bluuebunny/crossref_metadata_2025 huggingface dataset:
WORLD OUTLOOK
Authors: Dicks Geoffrey
Published: January 2008

The world recovery, which began at the turn of the year, gathered pace in the second quarter. We have again revked our forecast upwards and predict an increase of 2 1/2 per cent in OECD GNP in 1983 and a further 3 1/2 per cent in 1984. In its early stages the recovery was centred upon North America, though more recently it has spread to West Germany and Japan. France and Italy, however, remain in recession. Over the next 12 months this pattern is unlikely to change significantly‐in the approach to the Presidential election the US is expected to grow quite rapidly, but domestic demand will remain a restraining factor in Europe/Japan where, by historical standards, modest growth is expected. Reflecting this some inflationary pressure could re emerge in the United States towards the end of next year, though not, in this forecast, elsewhere. We continue to expect therefore that world inflation will settle in the 6–7 per cent range and that this will enable the world recovery to be sustained over the medium term.
Europe ‐ Crisis or opportunity?*
Authors: BALL JIM
Published: January 2008

This Economic Viewpoint is based on the report “Towards European Economic Recovery in the 1980s” which was written by Sir James Ball and M. Michel Albert (former head of the French Commissariat au Plan). The report was commissioned by the European Parliament.
THE AUTUMN STATEMENT
Authors: Budd Alan , Dicks Geoffrey
Published: January 2008

The Treasury's forecasts, published with the Autumn Statement, are close to those we presented in October. For domestic demand the main difference is that the Treasury has consumption growing by 3 per cent next year whereas we had forecast a growth of only 2 percent. Behind this difference lies a significant different in policy assumptions. In October we estimated that there was no scope for tux cuts, yet the Treasury's forecast assumes that there will be net cuts in taxation (over and above indexation) of £11/2bn in the next Budget. In this Forecast Release we show that the main differences are (a) that the government has raised its forecasts of sales of assets and council houses arid (b) that it expects more North Sea Oil Revenue than we do. The latter forecast depends critically on what happens to the exchange rate.

We present a revised forecast based on the new information in the Autumn Statement and incorporating the £1 1/2bn tax cuts. It is very close to the Treasury's forecast.

We also discuss the relevance of changes in North Sea oil revenue to fiscal policy and we suggest that it is misleading to treat it on a par with other sources of revenue. We then show that the suggested tax cuts of £11/2bn in the next Budget are effectively £4bn less than was indicated last March. Finally we argue that the Chancellor's claim to have kept within his Planning Totals for spending in the last three years has only been achieved by increased asset sales.
HOW LARGE A COAL INDUSTRY?
Authors: Robinson Bill
Published: January 2008

In a dispute which has so far lasted nine months, neither side has attempted to advance its cause by reasoned argument. “Negotiations” have made little head way against a starting position of non‐negotiable demands, so that the dispute has settled into a trial of strength. In October's Economic we described the back ground to the dispute; here we attempt to go a stage further by presenting estimates of the number of people who can profitably be employed in the industry. We show that the number is crucially dependent on the price of coal and the costs of producing it. It also depends on which definition of ‘uneconomic pits' is used, and what definition of marginal (avoidable) costs. We recommend using a strict definition of ’uneconomic‘ but a generous interpretation of avoidable cost, and suggest that on this basis the current level of profitable employment in the industry is some 160,000. However, future employment prospects depend on how coal prices move in relation to costs of extraction.
The Medium term Outlook
Authors: Robinson Bill
Published: January 2008

In this Forecast Release we consider the prospects for the economy after the present phase of cyclical recovery. Our central forecast, which we regard as the best medium‐term planning assumption, is that the economy slows down to a sustainable growth rate of around 1% per cent. This is in line with the underlying growth of productive capacity but not sufficient to cure unemployment. We recognise that in practice the economy may be pushed away from the underlying growth trajectory by random shocks, and we look at three major risks surrounding the present forecast: a rise in the savings ratio; a slower world recovery; and a cut in investment. We contend that the most serious of these risks is to investment, since the company sector will face a major increase in its tax bill from 1985‐6 onwards. A growth recession is thus distinctly possible in 1986, which could, for economic and electoral reasons, be the low point of the present cycle.
Why has inflation fallen?
Authors: BUDD ALAN , DICKS GEOFFREY
Published: January 2008

There is no doubt that the most encouraging aspect of Britain's economic performance in recent years has been the fall in inflation from a peak of over 20 per cent in June 1980 to a current rate of about 5 per cent. The speed at which inflation fell has taken many forecasters (including ourselves) by surprise. In this Economic Viewpoint we ask why the inflation rate has fallen. If we can understand why it has happened we are better placed to answer questions about the future. In particular we can try to decide whether the success in reducing inflation will be maintained and whether further cuts in inflation will be consistent with a fall in unemployment.
WORLD OUTLOOK
Authors: Dicks Geoffrey
Published: January 2008

