

Surplus on public sector current budget (a)           -61.0      -44.9
(as a % of GDP)                                        -3.3       -2.4

Gross investment                                       76.0       75.0
Net investment                                         37.0       34.9
(as a % of GDP)                                         2.0        1.8

Total managed expenditure                             753.3      759.3
(as a % of GDP)                                        40.7       39.9

Public sector net borrowing                            97.9       79.8
(as a % of GDP)                                         5.3        4.2

Financial transactions                                  4.9       15.9
Public sector net cash requirement                     93.0       63.9
(as a % of GDP)                                         5.0        3.4
Public sector net debt (% of GDP)                      83.3       83.1

GDP deflator at market prices (2015=100)               99.7      100.4
Money GDP                                            1852.1     1904.6

Financial balance under Maastricht (% of GDP) (b)      -5.4       -4.2
Gross debt under Maastricht (% of GDP) (b)             87.4       88.2

                                                    2016-17    2017-18

Current receipts:       Taxes on income               430.4      447.6
                        Taxes on expenditure          251.5      260.6
                        Other current receipts         37.0       36.1

                        Total                         719.0      743.2
                        (as a % of GDP)                36.2       36.3

Current expenditure:    Goods and services            371.3      376.6
                        Net social benefits paid      233.7      235.7
                        Debt interest                  40.4       44.7
                        Other current expenditure      49.6       52.3

                        Total                         694.9      709.2
                        (as a % of GDP)                35.0       34.6

Depreciation                                           40.8       40.9

Surplus on public sector current budget (a)           -16.7       -7.0
(as a % of GDP)                                        -0.9       -0.3

Gross investment                                       79.9       89.0
Net investment                                         39.1       48.0
(as a % of GDP)                                         2.0        2.3

Total managed expenditure                             774.8      798.2
(as a % of GDP)                                        39.0       39.0

Public sector net borrowing                            55.9       55.0
(as a % of GDP)                                         2.8        2.7

Financial transactions                                -65.0      -75.4
Public sector net cash requirement                    120.8      130.4
(as a % of GDP)                                         6.1        6.4
Public sector net debt (% of GDP)                      85.7       87.9

GDP deflator at market prices (2015=100)              102.6      104.2
Money GDP                                            1985.0     2048.6

Financial balance under Maastricht (% of GDP) (b)      -3.0       -1.9
Gross debt under Maastricht (% of GDP) (b)             88.2       86.0

                                                    2018-19    2019-20

Current receipts:       Taxes on income               471.1      494.1
                        Taxes on expenditure          271.1      283.2
                        Other current receipts         34.2       33.8

                        Total                         768.0      805.7
                        (as a % of GDP)                36.3       36.5

Current expenditure:    Goods and services            385.9      399.7
                        Net social benefits paid      232.9      237.9
                        Debt interest                  45.6       48.1
                        Other current expenditure      57.4       68.0

                        Total                         721.7      753.7
                        (as a % of GDP)                34.1       34.2

Depreciation                                           40.9       42.2

Surplus on public sector current budget (a)             5.4        9.8
(as a % of GDP)                                         0.3        0.4

Gross investment                                       95.3      100.8
Net investment                                         54.4       58.6
(as a % of GDP)                                         2.6        2.7

Total managed expenditure                             817.0      854.5
(as a % of GDP)                                        38.7       38.8

Public sector net borrowing                            48.9       48.8
(as a % of GDP)                                         2.3        2.2

Financial transactions                                 -6.3      -10.5
Public sector net cash requirement                     55.2       59.3
(as a % of GDP)                                         2.6        2.7
Public sector net debt (% of GDP)                      88.2       88.4

GDP deflator at market prices (2015=100)              105.9      108.6
Money GDP                                            2113.8     2204.7

Financial balance under Maastricht (% of GDP) (b)      -4.0       -3.8
Gross debt under Maastricht (% of GDP) (b)             86.1       84.6

                                                    2020-21    2021-22

Current receipts:       Taxes on income               515.3      540.4
                        Taxes on expenditure          293.7      304.6
                        Other current receipts         35.3       36.7

                        Total                         838.5      875.7
                        (as a % of GDP)                36.5       36.6

Current expenditure:    Goods and services            417.4      437.5
                        Net social benefits paid      246.8      256.4
                        Debt interest                  50.8       53.9
                        Other current expenditure      70.7       73.0

                        Total                         785.7      820.8
                        (as a % of GDP)                34.2       34.3

Depreciation                                           43.5       44.9

Surplus on public sector current budget (a)             9.4       10.0
(as a % of GDP)                                         0.4        0.4

Gross investment                                      109.1      110.6
Net investment                                         65.7       65.7
(as a % of GDP)                                         2.9        2.7

