• • GDP will grow at under half its trend rate in the rest of 1998; there is a one in three chance output will decline.

• • We have lowered our forecast for growth in 1999 from 2.1 to 1.6 per cent; there is now a one in four chance of a recession next year.

• • Earnings growth will fall to 3 per cent in 1999.

• • Inflation will run at 2.2 per cent at the end of 1998 and 2.6 per cent in the last quarter of 1999.

• • A minimum wage set at £3.70 an hour will cut employment in the long run by 1 per cent.

• • Euroland will start in 1999 with interest rates around 3.75 per cent, growth of 2.6 per cent and subdued inflation.

• • Economies on the periphery of the Euro-zone are diverging sharply from those in the core.

• • Japan's Y16 trillion fiscal package will lift output by under 1 per cent in 1998 and 0.5 per cent in 1999.

• • A clean-up of the Japanese financial sector is needed to restore consumer confidence and allow a sustained recovery.

• • Asian export recovery has been delayed because of the Japanese downturn and difficulties in restoring trade finance.

• • US interest rates will remain on hold as buoyant domestic demand is offset by the disinflationary impact of the Asian crisis.

The performance of the UK economy in recent months has continued to be enviable. Inflation is almost exactly equal to the government's target. Economic growth has slowed down to what appears to be a sustainable rate of about ½ per cent per quarter. Unemployment is falling, but at a slower rate than last year. Most spectacularly, government borrowing has fallen to within a billion pounds of a balanced budget.

The effects of the financial turmoil in Asia are beginning to emerge in the industrialised economies, with a sharp decline in export sales to East Asia apparent in the most recently available trade statistics for Japan, the United States and Australia. Manufacturing output has fallen this year in both the United States and the UK, with external demand weakened further by the sustained rise in their real exchange rates over the past eighteen months. Firms in the major economies are facing greater price competition from Asian producers in their main markets. Imports have fallen sharply in the affected Asian economies, and domestic demand has been weak. This has also led to some weakness in most commodity markets. Global demand pressures have been further eased by the continuing downturn in Japan, where the economy is now on the verge of recession. This can only prolong the adjustment process for the smaller Asian economies as Japan is a key export market for them, and raises renewed risks of systemic failure within financial markets. Japan and the five smaller Asian economies directly affected by currency crises last year both account for around 7 per cent of total world trade.

The present economic expansion in the United States continues to appear firmly based. GDP rose by 0.9 per cent in the final quarter of last year, giving calendar year growth of 3.8 per cent, the best outturn since 1988. Industrial production rose by 5¾ per cent in 1997, helped by the rapid expansion of cross-border trade in North America. Recent developments in Asia are likely to have an important bearing on economic prospects this year, with signs that weaker external demand has begun to affect the tradable goods sector and offset some of the remaining cyclical strength in domestic demand. The present strength of the dollar along with the decline in energy prices is continuing to help to balance the cost pressures emerging from the domestic labour market and bring a further temporary decline in price inflation. Overall, we continue to expect growth to slow to between 2½–2¾ per cent this year, with inflation declining to 1½ per cent.

Aggregate EU growth was estimated to have been 2.6 per cent last year, markedly higher than the 1.8 per cent recorded in 1996. Ireland remained the fastest growing EU economy with the most recent estimates putting growth at over 10 per cent last year. Finland also recorded rapid growth of nearly 6 per cent. A large group of countries, comprising the UK, Denmark, Greece, Spain, Luxembourg, the Netherlands and Portugal also enjoyed growth rates of 3 per cent or above. Italy and Sweden recorded growth rates below 2 per cent for the second year running.

We examine the forecasting record of HM Treasury for GDP and the RPI from 1971 to the present. As well as presenting the usual statistical measures of performance, such as Root Mean Squared Errors, and regression tests of forecast efficiency and bias, we test for any relationship between the errors in GDP and RPI forecasts. Confidence intervals are constructed using a classical statistical approach based on past forecast errors, which is similar to that employed in this Review to describe forecast uncertainty.

This article analyses the role of technical progress in three models of the UK economy. In the standard neoclassical growth model, the growth of the economy is dictated by the growth rate of technical progress plus that of the population. Our two simulation experiments, increasing the level of technical progress by 1 per cent and the growth rate by 0.1 percentage points, suggest that technological progress plays the same role in these large macroeconometric models. In both cases the result is higher output and real wages. However adjustment following the shocks is protracted, giving substantial technological unemployment which in several instances is permanent.

A multicountry econometric model and stochastic simulation are used to estimate the stabilization costs of the European Monetary Union (EMU). A measure of the variability of output and other variables is computed for the current regime and for the EMU regime. The results show that Germany is hurt the most in terms of increased output variability in moving from the current regime to the EMU regime.

In this article we propose a policy framework for inflation targeting that contains elements of both optimal and simple rules. We use a simple feedback rule for the interest rate to look after monetary policy in the long run whilst using optimal control in the short run to determine appropriate responses to shocks. The composite policy is capable of substantial welfare improvements over using a simple rule alone whilst maintaining tractability. We see the use of such a framework together with a fully specified model as a feasible approach to practical policy design.