In the course of 1984 growth rates in the major economies came together. This reflects a slowdown in the United States, and to a lesser extent Japan, from the middle of the year and continuing recovery in Europe. This convergence is expected to continue in 1985 when total output in the OECD area is forecast to increase by 3 per cent. Within this total it is likely that the US, West Germany and the UK all achieve about 3 per cent; Japan should grow more quickly, France more slowly. In spite of a rapid recovery in output from the late‐1982 trough, inflationary pressures remain weak. Measured in dollar terms, non‐oil commodity prices have fallen and the oil price is under considerable down wards pressure. We expect inflation to stay at about its preset level in the US, West Germany, Japan and the UK and decline further in France, Italy and other countries where policy reaction to the 1979‐80 oil price shock was delayed. In the medium term we expect the world economy to experience steady growth combined with a constant or slightly increasing inflation rate. This reflects a stable policy environment and falling real oil prices. After the excesses of the 1970s and early 1980s it is possible that the rest of the decade will experience u greater stability than at any time since the 1960s.
A BUDGET FOR STERLING AND A BUDGET FOR JOBS
Authors: Dicks Geoffrey , Robinson Bill
Published: January 2008

In our assessment macroeconomic policy is now tighter as consequence of the Budget than we had assumed in February. We interpret the Budget speech as indicating higher interest rates (tighter monetary policy) and, in consequence, a stronger exchange rate. On this basis we find that the prospects for inflation are slightly better than before, though output is weaker. Additionally we forecast a PSBR in 1985‐6 of £ 63/4bn, below the official forecast of £7.1bn but in line with our February forecast. Of £7.1bn but in line with our February forecast. Because output is lower, however, this implies a tighter fiscal policy.

The other main change to our forecast is unemployment. The changes to National Insurance Contribution scales represent a very cheap way of reducing the cost of employing the lower paid, and we estimate that these measures, together with the extension of the Youth Training Scheme and Community Programme, will create an extra 375,000 jobs and training places by 1988. However these effects are partially offset by the effects on output of the higher interest rates and higher exchange rate that we are now forecasting. When account is also taken of the increase in labour supply that follows any increase in employment, the net effect on unemployment is to reduce it by 300,000 by 1988 compared with our February forecast.
WORLD OUTLOOK
Authors: Dicks Geoffrey , Robinson Bill
Published: January 2008

The world recovery, now three years old, has proved more resilient than many expected and will be sustained in 1986 by lower oil prices. Fears that the early‐1985 slowdown would turn into renewed recession have proved unfounded, as output in both the United States and Europe picked up in the second half of the year. The improvement stemmed from lower interest rates, falling inflation and weak commodity prices and was further helped by the sharp correction to the value of the dollar following September's G5 agreement. To these factors, which will remain supportive this year, is now added a lower oil price. The recovery in world output has not produced an increase in oil demand and, as the oil price rise of 1979‐80 gave a further boost to supply from non‐OPEC sources, a severe imbalance has emerged in the oil market. To maintain a £26 marker price (itself cut from £29 last July) has required a cutback in production of ever‐increasing magnitude from Saudi Arabia in its role as OPEC's swing producer. Now that Saudi Arabia has abandoned this role in favour of stabilising its market share, oil prices have fallen sharply. We assume that the oil price will fall to £20 by the end of this year, a fall in real terms of 30 per cent. As a result the world recovery is given renewed impetus and output accelerates over the next twelve months. A cyclical peak in activity emerges in 1987, after which output growth settles at 2%‐3 per cent and inflation at 4–5 per cent.
The London Business School with Gower Publishing
Authors: Dicks Geoffrey , Keating Giles , Robinson Bill
Published: January 2008

Collapsing oil prices and a falling dollar set the background to a Budget in which the Chancellor, hamstrung by lower oil revenues, was seen as having little room for manoeuvre. In fact the sharp fall in the sterling price of oil has provided him with the perfect excuse for not making significant cuts in personal income tax that were largely irrelevant to the needs of the economy. Instead of a boost to household demand we have had, thanks to OPEC, a transfer to companies in the form of a reduction in costs. This should enable them to expand output against a background of falling inflation. Our post‐Budget assessment of macroeconomic prospects (Section I), made on the Treasury's assumption of a $15 oil price, shows output growing by 2 1/2 per cent this year and inflation falling below 3 per cent in 1987. We are thus less optimistic than the Treasury about output but more optimistic about inflation.

How was the Chancellor able, within the confines of the Medium‐Term Financial Strategy, to give anything away having lost so much oil revenue? A detailed analysis of the PSBR forecast (Section II) reveals good reasons why non‐oil tax revenues should be some £3 1/2n higher than forecast this time last year. But, because we still expect public spending to be above the official figures, our PSBR forecast is £1bn higher than the Treasury's.