Total managed expenditure                             894.8      931.4
(as a % of GDP)                                        39.0       39.0

Public sector net borrowing                            56.3       55.6
(as a % of GDP)                                         2.5        2.3

Financial transactions                                 31.2       51.3
Public sector net cash requirement                     25.1        4.3
(as a % of GDP)                                          1.1       0.2
Public sector net debt (% of GDP)                      87.2       85.1

GDP deflator at market prices (2015=100)              111.2      113.8
Money GDP                                            2297.2     2389.7

Financial balance under Maastricht (% of GDP) (b)      -4.0       -4.0
Gross debt under Maastricht (% of GDP) (b)             83.5       82.4

Notes: These data are constructed from seasonally adjusted
national accounts data. This results in differences between
the figures here and unadjusted fiscal year data. Data exclude
the impact of financial sector interventions, but include flows
from the Asset Purchase Facility of the Bank of England, (a) Public
sector current budget surplus is total current receipts less total
current expenditure and depreciation, (b) Calendar year.

Table A9. Saving and investment

As a percentage of GDP

                                                 General
         Households         Companies           government

       Saving   Invest-   Saving   Invest-   Saving   Invest-
                 ment               ment               ment

2012    6.7       3.4      9.2       9.7      -4.4      2.6
2013    6.2       3.8      7.2      10.1      -2.7      2.5
2014    6.0       3.9      8.4      10.5      -2.6      2.6
2015    6.6       3.9      6.4      10.5      -1.2      2.5
2016    5.0       4.2      6.5      10.3      -0.4      2.5
2017    3.6       4.4      8.6      10.1       0.8      2.5
2018    3.9       4.5      8.9      10.4       0.8      2.6
2019    4.0       4.6      8.8      10.5       1.0      2.6
2020    4.4       4.7      8.9      10.6       1.0      2.8
2021    4.6       4.9      9.0      10.6       1.0      2.8
2022    4.8       5.0      9.2      10.6       1.0      2.7

                           Finance from
        Whole economy        abroad (a)

       Saving   Invest-   Total   Net factor     Net
                 ment               income     national
                                                saving

2012    11.5     15.7      4.2       1.0         -0.8
2013    10.8     16.3      5.5       2.0         -1.5
2014    11.8     17.1      5.3       2.0         -0.4
2015    11.8     17.0      5.2       2.2         -0.5
2016    11.2     17.0      5.8       2.5         -1.1
2017    13.0     17.0      4.1       1.6          0.7
2018    13.5     17.4      4.0       0.7          1.3
2019    13.9     17.7      3.8       0.6          1.7
2020    14.3     18.1      3.9       0.6          2.0
2021    14.6     18.3      3.7       0.3          2.4
2022    14.9     18.4      3.4       0.0          2.7

Notes: Saving and investment data are gross of depreciation
unless otherwise stated, (a) Negative sign indicates
a surplus for the UK.

Table A10. Medium and long-term projections

All figures percentage change unless otherwise stated

                                     2014     2015       2016    2017

GDP (market prices)                   3.1      2.3        1.9     1.8
Average earnings                      0.4      1.0        3.2     2.9
GDP deflator (market prices)          1.7      0.5        2.0     2.0
Consumer Prices Index                 1.4      0.1        0.7     2.7
Per capita GDP                        2.3      1.6        1.1     1.2
Whole economy productivity (a)        0.7      1.0        0.3     0.6
Labour input (b)                      2.8      1.5        1.4     1.2
ILO unemployment rate (%)             6.2      5.4        4.9     4.4
Current account (% of GDP)           -5.3     -5.2       -5.8    -4.1
Total managed expenditure
  (% of GDP)                         41.0     40.0       39.2    38.8
Public sector net borrowing
  (% of GDP)                          5.8      4.4        3.4     2.4
Public sector net debt (% of GDP)    82.2     83.8       83.6    86.3
Effective exchange rate
  (2011 = 100)                      110.2    116.3      104.8    99.3
Bank Rate (%)                         0.5      0.5        0.4     0.3
3 month interest rates (%)            0.5      0.6        0.5     0.4
10 year interest rates (%)            2.5      1.8        1.3     1.2

                                      2018    2019       2020

GDP (market prices)                   1.4      1.7        1.8
Average earnings                      2.7      3.1        3.3
GDP deflator (market prices)          1.2      2.5        2.4
Consumer Prices Index                 2.4      2.1        2.0
Per capita GDP                        0.8      1.1        1.2
Whole economy productivity (a)        0.8      1.2        1.5
Labour input (b)                      0.6      0.5        0.2
ILO unemployment rate (%)             4.1      4.2        4.4
Current account (% of GDP)           -4.0     -3.8       -3.9
Total managed expenditure
  (% of GDP)                         38.8     38.7       38.9
Public sector net borrowing
  (% of GDP)                          2.5      2.2        2.4
Public sector net debt (% of GDP)    88.1     88.3       87.9
Effective exchange rate
  (2011 = 100)                      103.3    103.9      104.0
Bank Rate (%)                         0.6      1.1        1.6
3 month interest rates (%)            0.8      1.3        1.8
10 year interest rates (%)            1.6      2.3        2.8

