Recovery Of Economic Activity Research Articles

WORLD OUTLOOK

The strong recovery in economic activity in Europe coupled with persistently rapid growth in North America has focused attention on whether we are about to see another boom‐bust cycle in the world economy. Our central assessment is a fairly optimistic view where the present recovery is succeeded by a period of steady growth and continued low inflation. However our alternative scenarios indicate that this central assessment could be disturbed by a number of factors.

UK Economic Prospects and Policy Dilemmas

Our current forecast, largely unchanged from that published in the October 1992 Economic Outlook, is for a gradual recovery in economic activity during 1993, gathering pace in the course of the year. Unemployment continues to rise through the year, and inflation remains subdued. The main risk to the forecast lies in the possibility that a continued decline in property values may check reviving confidence and lead the banks to restrict lending.The principal policy dilemma lies in the very high level of public sector borrowing, likely to rise to around 7.5 per cent of GDP on unchanged policies. The Government will need to signal its willingness to act to cut the PSBR by higher taxes or reduced spending plans. This will allow interest rates to remain low for longer, and offers the best prospects of maintaining a competitive pound and reducing the burgeoning current account deficit. There is room for a further cut in interest rates in the Budget to boost confidence and recovery, but rates may need to rise towards the end of the year if the higher prices resulting from the sterling devaluation start to feed into wage claims.The Government should also consider seriously the need for reform of the institutional framework for policy making, to help restore credibility weakened by the manner of sterling's departure from the ERM. These should include greater openness about official thinking on monetary policy, and greater autonomy, within a new framework of accountability, for the Bank of England.

Chapter I. The Home Economy

The recovery in economic activity which began last spring was interrupted during the winter months. Industrial production fell in November and December and was unchanged in January. Although output during this period was affected by strikes and unusually severe winter weather, there was only a modest rebound—a rise of ½ per cent—in February, when output was 1¾ per cent lower than in October and only 1½ per cent higher than its low point of May last year.

Chapter II. The Home Economy

The forecasts we have made for the UK economy during the past year have all shown not just the end of the current downturn, but a noticeable, if small, recovery in economic activity subsequently. On this occasion the profile differs (table 1); although the decline in GDP seems to have ended in the last quarter of 1980 there is now no forecast of a recovery before the end of 1982. As a result of upward revisions of data for the past the estimated decline in GDP in 1980 of 2.7 per cent and the forecast further decline of 1¼ per cent in 1981 are similar to those we published in November. The level of GDP suggested for 1981 is also little changed but its composition is different (table 2).

The Economic Situation: Chapter I. The Home Economy

The recovery in economic activity which took place in the third and fourth quarters of 1968 has been sharply braked in the first three months of this year.However, the picture provided by the published national income statistics of the movement in output in the last quarter of last year is a confusing one : the income and output measures showed increases of 1 per cent on the third quarter level, whilst the expenditure-based measure showed a rise of some 3½ per cent. Averaging the three gives an increase of nearly 2 per cent, but even this should probably be regarded as an overestimate of the true rise in output ; the expenditure figures throughout 1968 showed considerable variations, associated with marked movements in consumers' expenditure which were probably not correctly offset by changes in the recorded stockbuilding figures, and the fourth quarter of 1968 again saw a very large rise in consumers' expenditure, partly reflecting anticipation of the November measures.