Although the macroeconomic impact of the Budget was small (especially in relation to that of the fall in oil prices which preceded it), it continued the process of tax reform. We focus, in Section III, on the new proposals to deal with the problem of the pension fund surpluses to which we drew attention in the November issue of Financial Outlook. We conclude that the proposed measures could have a larger effect on tax revenues in the longer term than is indicated by the Treasury's Budget estimates.
The London Business School with Gower Publishing
Authors: ROBINSON BILL
Published: January 2008

Immediately after the year‐long coal strike the prospects for the industry appeared remarkably bright. Normal production was resumed more quickly than expected. The fall in the exchange rate, especially against the dollar, had greatly lessened the threat from cheap imported coal. The number of miners employed in deep mines was quickly reduced from 180,000 to 140,000, and the closure of uneconomic pits enabled production in the new super‐pits to be stepped up. The resulting sharp rise in productivity meant that the underlying position of the industry was close to break‐even, and at the coal prices prevailing last year could even have made a modest profit.

The fall in the price of oil has plunged the industry into a new crisis. To preserve coal's market share, its price must follow oil prices downwards, which will drastically reduce the amount of coal that can be profitably produced in this country. with obvious implications for employment. In this Forecast Release we present some calculations (using the approach we adopted in earlier articles published in October and December 1984) which show the scale of the required reductions, and consider the policy implications. We conclude that there 13 no case for constraining coal prices to remain above true market‐clearing levels, since this amounts to a concealed tax on coal‐ (and hence electricity‐) users which would hamper the employment‐creating growth of manufacturing industry. There is however a strong case for allowing the coal industry to increase its borrowing to cover the deficits that result from keeping higher‐cost pits in production in order to reduce future dependence on imported oil.
Briefing Paper: Public expenditure control in the 1980s
Authors: LIKIERMAN ANDREW , BLOOMFIELD SUSAN
Published: January 2008

The past few months have seen well‐leaked ministerial bids for additional resources as the government prepares to consider allocations for the 1987‐8 financial year. There has also been an increasing number of calls from within the Conservative party for more public expenditure as a response to poor performance in the polls. The first part of this Briefing Paper provides a new dimension to the discussion of future spending plans by analysing the record of controlling public expenditure in the past. It outlines the reasons for uncertainty and the various ways by which the government has sought to keep expenditure under control and the limitations of the available information.

On the basis of this analysis we look at the future and conclude that the government is unlikely to be able to keep expenditure within the plan for the coming year, or indeed for the rest of the decade. There has been a regular pattern of overspending in the past and this cannot be entirely explained by such factors as the miners' strike and the Falklands. Another conclusion is that the government has so far chosen to be seen to be keeping plans for expenditure growth down rather than providing realistic plans which allow for overspending, and is likely to continue to do so in the future.

At a disaggregated level, analysis of the pressures on three major spending departments – Defence, the DHSS and Education and Science – suggests that these are unlikely to be completely offset by efficiency savings. Indeed it may be more difficult to make savings in the future because of past success in eliminating inefficiencies and slack in the system. The freedom of manoeuvre available to the government, including the use of the reserve, adjusting proceeds from the privatisation programme and the possibility of adjusting the figures themselves, is less than in the recent past. And the greatest potential scope for manoeuvre – policy changes to cut spending in areas that have a significant impact on the totals – is effectively denied a government wishing to present a caring image in the run‐up to a general election.
Is the Economy Overheating?
Authors: DICKS GEOFFREY , BUDD ALAN
Published: January 2008

In the last year total output has risen 4 per cent and manufacturing is up 6 per cent. Unemployment has fallen by 400,000. The current account, which was in surplus in the first half of the year, has moved back into deficit. Does this mean that the economy is “over‐ heating”? In the context of our forecast we examine this issue; we consider how rapidly supply can increase and how fast demand is increasing. We conclude that the growth of output in the last year was initially driven by supply and that, more recently, domestic demand has been growing very rapidly. The emergence of a current account deficit is evidence of excess domestic demand but from now on we expect demand to grow less rapidly. With non‐oil supply expanding at a rate in excess of 3 per cent, we forecast steady output growth and little change in either inflation or the current account. In our judgement, the economy, though hot, is not overheating.
THE OUTLOOK FOR 1988
Authors: Budd Alan , Dicks Geoffrey
Published: January 2008

We have updated our October forecast to take into account recent events in equity and foreign exchange markets as well as the Autumn Statement. As far as the prospects for the world economy are concerned, we have taken a gloomier view than the Treasury. On this basis we also obtain slower growth in the UK next year: output is forecast to rise 2.2 per cent compared with 2.8 per cent in October and 2.7 per cent in the official forecast. Inflation and the balance of payments are little changed from October. For next year's Budget we continue to assume a cut in the standard rate of income tax to 25 per cent though, on our calculations, this requires a PSBR it 1988–9 of newly £2bn whereas the Autumn Statement forecast assumed a constant PSBR of £1bn
WHY IS UNEMPLOYMENT FALLING?
Authors: Dicks Geoffrey
Published: January 2008