                                     2021     2022    2023-27

GDP (market prices)                   1.7      1.7        1.6
Average earnings                      3.2      3.2        3.3
GDP deflator (market prices)          2.3      2.3        2.4
Consumer Prices Index                 2.0      2.0        2.1
Per capita GDP                        1.1      1.2        1.1
Whole economy productivity (a)        1.4      1.3        1.2
Labour input (b)                      0.3      0.5        0.4
ILO unemployment rate (%)             4.7      4.7        4.9
Current account (% of GDP)           -3.7     -3.4       -3.0
Total managed expenditure
  (% of GDP)                         39.0     39.0       39.5
Public sector net borrowing
  (% of GDP)                          2.4      2.3        2.3
Public sector net debt (% of GDP)    86.4     85.6       88.8
Effective exchange rate
  (2011 = 100)                      104.1    104.2      103.9
Bank Rate (%)                         2.0      2.3        3.5
3 month interest rates (%)            2.2      2.5        3.7
10 year interest rates (%)            3.2      3.6        4.1

Notes: (a) Per hour.

Caption: Figure 1. Real GDP growth (per cent per quarter)

Caption: Figure 2. GDP growth fan chart (per cent per annum)

Caption: Figure 3. CPI inflation fan chart (per cent per annum)

Caption: Figure 4. Market-implied paths for short-term interest rates and NIESR forecast

Caption: Figure 5. Contributions to GDP growth

Caption: Figure 6. Business investment in the UK, France, Germany and Italy

Caption: Figure 7. BoE agents recruitment difficulties

Caption: Figure 8. BoE agents labour costs

Caption: Figure 9. International productivity comparisons

Caption: Figure 10. Government consumption, annual growth

Caption: Figure 11. Public finances forecast

Caption: Figure 12. OBR productivity and employment growth surprises

Caption: Figure 13. UK sectoral financial balances

Table 1. Summary of the forecast Percentage change

                              2014    2015    2016

GDP                            3.1     2.3     1.9
Per capita GDP                 2.3     1.6     1.1

CPI Inflation                  1.4     0.1     0.7
RPI Inflation                  2.4     1.0     1.7

RPDI                           1.0     5.3     0.2
Unemployment, %                6.2     5.4     4.9
Bank Rate, %                   0.5     0.5     0.4
Long Rates, %                  2.5     1.8     1.3
Effective exchange rate        7.4     5.6    -9.9

Current account as % of GDP   -5.3    -5.2    -5.8

Net borrowing as % of GDP      5.3     4.2     2.8
Net debt as % of GDP          83.3    83.1    85.7

                              2017    2018    2019

GDP                            1.8     1.4     1.7
Per capita GDP                 1.2     0.8     1.1

CPI Inflation                  2.7     2.4     2.1
RPI Inflation                  3.6     3.9     3.9

RPDI                           0.2     1.5     1.8
Unemployment, %                4.4     4.1     4.2
Bank Rate, %                   0.3     0.6     1.1
Long Rates, %                  1.2     1.6     2.3
Effective exchange rate       -5.2     4.1     0.6

Current account as % of GDP   -4.1    -4.0    -3.8

Net borrowing as % of GDP      2.7     2.3     2.2
Net debt as % of GDP          87.9    88.2    88.4

                              2020    2021    2022

GDP                            1.8     1.7     1.7
Per capita GDP                 1.2     1.1     1.2

CPI Inflation                  2.0     2.0     2.0
RPI Inflation                  3.5     3.6     3.4

RPDI                           2.0     1.8     1.6
Unemployment, %                4.4     4.7     4.7
Bank Rate, %                   1.6     2.0     2.3
Long Rates, %                  2.8     3.2     3.6
Effective exchange rate        0.1     0.1     0.0

Current account as % of GDP   -3.9    -3.7    -3.4

Net borrowing as % of GDP      2.5     2.3     2.3
Net debt as % of GDP          87.2    85.1    86.4

Notes: RPDI is real personal disposable income.
PSNB is public sector net borrowing. PSND is public
sector net debt, (a) Fiscal year, excludes the impact
of financial sector interventions, but includes the flows
from the Asset Purchase Facility of the Bank of England.
Annual averages unless stated otherwise.