The July interest rate increase has taken the Bank of England's Base Rate to the highest value for six years. In figure 1 we show the forward estimates for the nominal short-term interest rate taken from the Bank of England's yield curve tables for both government debt and liabilities of commercial banks. These are in effect market forecasts of the short-term rate produced in the past. The graph shows that the market has been taken somewhat by surprise by rising short-term interest rates. Two years ago the market was forecasting a rate of around 4 per cent per annum for July 2007. Nor were the probabilities the market gave to an interest rate of 5.75 per cent per annum very high. Twelve months ago the market in financial options implied that the chance of the rate exceeding 5.66 per cent per annum was only 15 per cent. Even in January of this year the chance of it reaching its current level or higher was put at less than 25 per cent. The National Institute cannot claim a substantially better record at forecasting interest rates. We normally use market expectations, as calculated from the yield curve, to provide exogenous forecasts as input into our model in the short term.

In 2006, global output, measured in terms of purchasing power parities, expanded by 5.4 per cent, the fastest rate of growth since 1973. Despite a higher oil price and the recent rise in global long-term interest rates, we expect world growth to remain above 5 per cent this year, with a slowdown in the US offset by the rapidly expanding China and stable growth in the EU and Japan. In this issue we explore the widening divergence between the return on investment and real interest rates in the major economies. This suggests that despite the recent rise in long real rates it remains profitable for firms to invest in many countries.

Output growth slowed in the US and Mexico in the first quarter of 2007, while the Canadian economy accelerated. The US and Mexico both suffered from weak export growth, with the housing market continuing to put strain on domestic demand growth in the US. In aggregate, North American growth slowed to just 0.3 per cent relative to the previous quarter. Inflation accelerated in both the US and Canada in the first half of 2007, prompting a rise in Canadian interest rates. Rising inflation stems partly from tight labour markets, which have put upward pressure on wages. Labour market pressures in Canada are likely to be offset by the impact of the 6 per cent rise in the country's effective exchange rate between the first and second quarters of 2007, whilst the renewed weakness of the dollar, which fell by 2 per cent in effective terms between the first and second quarters of 2007, is likely to exacerbate inflationary pressures.

In the past twelve months the government budget situation in Germany has improved markedly, and the budget deficit has moved from 3.2 per cent of GDP in 2005 to 1.7 per cent in 2006, with further improvements in prospect. Over the same period in France, the budget deficit moved marginally from 3 per cent of GDP in 2005 to 2.5 per cent of GDP in 2006. The prospects for further improvement appear limited as the new government plans to cut taxes to stimulate the economy. Projections for budget deficits are very uncertain, as they are the difference between two large numbers (receipts and spending) that are difficult to predict accurately. Figures 1 and 2 plot the errors around our budget projections for France and Germany based on stochastic simulations on NiGEM. The 95 per cent confidence limit for our forecast one year ahead is around 1 per cent of GDP around our central forecast, and uncertainty increases into the future. As we can see from figures 3 and 4, our forecast errors for France and Germany have been well within the 95 per cent bands in the past three years, except for our one year ahead forecast for Germany for 2006. The budget improved by 1.5 per cent of GDP more than we had anticipated, and this appears to have been due to unexpectedly high tax receipts, rather than to changed policy.

During 2006, output in the UK economy grew by 2.8 per cent and the robust pace of economic growth has continued in the first half of this year. After a first estimate of quarterly GDP growth of 0.7 per cent into the first quarter of this year, the official preliminary estimate suggests that the economy expanded by 0.8 per cent into the second quarter. The economy continues to be driven by business services and finance, although the production sector actually reported quarterly growth for the first time since the first quarter of 2006. The economy is now operating around full capacity, and has recovered from the weakness that was apparent in 2005. We have revised up our forecast for this year to 2.8 per cent per annum, from 2.7 per cent per annum in our April forecast. This is due to an upward revision to estimates of GDP growth at the end of 2006 and more robust growth than we had anticipated in the first half of this year. We expect growth of just below the trend rate for the remainder of the forecast period as domestic demand growth moderates.

