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The UK economy will soon be completing the third year of recovery from the low point of the business cycle reached in the second quarter of 1992. Since that time output has risen by close to 8 per cent and now stands at 4 per cent above its previous peak. Over the recovery phase of the cycle, output in the onshore economy has grown at an average rate of 2.7 per cent per annum, with the annual rate of expansion accelerating to reach 3.7 per cent in the last quarter of 1994. This rate of growth is certainly in excess of that which the economy can sustain in the long term. Unsustainable growth eventually leads to inflationary pressure as firms, faced with strong product demand, push up their prices. Depending on the attitude of the monetary authorities, this leads either to a period of higher inflation or to tighter policy and higher interest rates to prevent inflation speeding up.
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- Copyright © 1995 National Institute of Economic and Social Research
Footnotes
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The forecast was compiled using the latest version of the National Institute Domestic Econometric Model. I am grateful to Andrew Britton, Ray Barrell, Peter Westaway, Andy Blake and Nigel Pain for helpful comments and discussions and to Anne Perrin for her help with the database and charts. The forecast was completed on February 6 1995.
References
Notes
(1) See Pain, N. and Westaway, P., (1995), ‘The demand for domestic output and imports in the UK: a dynamic systems approach’, The Manchester School, forthcoming.
(2) See Bank of England, Inflation Report, February 1994, p. 32.