Unemployment fell a record 66,000 in May and the total dropped below the symbolic 3 million level for the first time in nearly five years. In June unemployment declined again, for the 12th successive month, and by nearly 300,000 on a year earlier. What is causing this? Is it, as the government claims, the result of improving employment opportunities or, as its critics claim, a combination of statistical trickery and deliberate frightening off the register of those who have given up all hope of getting a job? Our analysis shows that the drop in unemployment last year and in the early months of 1987 owed much to the restart programme and other special measures; more recently there is evidence of strong employment growth.
WORLD OUTLOOK
Authors: Dicks Geoffrey , Breedon Francis
Published: January 2008

World output, which was strengthening immediately prior to last October, appears to have barely suffered in the short term from the stock market crash. Apart from an early reaction by US consumers ‐ since reversed ‐ demand is proving robust and in early 1988 OECD industrial production is, we estimate, 6 per cent up on year‐earlier levels, with GNP more than 4 per cent higher. Indeed such is the strength of activity that the present balance of risk is not that recession is imminent but that inflation may pick up again. In the United States, where activity rates are at their highest level for eight years and unemployment is at a fourteen‐year low, monetary policy has been tightened and interest rates are moving higher. The Bundesbank is keen to follow suit and the BoJ is keeping the situation under review. Nevertheless, with wages in most countries still adjusting to the low inflation rates of the last two years, there is little evidence yet that prices are accelerating.

We expect to see world interest rates edging higher in the second half of the year as recorded inflation picks lip. But we believe that underlying inflation remains low and that, even on the assumption that oil prices return to 18 a barrel, OECD consumer price inflation will peak early next year at a little over 4 per cent. Tighter monetary policy is also expected to hold back demand over the next 12 months. Consequently, we expect some weak‐ ness in output in the first half of next year but discount the possibility of a severe recession. GNP growth in the OECD area is forecast to decline from the 3 per cent rate of 1987–8 to a little over 2 per cent next year and to a sustainable 2½ per cent p.a. over the medium term.
The London Business School with Gower Publishing
Authors: Breedon Francis , Currie David , Dicks Geoffrey
Published: January 2008

The Autumn Statement updated the government's spending plans and its forecast from those announced in the Budget in March. On both counts there is very little difference between the Treasury view and our own forecast released in October. The Treasury supports our projection that output and demand will decelerate in 1989, that inflation will peak in the first half of the year at about 7 per cent and fall back to 5 per cent by the end of the year and that the deficit on the current account of the balance of payments will narrow only marginally over the next 12 months. On public spending in 1989–90, our October forecast was close to the unchanged official figures. It was clear to us ‐ though not to most City commentators ‐ that savings on unemployment benefit, debt interest and elsewhere would enable greater spending on programmes within an unchanged planning total. In later years the government has upped its expenditure plans from those announced a year ago, as we had assumed it would. As a result, the Autumn Statement projects significant increases in real public spending from now on. We show that, under a more appropriate inflation forecast, public spending rises nearly 2 per cent next year but falls back in 1990–92. Finally we argue that, unless the Chancellor decides to run an even larger PSDR (public sector debt repayment) than the £12bn built into our forecast ‐ and the Autumn Statement forecast assumes a PSDR in 1989–90 similar to the expected outturn in 1988–9 of £10bn ‐ the scope for tax cuts remains intact.
The London Business School Gower Publishing
Authors: Allen Chris , Dicks Geoffrey
Published: January 2008

The worldwide monetary tightening, which was necessary to contain the inflationary effects of last year's cyclical upturn, is close to having run its course. The boom is giving way to a period of slower but more sustainable growth, while the distribution and structure of demand has turned out to be more favourable than could have been anticipated. The US economy has successfully slowed (but recession seems unlikely), whilst Japan and Europe are still expanding rapidly. The world economy thus continues to grow at a rate of around 2.75 per cent, allowing modest reductions in international current account imbalances. The impact of interest rates has been felt mainly by consumers and in the housing market, and has had only a limited effect on investment and trade. So demand has been reduced but not at the expense of a capacity expansion which will, through productivity gains, dampen inflationary pressures. We expect world inflation to fall slowly front a little above 4 per cent currently to around 3 per cent by 1992. This is above the declared objectives of policy makers but is as close to the hoped‐for soft landing as may be achievable.
The London Business School with Gower Publishing
Authors: Allen Chris , Breedon Francis , Scott Andrew
Published: January 2008