The National Institute has been producing forecasts since 1958, and they are an essential part of our contribution to the policy debate in the UK and elsewhere. Model-based forecasts for the UK have been published every quarter1 since the 1970s, whilst model-based forecasts for the US and the major Europeans started only in the late 1980s. The country coverage of the European forecasts has increased over the years, and Euro Area forecasts began as soon as membership was clear. There is a long enough history of forecasting to be able to evaluate our performance, and this note extends the work reported in Pain, Riley and Weale (2001), Barrell, Kirby and Metz (2005) and Barrell and Metz (2006). The Institute forecasts for the UK are the main focus of the analysis in this note, but evaluations of the US and Euro Area forecasts produced by the Institute are also undertaken. We focus on evaluating the last forecast undertaken (at T–1) before the start of the year being forecast (at T), as they contain as much information as was possible without using any from the year being forecast. We also look at the evolution of forecasts over the two years preceding the publication of the first outturn for the year being forecast in order to gauge at which point those forecasts become efficient in that the root mean squared deviation (RMSD) of the errors is smaller than standard deviation of the series.

This paper describes the diffusion of computer use among jobs in Britain, and shows that the technology is having notable effects on the labour market. By 2006 three in four jobs entailed job-holders using computers, while for two in four jobs computer use was essential. Computing skills have a significant impact on pay but, in 2006, much of this effect is interactive with what we term ‘influence skills’. The average effect of a unit increase in the Computing Skills index (which ranges from 0 to 4) is to raise pay by an estimated 5.3 per cent and 6.0 per cent for men and women respectively. For men there is an additional 19.2 per cent boost to pay in establishments where at least three quarters of workers are working with computers, compared to establishments where no one uses computers. These effects are greater for those people in jobs with above-average influence skills requirements. Our estimates allow for education, a large number of other generic skills and other conventional controls, which makes them more robust to the critique that they are overestimates because they might suffer from omitted skill bias. IV estimates show only small differences from the OLS estimates. We also find that the direct and interactive effects of computer skills and influence skills have risen over the decade, indicating increased scarcity.

We use the United Kingdom Labour Force Survey to estimate the returns to schooling and job-specific experience in sixteen different industry sectors over the period 1994-2001. Next, assuming skill levels are fixed, we assess the marginal effect on these returns of the capital intensity of production and the ICT intensity of capital. Our results indicate that in the UK, over the period 1994-2001, the rising ICT intensity of capital was associated with a rise in the return to schooling, and a reduction in the return to job-specific experience.

This paper looks at the implications of offshoring for industry employment whilst explicitly accounting for the scale and technology effects of offshoring. The effects of offshoring on employment are analysed using industry-level data for 17 high income OECD countries. Our findings indicate that offshoring has no effect or a slight-positive effect on sectoral employment. Offshoring within the same industry (intra-industry offshoring) reduces the labour-intensity of production, but does not affect overall industry employment. Inter-industry offshoring does not affect labour-intensity, but may have a positive effect on overall industry employment. These finding suggest that the productivity gains from offshoring are sufficiently large that the jobs created by higher sales completely offset the jobs lost by relocating certain production stages to foreign production sites.

At the time of the fall of the Berlin Wall, employees in East Germany were at least as well educated as employees in West Germany in terms of formal educational qualifications. However, it is unclear to what extent the skills and knowledge acquired through the East German education system, and through employment in a socialist labour market, are transferable to the new market-based economy. This study aims to shed light on this issue by giving a comprehensive description of the work of those employees who remained employed after the first phase of restructuring (i.e. in 1991) in East Germany, and comparing it with work in West Germany. Overall, the similarity between workplaces in East and West Germany soon after reunicication is striking. In addition, the patterns of task changes between 1991 and 1999 were very similar in both parts of Germany. Neither the level of task inputs in1991 nor the changes in task inputs between 1991 and 1999 were driven by cohort effects, a surprising finding given how differently the age groups were affected by the historical event. The Largest difference between the east and the west exists in terms of workplace computerisation. Although East Germany has caught up rapidly, it was still lagging behind the west in terms of computer use in 1999.

This article uses a competence-based approach to the firm in order to analyse the recent destabilisation of internal labour markets. We argue that increasing knowledge codification made possible by the diffusion of information and communication technologies has made competences less dependent upon individuals. Knowledge has been increasingly embodied in firms themselves, which has played an important role in lowering the relative cost of human resource management strategies based on external labour flexibility. As a consequence, recourse to external labour markets has developed, which may harm firms' innovative capabilities in the long run.