• Global GDP will grow by 4.4 per cent a year in 2005 and 2006.

• Inflation in the OECD will rise from 1.7 per cent last year to 2.1 per cent in 2005, the highest since 2001.

• The United States will grow by 31/2 per cent a year in 2005 and 2006; inflation will rise to 3.2 per cent next year.

• Inflationary pressures will persist in the Euro Area despite weak growth of 1.3 per cent in 2005 and 1.9 per cent in 2006.

• Japan will grow by 21/2 per cent a year in 2005 and 2006, but prices will continue to fall.

Between 2000 and 2003 OPEC maintained a target range for the price of oil of US$22–28 per barrel. In early September of this year the price of oil reached US$67 per barrel. Such a rapid change in the price of oil was not anticipated either by economic forecasters or by those involved in the industry. Indeed, about a year ago, with the price of oil just over US$40 per barrel, a senior oil company executive, said that the high prices were caused by short-term factors and that prices had reached their peak. As the rise of oil prices has continued, people's thoughts have inevitably turned to the two oil crises of 1973–4 and 1979–80.

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.

GDP growth remained below trend into the second half of this year. Early estimates of GDP show the economy expanding by 0.4 per cent in the third quarter of the year, similar to the rate we projected when constructing the forecast. The economy has now expanded at a rate below 0.6 per cent for five consecutive quarters (chart 1), and this is now affecting the annual figures. Our forecast shows GDP growth this year at 1.7 per cent. This is the weakest growth rate observed in the past decade in a single calendar year.

This paper documents the fundamental changes in family formation that took place in Europe during the last two decades of the twentieth century, as well as some possible explanations for these changes. First, European youth have postponed key demographic events, and the latest-late pattern of transition to adulthood emerged in the South. Second, lowest-low fertility emerged during the 1990s in the same area, spreading quickly to Central and Eastern Europe. Policies and economic trends, long-standing cultural factors and ideational change interact in shaping change and differences. Macro-level factors in turn interact with micro-level ones to shape outcomes. The new demographic regime of Europe is thus likely to persist.

If current demographic trends continue, the combined population of the twenty-five countries that currently make up the European Union will age rapidly and decline in size in the coming decades. As the EU population ages and declines, so will its labour force, which will likely constrain the labour market and generate lower rates of economic growth. Data from the most recent round of United Nation population projections is used to illustrate the scale of these changes.

Even over a 75-year horizon, forecasts of PAYGO pension finances are misleadingly optimistic. Infinite horizon forecasts are necessary, but are they possible? We build on earlier stochastic forecasts of the US Social Security trust fund which model key demographic and economic variables as historical time series, and use the fitted models to generate Monte Carlo simulations of future fund performance. Using a 500-year stochastic projection, effectively infinite with discounting, we find a fund balance of −5.15 per cent of payroll, compared to the −3.5 per cent of the 2004 Trustees‘ Report, probably reflecting different mortality projections. Our 95 per cent probability bounds are −10.5 and −1.3 per cent. Such forecasts, which reflect only ‘routine’ uncertainty, have many problems but nonetheless seem worthwhile.

The European Union aims at a stronger participation by its population in work to foster growth and welfare. There are concerns about the attachment of immigrants to the labour force, and discussions about the necessary policy responses. Integrated labour and migration policies are needed. The employment chances of the low-skilled are limited. Whereas Europe could benefit from a substantive immigration policy that imposes selection criteria that are more in line with economic needs, the substantial immigration into the European Union follows largely non-economic motives. This paper discusses the economic rationale of a selective immigration policy and provides empirical evidence about the adverse effects of current selection mechanisms.

Policy towards asylum seekers has been a controversial topic for more than a decade. Rising numbers of asylum applications have been met with ever-tougher policies to deter them. Following a period of policy harmonisation, the EU has reached a crucial stage in the development of a new Common European Asylum System. This paper seeks to shed light on what form this should take. It summarises the development of policy to date and it argues that these policies have been too tough, even from the point of view of EU citizens. Using an economic framework, it examines scenarios with different degrees of policy harmonisation and integration among EU countries. Finally, it argues that there is an important role for enhanced burden-sharing arrangements.