With the benefit of hindsight, we can see that the course of the world economy in 1988 was a product not so much of the stock market crash of October 1987 but of the reaction to the crash. Monetary policy and to a lesser extent fiscal policy were eased and consumer spending responded to cuts in interest rates and rising real incomes. With the world recovery in its sixth year, capacity pressures began to emerge and investment also boomed, helped by a lower cost of capital. As a result of this strong private sector demand, OECD output increased 4 per cent in 1988 as a whole and industrial production and world trade rose even more rapidly. Against the background of buoyant demand and output, inflationary fears have resurfaced. Since the spring monetary authorities in most countries have been tightening policy, raising interest rates by early 1989 above the levels which helped bring about the stock market crash. Their aim is to effect a slowdown in demand before a significant upward movement in inflation and inflationary expectations takes hold. In our judgement the present policy stance will achieve its aim of a “soft landing” for the world economy. The pick‐up in world inflation is contained below 5 per cent and by the second half of this year inflation eases, paving the way for a relaxation of monetary policy. Output growth slows from 4 per cent to 3 percent in 1989 and 2 per cent in 1990, picking up again as interest rates are lowered in 1991–2.
The London Business School with Gower Publishing
Authors: Dicks Geoffrey , Breedon Francis
Published: January 2008

Last year the Chancellor followed “the path of prudence and caution”, cutting taxes by £4bn and budgeting for a public sector surplus of £3bn. This year ‐ rather more compellingly ‐ he is travelling the same route. Against the background of a record current account deficit and rising inflation, Mr. Lawson has tightened fiscal policy, cutting taxes in 1989–90 by nearly £2bn ‐ less than is needed to offset real fiscal drag. His main priority, reaffirmed in the Budget speech, is to tackle inflation and, to this end, he chose not to revalorize excise duties. This was reinforced by a reduction in national insurance contributions, which not only benefits the low paid in relative terms, but also sharpens the incentive to supply labour at the bottom end of the wage spectrum. But this reform of national insurance is not cheap. Even though it is not practicable to implement the changes until October, the cost in 1989–90 is estimated at £1bn, rising to £2.8bn in 1990–1. This is equivalent, in PSDR terms, to a 2 per cent cut in the basic rate of income tax arid, in our post‐Budget forecast, precludes further tax cuts in 1990. Unless there is an unexpectedly large rebound in personal savings, the Chancellor is likely to find himself in his present position in a year's time: presiding over a large budget surplus but unable to reduce it significantly for fear of rekindling inflation or aggravating the current account deficit. Simply writing declining numbers for the PSDR into the MTFS offers no genuine guidance on medium‐term fiscal policy and may even be positively misleading to financial markets.
Trends and Cycles in GDP
Authors: SCOTT ANDREW , SMITH PETER
Published: January 2008

The recent experience in the UK of substantial growth in GDP following the recession of the early 1980s has led to renewed interest in the measurement and explanation of business cycles. Development of economic as well as econometric theory has improved our ability both to measure the cycle more accurately and to offer a better explanation of its behaviour. In this Briefing Paper we present an analysis of these two developments.
Economic Viewpoint: Options for UK policy within the ERM
Authors: CURRIE DAVID , DICKS GEOFFREY
Published: January 2008

Although the precise timing of the British government's decision to take sterling into the Exchange Rate Mechanism on 8 October was a surprise, the broad features of the decision were not. Indeed, we argued in the June Economic Viewpoint for entry this autumn with broad 6 per cent bands and a high central rate against the DM, illustrated at DM2.95, precisely in line with the outcome. Now that sterling is in the ERM, the conduct of UK macroeconomic policy is profoundly altered, with changes not just in its technical aspects but also in the balance of the supporting institutions. In this Viewpoint, we explore the map of macroeconomic policy in the post‐flouting, ERM context.
House Prices, Housing Investment and Demography Forecasts from the LBS/Abbey National Model of the UK Housing Market
Authors: MILNE ALISTAIR , CLARK ANDRÉ
Published: January 2008

A new housing sector has been incorporated into the London Business School model. This article outlines the new housing model, summarizes the research which has gone into its construction, and presents a forecast of the UK housing market. Using the new housing model, we forecast a moderate recovery in the housing market in the later part of 1991 and 1992. This recovery is however short‐lived and does not result in such high rates of house price increase as previous house price booms (Chart 1).

