The world economy continues to face strong deflationary pressures at the present time. Whilst growth has remained above trend levels in North America, the Japanese economy has sunk further into recession, and there are increasing signs of an economic slowdown in Europe. Overall we expect GDP growth in the OECD economies to slow to around 1.8 per cent this year, from an estimated 2.4 per cent in 1998. Global demand as a whole remains relatively weak, with the growth in the volume of world merchandise trade estimated to have halved last year to around 5 per cent and projected to fall further to between 4-4½ per cent this year. Trade in Asia is estimated to have declined by 7½ per cent last year, with potentially serious consequences for growth prospects in economies such as China, Hong Kong and Singapore that have become increasingly affected by the regional economic downturn.

In the past year we have attempted to incorporate forward-looking exchange rates into our econometric model, GEM. This work is still at an experimental stage, and hence will not be immediately available to model-users, but we feel we have made sufficient progress to present some of the results.

The introduction of forward-looking exchange rates is consistent with modern economic theories of exchange-rate determination. These view the exchange rate as an asset price, which is valued according to the expected returns from holding domestic and foreign assets. This gives rise to the short-run arbitrage condition, that the interest-rate differential between equivalent assets in different currencies should equal the expected depreciation of the exchange rate between those currencies. The expected depreciation is determined by a longer-term view of the currencies' worth, which can be related to the fundamental equilibrium exchange rate (FEER), which would achieve a balance between the current account and long-term capital account flows. Previous work at the Institute has expanded on some of these issues. Davies (1988) and Gurney (1988) look at some the issues raised by forward-looking exchange rates. Barrell, Gurney, Pesaran and Wren-Lewis (1988) look at alternative forward-looking models and Barrell and Wren-Lewis (1989) investigate FEERs based on the trade equations used in GEM.

Global growth was at its strongest for over 20 years in 2004, and is expected to decline from 5.1 per cent to 4.4 per cent in 2005. Growth stabilised in the first half of 2005, after decelerations in the US in the first half of 2004 and in the European Union in the second half of 2004. Of the major economies, only Japan recorded a significant strengthening in the first half of the year relative to the previous six months, and on a global level this was offset by modest slowdowns in North America. The slowdown in Canada, illustrated in chart 1, reflects a sharp deceleration in export growth, while domestic demand growth outpaced all other major economies in the first half of 2005. World trade growth moderated somewhat from the rapid growth recorded in 2004, with a sharp slowdown in import growth from the Euro Area, accompanied by more modest decelerations in the US, Japan, the UK and Canada.

This note responds to the recent critique by Goodridge, Haskel and Wallis (GHW) of our 2012 study of Britain's productivity puzzle. We show that a correct reworking of the latest official data on changes in labour composition overturns GHW's main criticism. We also question the strength of the empirical evidence offered by GHW in support of their alternative explanations of the productivity puzzle.

In 1946, when the Soviet economy was still suffering acutely from war damage, Stalin addressed a meeting in Moscow and announced some long-term economic targets : the aim, he said, was to treble the 1940 output of basic industries, and in particular to reach an output of 50 million tons of pig-iron, 60 million tons of steel and 60 million tons of oil. ‘This will take three five-year plans, or maybe longer’, he said, suggesting that he hoped to reach these goals in the early 1960s. Ambitious as his targets seemed at the time, they will in fact probably be exceeded by 1960—in the case of oil by a very wide margin. The period from 1946 to 1956 was one of exceptionally rapid growth. In the first years, the restoration of war-damaged productive capacity and reparations deliveries helped, but progress continued to be very rapid during the fifth five-year plan (1951–1956), when these factors were no longer important.

