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Chapter I. The Home Economy

Published online by Cambridge University Press:  26 March 2020

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Although information is still very incomplete for the second quarter, it seems likely that total output has continued to rise this year at a moderate rate—perhaps 1 ½ per cent a year. On constant fiscal policies, we would expect demand to grow just sufficiently during the rest of this year and in 1987 to keep non-oil GDP rising at about this rate, or perhaps just a little faster. Unemployment is still rising; the figures may soon level out, or possibly decline a little, under the impact of the special employment measures. Inflation is lower than for many years; it will probably edge up. The fall in oil prices has transformed the balance of payments. There could be a deficit on current account of substantial proportions in 1987.

Type
Articles
Information
National Institute Economic Review , Volume 117 , August 1986 , pp. 5 - 19
Copyright
Copyright © 1986 National Institute of Economic and Social Research

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References

(1) These developments are broadly in line with the forecasts we were making a year ago. See, for example, National Institute Economic Review, no. 113, August 1985, pp. 6-7.

(2) The abnormally large ‘statistical discrepancy’ for the earlier period warns against too rigorous an interpretation of the figures: the estimates of the increase in expenditure fall short of the estimates of the increase in output, and so fail to explain where all of the increase in output went to.

(3) The figures are provisional and liable to be revised.

(1) It should be borne in mind, however, that the employment figures, particularly for the more recent past, are themselves liable to substantial error: also that no allowance has been made for the increasing proportion that are part-time.

(2) Comparisons over long periods in this series should be taken with some caution however. It is possible that after a long period of excess capacity firms tend to revise down their expectations of what constitutes a normal or ‘satisfactory’ level of output.

(1) Economic Trends, June 1986, pp. 68-9.

(1) Our assumption of 130 million tonnes for oil production this year is towards the upper end of the range (120-135 tonnes) projected by the Department of Energy in this year's Brown Book. Our assumption of 124 tonnes for 1987 is also above the mid-point of the Brown Book range (110-130 tonnes).

(2) The May Review (pp. 17-18) gave details of an alternative forecast based on the assumption of a £2 billion cut in income tax (the ‘fiscal adjustment’ embodied in the Treasury forecast at Budget time), which showed, by the end of 1987, a level of GDP a little over ¼ per cent higher than on ‘unchanged policies’. The effect on our current forecast would be similar.

(1) Initial estimates of consumers' expenditure are liable to be substantially revised. For instance, the initial estimate for the first quarter showed a fractional fall; the revised estimate, a rise of ¾ per cent.

(1) Our assessment makes no allowance for the possibility of trade sanctions against South Africa. The impact even of an embargo on all trade with South Africa would probably not be very great in the aggregate, though particular sectors might be much affected. In 1985, 1.3 per cent of total British exports of goods (£1,010 million) went to South Africa, and 1.2 per cent of imports (£990 million) came from there. 90 per cent of our exports to South Africa were manufactures and these accounted for 1.7 per cent of total exports of manufactures. Of our imports from South Africa, 38 per cent were crude materials (chiefly ores), 33 per cent were semi-manufactures (chiefly precious stones), and 14 per cent were vegetables and fruit.

(1) The elasticity of exports of manufactures with respect to world trade in manufactures is 0.6 in our model.

(1) Our wage equation has consistently under-predicted since the end of 1984. The average (one-step-ahead) residual over the last six quarters for which we have data is 0.8 per cent.

(2) On these assumptions, the implied residual on our wage equation declines gradually to zero by the end of the period.

(1) Defined as wages and salaries divided by non-oil GDP rather than total GDP.

(1) The employment estimates for the recent past are based on the the Labour Force sample surveys, the latest of which was carried out in spring 1985. The data all the way back to 1983 are liable to be revised when the results of the 1984 Employment Census become available (probably later this year).

(2) The latest actual data on self-employment relate to mid-1985.

(3) The Department of Employment press release giving estimates of the ‘register effect’ of the schemes has been discontinued.

(1) The effect on the effective exchange rate of the expected movement of the current balance of payments into deficit was estimated using the ‘backward-looking’ equation in our model (a short description of which is given in the Listing of NIESR Model 7, p. 15).