Cuts in interest rates following entry to the exchange rate mechanism of the EMS prompt a recovery in house prices from the middle of 1991. House price inflation then peaks with an increase in average UK house prices in 1992 of 11 per cent over the previous year. Increases in real personal disposable income are modest, by the standards of the 1980s, and for this reason the recovery does not develop the momentum of previous house price booms. House price inflation moderates again in 1993 falling back to around 7 per cent. Housing starts and housing investment recover only slightly from their present depressed levels.

the recovery in house prices is weaker than that foreseen in our April Forecast Release. This is because real personal disposable income is now forecast to grow more slowly during 1991. Sterling's membership of the ERM is followed by a fall in interest rates, but it is the timing of interest rate cuts rather than their magnitude which differs from the earlier forecast. The changed profile of interest rates has altered the house price forecast only marginally.
THE 1990‐91 WAGE ROUND
Authors: Burrell Andrew , Dicks Geoffrey
Published: January 2008

The 1990‐91 pay round could hardly have started against a less propitious background. Retail price inflation ‐still the principal target for wage negotiators despite its unreliability as a measure of inflation ‐is at 10 per cent and rising. The shock to oil prices will boost prices and add to wage demands ‐the natural desire to seek recompense in higher wages will be little impressed by the economist's argument that it is not possible to offset the real income shock to oil consumers by raising nominal incomes. And while cost pressures are pushing up prices, almost every other factor is working in the opposite direction. Domestic demand is at last responding to high interest rates, while the recovery in the pound has worsened UK competitiveness by 10 per cent since the start of the year and this is now taking its toll of exports, hitherto the only buoyant component of demand. The CBZ is warning forcibly that recession is beckoning. How will wages respond to a situation where a backward‐looking view points to higher settlements but a forward‐looking view indicates the need for wage moderation?
WORD OUTLOOK
Authors: Allen Chris , Burrell Andrew , Dick Geoffrey
Published: January 2008

As the world economy enters the 1990% a significant reorientation of growth and demand is taking place amongst the major economies. The desynchronuation of the economic cycle, which occurred last year as the US economy slowed down while Europe and Japan continued to advance rapidly, is likely to be taken a stage further. Europe, in particular West Germany, is expected to continue to grow quickly in the run‐up to the completion of the single EC market in 1992 and as a result of the opening of eastern Europe. Japan and the Asian NICs, adapting with an unprecedented programmed of industrial re‐tooling to their new circumstances, are already set on an accelerated growth path. In contrast, the US appears to be in for a period of sluggish growth, as the Fed attempts to press down on inflation without causing a recession. As a result we expect US output growth of only 2 per cent a year over the next few years compared with a sustainable 3 per cent in Germany and 4 per cent in Japan. Despite these differences in growth, US inflation performance lags behind that in Germany and Japan and, partly because of the sue of existing IPD flows, little progress is like& on reducing current account imbalances.
The London Business School with Gower Publishing
Authors: Currie David , Dicks Geoffrey
Published: January 2008

The Budget embodies many of the recommendations that we have put forward over the last year ‐on personal savings and the appropriate stance of macroeconomic policy ‐ but a void remains on the key issue of ERM entry. With inflation set to rise above 9 per cent in the short term, there is a danger that an inflation l sterling depreciation cycle becomes entrenched. In fiscal terms, the Budget was broadly neutral and the Chancellor con‐ firmed that the strategy is to rely on high interest rates to support the exchange rate and tame inflation. This year, with base rates of 15 per cent, we expect the pound to remain reasonably stable but in 1991‐2, as interest rates fall ‐which they are bound to ahead of the election ‐the pound could well come under pressure, so putting the government's inflation objectives at risk. ERM entry would provide the obvious support and is consistent with the Treasury forecast. Without it, inflation is unlikely to fall below 5 per cent next year.
HOUSE PRICES AND THE ECONOMY
Authors: Milne Alistair
Published: January 2008

UK house prices more than doubled from 1985 until 1989, with house price inflation over the previous year peaking at 34 per cent in the fourth quarter of 1988. The ratio of house prices to average incomes reached levels which surpassed even those experienced during the 1972‐73 house price boom. This sharp increase in housing wealth has been a major factor in the fall in the savings ratio over the past three years. This forecast release examines the prospects for future house price movements, discusses the sources of the recent house price boom and finally considers the possible impact on consumer expenditure.
Economic Viewpoint The Shape of the UK Recovery
Authors: CURRIE DAVID , DICKS GEOFFREY
Published: January 2008

Monthly economic data combined with the more optimistic tone of CBI and other surveys suggest that the recession may be drawing to a close. By the early summer it was becoming apparent that output was no longer falling; now it appears that the economy is in transition front the ‘bumping along the bottom’ phase, which lasted through the summer months, to the beginnings of a modest recovery in output and demand. The focus of interest is therefore switching away front the timing of recovery towards its shape and strength.

We have previously argued that the recovery would be led by consumer spending, that industry would not resume investment spending un ti1 demand elsewhere was picking up, and that although exports have held up remarkably well, taking some of the strain of the downturn in domestic demand, there was little prospect of a surge in world trade to provide the pre‐conditions for an export‐led recovery. What was and is needed is a recovery in consumer confidence, with a willingness to borrow at lower interest rates showing up in a reduction in the personal savings ratio.