This article discusses some of the factors that will affect house building in England and Wales during the next twenty years. It is hardly possible to predict the demand for new houses, as it is for consumer durables like cars and domestic appliances, by reference to changes in incomes and prices. Governments in Britain (as in most other wealthy countries) have taken the view that housing is, up to a point, a social responsibility and should not be left to the free play of market forces. Private rents have been controlled; most of the new houses since the war have been built by local authorities to be let at subsidised rents; and certain minimum standards have been laid down both for new public housing and for existing privately owned houses. Hence the cost of housing to the occupier, and the supply of new houses, have been largely dominated, directly or indirectly, by public policy; and the size of the house building programme is likely to continue to be, at least partly, a political decision.

This paper uses a variant of the IMF's Global Economy Model (GEM) to examine the macroeconomic impact of the rise in energy prices since the end of 2003 in the Euro Area, the United Kingdom and the United Sates. The analysis illustrates how the impact varies across these countries based on their level of energy use and energy production. In addition, the analysis uses Euro Area simulations to consider how the macroeconomic implications depend on the factors driving higher energy prices. If labour supply or tradable sector productivity increases in emerging Asian economies are an important factor driving energy price increases, then industrial countries receive some positive terms-of-trade effects coming through non-energy tradable goods that offset some of the negative implications of permanently higher real energy prices. The stronger are the industrial countries' trade links with emerging Asia, the larger will be the offsets.

The latest set of official statistics and survey evidence suggests that activity remained subdued in the first half of this year, with the optimism apparent in post-election business and consumer sentiment proving to be ephemeral. However it is not unusual for there to be some delay before movements in survey responses are reflected in measured expenditure. On balance it does appear as if output has begun to stabilise and we expect a modest recovery over the second half of this year, although it is difficult to be confident about the pace at which the recovery will proceed. Any potential recovery is unlikely to prove sufficient to prevent a further year-on year fall in the level of GDP and the aftermath of the recession, in the form of rising unemployment, repossessions and business failures, can be expected to persist into 1993.

The structural pattern of the economy is changing all the time. It has changed considerably in the past ten years (table 1), partly because of the emergence of oil production, but partly also because industries that previously constituted the mainstay of the UK economy—like steel, coal, textiles and mechanical engineering—have declined in importance whilst others, for example electronics and chemicals, have become the driving force of industry and certain types of services have grown out of all proportion to the national economy as a whole. This point can be illustrated by the fact that in the ten years to 1983 manufacturing output fell by 15 per cent, while at the same time the output of all services increased quite markedly and one section, banking, financial, business and professional services, insurance and leasing, grew by some 70 per cent.

This paper describes the Danish mortgage system by comparing it with the UK mortgage system. The Danish mortgage system has attracted attention in the literature on the design of mortgage systems. It is a type of narrow banking model where mortgage loans are financed by specialised institutions that issue bonds with cash flows that match that of the mortgage loans. Thereby, the Danish mortgage system outsources many of the risks that are usually kept on the balance sheet of banks to bond investors. Measured in terms of four criteria, the Danish mortgage system performed better during the financial crisis than the UK mortgage system. However, both in Denmark and the UK, alignment of the mortgage and the pension systems could offer significant advantages.

While at a global level the outlook for growth remains strong, with GDP growth expected to exceed 4.5 per cent per annum until 2008, we have started to see some shift in the regional composition of growth, with a more dominant role for the Euro Area and Japan and weaker prospects in the US. Oil producing economies are also expected to record strong growth over the next few years, although the recent drop in the oil price has dampened the outlook for these economies slightly. China will continue to expand at a rapid pace, albeit with some easing from the exceptional growth in the first half of this year. Euro Area growth outpaced both the US and Japan in the second quarter of 2006, for the first time since 2001. This acceleration in Euro Area growth was dominated by private sector investment, supported by strong corporate profitability, rising capacity utilisation and low real interest rates.

In the last six months political and economic developments in Europe have moved very rapidly. The democratisation of the East has been quite remarkable, and much heralded, but the change in the political agenda in the West has been almost as important, although much quieter. The drive toward European Monetary Union seems to have speeded up, although there are many important issues still to be settled.