In recent years higher investment, especially in the ICT sector, has raised productivity through capital deepening which, in turn, has stimulated further investment. What will happen to productivity growth now investment has slowed is a question to which the answer should become apparent over the next year or so. But the key factor will be the behaviour of consumption. Some slowdown is very likely, especially with rising unemployment, lower equity prices and high debt-income ratios. So far, however, consumption has held up and the housing market remains strong.
Fiscal policy is also likely to be supportive of a recovery.
Elsewhere, the euro area has seen some decline in business confidence, although consumer confidence remains high, and in Japan the prospect for domestic demand growth appears weak. The central projection is for this growth in world trade to halve in 2001. In recent months, however, the data have moved rather erratically, affected by adverse weather, travel disruption and foot and mouth disease. Figures for business investment have been revised up significantly since the February Report and the many explanations that were provided for the apparent weakness of investment growth have proved redundant. Government spending is planned to rise rapidly.