But the recovery starts with the personal sector still having a large debt overhang from the 1988‐9 boom, which will inevitably inhibit new borrowing. Meall while the credit crunch is restricting the ability of banks to lend. Together these imply only a limited response to the interest rate cuts of the last year and would, in the absence of the EMS link with high German interest rates, argue for further interest rate reductions. But high post‐unification German rates put a floor under UK rates and will slow the recovery. The economy will do little more in 1992 than make up for the output losses of 1991 and our forecast (as in June) suggests that it will not be until 1993 that previous output peaks are passed and unemployment is stabilized.
Economic Outlook 1985‐ 1989: The London Business School with Gower Publishing: Forecast Release: THE AUTUMN STATEMENT: IF YOU CAN'T BEAT ‘EM
Authors: Currie David , Dicks Geoffrey
Published: January 2008

In announcing significant increases in public spending in the Autumn Statement, the government has recognised that the scope for further interest rate reductions ahead of the election is virtually nil. It has therefore sought to boost demand, and its own popularity, by a fiscal relaxation. It so doing, it is prepared to risk a PSBR. (excluding privatization) of £27bn, exactly in line with the estimates which we made in June of Labour Party policy. In terms of macroeconomic policy, therefore, the gap between the two parties is virtually closed, while that between Mr. Major's government and that of Mrs. Thatcher is evident. Front this starting point, we argue that honouring Mr. Laniont's pledge on income tax could be at the expense of removing tax relief on mortgage interest payments and that a Labour government which still cherishes higher public spending may be forced into continuing the privatization programme. Under either Party there is a strong political case for tax increases, or for rescinding some of the planned increase in spending, early in the life of the next Parliament in order to bring the economic and political cycles back into synchronisation from which they were disturbed by Mr. Lawson's tax‐cutting Budget of 1988.
The London Business School with Gower Publishing: Forecast Release: THE TIMING OF RECOVERY
Authors: Dicks Geoffrey
Published: January 2008

In his Budget speech the Chancellor argued that “there are good reasons to expect that the recovery will begin around the middle of this year, although initially it may be slow. As we found ten years ago, confidence revives as inflation comes down… Just as falling consumer spending contributed to the onset of recession, so returning consumer confidence is likely to lead the recovery.” Since then Mr. Lamont has detected ‘faint stirrings' of a recovery in activity, while the Prime Minister is confident of a return to growth, arguing this month that “there are far too many indications for anyone to doubt that in the second half of this year there will be a great improvement and we will be coining out of recession.” For all the official confidence that their relatively modest prognosis, which we shared in our June forecast, is proving correct, there are many who remain doubtful. The survey data, while improving, do not yet convincingly point to an upturn and there is a fear that while lower inflation and easier monetary policy would on their own produce higher spending, this effect could be outweighed by consumer caution in the face of rising unemployment. This Forecast Release examines these issues. It focuses particularly on the link between lower interest rates, falling inflation, rising unemployment and the savings ratio and finds that, on the basis of the experience in the recessions of 1975 and 1980 and the boom of 1988, it would be surprising if the savings ratio were not to head lower in the second half of the year. The latest figures on retail sales, which rose more than 1 per cent in June, suggest that this may already be happening, though this will only be confirmed by data showing a greater willingness on the part of consumers to step up their borrowing once again.
The Narrow Band Option for Mr. Lamont
Authors: CURRIE DAVID , DICKS GEOFFREY
Published: January 2008

The dilemma facing Mr. Lamont as he prepares his first Budget is the conflict between the need to keep interest rates high to maintain the commitment to sterling's ERM band and the wish to reduce interest rates to ease the severe recession in the domestic economy. In large part, this conflict is intrinsic to the government's aim to bring down UK inflation to German levels through membership of the ERM: the process of reducing inflation is always painful and costly in terms of lost output and higher unemployment. But the dilemma is made worse by the uncertainties over future policy direction, reflected in the differential between UK and German interest rates. German monetary policy is set to remain tight to hold in check the inflationary pressures that might otherwise arise from German unification. Against this background success in reducing UK interest rates will depend on the government's success in establishing the credibility of its anti‐inflation policy and of its ERM commitment. An expansionary Budget aimed at easing the recession would undermine this credibility, and remove the scope for additional interest rate reductions. An abandonment of the ERM commitment would signal the accommodation of inflation, and condemn the UK to continuing high inflation and interest rates. We argue in this Viewpoint that the best course open to the Chancellor is to adopt a broadly neutral Budget stance, and to strengthen the ERM commitment by moving to a narrow band for sterling within the ERM. This should enable the Chancellor to reduce UK interest rates again at around the time of the Budget and lay the basis for further subsequent cuts.
The London Business School with Gower Publishing: Forecast Release: THE GULF WAR: RECESSION AND RECOVERY
Authors: Dicks Geoffrey
Published: January 2008

The Iraqi invasion of Kuwait occurred at a time when many economies were in or heading towards recession. These trends were exacerbated by the Gulf crisis which had adverse effects on consumer and producer confidence. Now that the Gulf war is over, confidence is recovering but against the background of a relatively severe recession. In this Forecast Release we make use of a simple statistical tool to throw some light on how much of the downturn was due to confidence factors and thus to draw implications for the recovery. In broad terms we find that a large part of the US recession, in particular the downturn in consumer spending, was attributable to the effects on confidence of the Gulf crisis. In both the US and the UK, however, the effects on producer confidence were less marked, though here too the analysis suggests that, at its low point, producer confidence was also adversely affected by the crisis in the Gulf. The latest data show that there has been a full recovery in US consumer confidence but that producer confidence on both sides of the Atlantic remains well below pre‐Gulf trends. On this basis, therefore, we would expect a further recovery in industry's confidence over the coming months.
Economic Viewpoint: Economic Models and Economic Forecasting: Ptolemaic or Copernican?
Authors: HOLLY SEAN
Published: January 2008

Economic forecasters have come in for a lot of criticism in recent months. But this is not new. The failure to predict the boom in 1988 and ensuing inflation and balance of payments problems led to some serious re‐examination of the structure of the main macroeconometric models in the UK. The speed with which the UK economy moved into sharp recession in the second half of 1990‐ also appeared to catch most forecasters on the hop.

This Briefing Paper is not directly about forecasting; it is about macroeconometric models. However, forecasting provides by far the most extensive use of these models. Not all macroeconomic forecasters use a formal econometric model ‐ some City economists find a spreadsheet more than adequate ‐ but those that do find that they are an invaluable aid to clear thinking and provide an effective way of filtering all of the information that is available, in one form or another, about the economy.

This paper was originally intended to provide a retrospective review of the development of UK macro‐models since the late 1970s, coinciding broadly with my period at London Business School. However, it became clear that there was a need to argue more generally in favour of macro‐modelling, given the numerous assaults that this activity has sustained over the last 15 years. I want to demonstrate that the conduct of research in this area ‐ at the very least in the UK ‐ has been, and continues to be, a progressive research strategy in the sense in which philosophers of science use this term. I believe that macro‐modellers, because they have an obligation to forecast and to make the forecast public, are closer to how theoretical constructs in economics conflict with the observation of economic events, and provide a more robust testing ground for economic theories than the relatively narrow ‐ though very important ‐ confines of single equation statistical testing, that dominate academic journals.

This should not mean that every new theoretical idea should be expected to be able to survive immediately the rigours of testing within an existing macro‐model. One of the attractions of recent developments in macroeconomic theory has been an explicit attempt to seek to try to reconcile macroeconomics with micro‐economic reasoning and to derive macroeconomic principles from how rational, maximizing individuals can be expected to behave in a market economy. There is always a need periodically to re‐examine the basic postulates of any area of economics, especially one such as macroeconomics, which provides the basis for the conduct of national and international economic policy, and for providing explanations for economic cycles.

Macro‐econometric model building is a worthwhile exercise because it confronts theoretical models of how the macro‐economy is supposed to work with the hard lessons of experience. The use of these models for forecasting is therefore crucial to their continued growth and development.
Why We Should Leave the ERM
Authors: MINFORD PATRICK
Published: January 2008

The ‘liverpool Six’have called again on the government to leave the Exchange Rate Mechanism and return to monetarism with flexible exchange rates. Our reason is simple. Monetary conditions here have been tightened more than dangerously by the need to support the pound within the ERM, just as in late 1987 and early 1988 they were loosened excessively by the need to hold the pound down in the attempted ‘shadow’ phase of the ERM. The has repeatedly undermined monetary stability, and has caused first renewed inflation and now severe and protracted recession. It has also tended to produce sterling overvaluation and so chronic balance of payments difficulties; to correct these, recession will need to be prolonged. In the havoc it has wreaked, it risks fuelling demands for a return to the government intervention of he past. As a source of counter inflationary discipline it is therefore flawed. We advocate a return to monetary targeting under floating rates. This would in the short term permit interest rates to fall sharply to stimulate recovery in money supply growth and hence the economy; the exchange rate would fall to a properly valued level, removing the threat to our balance of payments. In the longer term this policy shift would recreate a framework of counter‐inflation discipline in which there could still be reasonable domestic responses to cyclical and other UK shocks.
THE ECONOMY AFTER THE ELECTION
Authors: Dicks Geoffrey
Published: January 2008

With the election out of the way and signs of recovery tentatively in place, the Government is likely to take steps to bring the economic and political cycles back into kilter so that it does not have to fight the next election under the handicap of recession. This suggests that its first priority will be to consolidate the progress on inflation with a tight fiscal and monetary stance, deferring until 1993‐4 any significant relaxation of policy. Holding the exchange rate close to its present parity will therefore take priority over interest rate cuts which may have to wait on a lead from the Bundesbank. On fiscal policy the aim will be to reduce the budget deficit, which suggests a tough approach to public expenditure in this year's spending round.