The outlook for world growth this year has deteriorated since April, due to a sharp contraction in world trade in the first quarter of the year and failure to sustain the revival in private sector investment seen in the fourth quarter of 2002. We have as a consequence revised our projections for world growth this year down by ¼ percentage point. This reflects sharp downward revisions of ½–¾ percentage points in the Euro Area and Canada, both of whose exchange rates have continued to appreciate in effective terms, while the outlook for the US and Japan is broadly unchanged. Growth in Japan and the Euro Area stagnated in the first half of 2003, with recessions in Germany, Italy, the Netherlands and Austria appearing likely. The US and Canada, on the other hand, continued to expand, albeit more slowly than in the second half of 2002. Following two years of exceptional weakness, Latin American growth has started to revive, although Venezuela is still suffering from the 2 month stoppage in the oil industry earlier this year and Argentina has lost competitiveness due to a strong appreciation against the dollar. Growth has slowed in several Asian economies, notably South Korea, but China continues to expand rapidly, spurred by the competitiveness impact of the dollar depreciation and infrastructure preparations for the 2008 Olympics. This has helped sustain export growth from the rest of Asia despite the more widespread slowdown in world trade.

Our projection for GDP growth in the US this year, at 2.4 per cent, is broadly unchanged relative to April. However, the underlying composition of GDP has shifted toward stronger consumer spending, weaker business investment and weaker trade growth. Stronger consumption stems from the implementation of the fiscal package that was approved by Congress in May. Downward revisions to investment and trade growth reflect the unexpectedly sharp declines recorded in the first quarter of the year. Business investment declined by 1.1 per cent in the first quarter, while the volume of exports of goods and services fell by 0.3 per cent and imports fell by 1.6 per cent. This weak outcome is thought to reflect the high level of uncertainty faced in the run up to the war in Iraq. As this uncertainty has now receded to a large degree, some recovery is anticipated in the second quarter. Monthly indicators suggest that consumer demand remained strong in the second quarter of 2003, although industrial production declined and business orders have continued to disappoint. The volume of exports in the three months to May were 9.2 per cent higher than in the previous three months, while imports rose by 7.4 per cent, pointing to a marked revival of trade in the second quarter. Despite the recovery of trade and positive outlook for consumer spending, the bleaker outlook for investment has caused us to revise our projections for GDP growth in 2004 down by ½ percentage point to 3 per cent. We have also revised down our projections for average GDP growth between 2005-2009 to 2.3 per cent per annum, as higher inflation and planned tax rises will weigh on consumer spending.

The outcome for growth in the Euro Area in the first quarter of 2003 was slightly weaker than our April projections. GDP grew by a marginal 0.1 per cent relative to the previous quarter, down from an average of 0.8 per cent over the year 2002 as a whole. The continued appreciation of the euro is largely to blame for this development, taking a toll on exports. The weaker outcome for the first quarter, coupled with the appreciation in the nominal effective exchange rate by about 6.9 per cent in the first half of this year, as well as significantly weaker prospects for private investment dampen the outlook for the year as a whole. Industrial production rose by 0.4 per cent in April, after a decline of 0.7 per cent in March and an increase of 0.3 per cent in February, supporting our expectation that recovery will be only gradual. In light of the most recent evidence, we have cut our estimate for Euro Area growth in 2003 by half, down to just over ½ per cent. However, we continue to anticipate a more pronounced improvement in 2004, as domestic and external demand both strengthen. We expect output growth in the Euro Area to return towards trend levels of about 2½-2¾ per cent per annum from 2005-2009. This is consistent with NIESR's output gap estimates for the Euro Area, which show the economy returning to capacity output in 2005.

Economic growth has been disappointing in the first half of 2003. The economy expanded by 0.1 per cent in the first quarter. Based on our monthly estimates of GDP we estimate that economic growth accelerated to around 0.4 per cent in the second quarter, remaining below trend. The weakness in the first quarter of the year came as a result of little growth in household consumption expenditure at a time when the corporate sector remained weak. We expect this pattern to have continued in the second quarter, although our forecast for growth in household consumption expenditure is not as weak as recorded at the beginning of the year. Our forecast of quarterly GDP growth (chart 1) shows the economy expanding more rapidly in the second half of the year. Growth in the second half of the year is supported by government investment and consumption expenditure, and a gradual recovery of growth in export volumes and business investment. Growth in export volumes is helped by the depreciation of the sterling effective exchange rate in the first half of this year, although there has been some rebound in the index over the summer. Conditions for business investment have also improved. Equity prices have risen in the second quarter of the year, monetary policy has been eased and the increase in geopolitical uncertainty that probably dampened investment in the first half of the year has subsided.

Since May 1997, when the Bank of England was given operational independence to set monetary policy, the Monetary Policy Committee (MPC) has been responsible for setting short-term interest rates to ensure that the Government's inflation target is met. The target is currently 2.5 per cent and the target measure is the Retail Price Index excluding mortgage interest payments (RPIX). If RPIX inflation deviates more than 1 per cent from the central target, the Governor of the Bank of England is expected to provide a written explanation to the Chancellor of the Exchequer as to why the inflation target has been missed.

Fiscal pacts and automatic stabilisers are widely discussed in the policy debate. Pacts put bounds on borrowing, and the bounds have to be evaluated. We use our model, NiGEM, to set safe targets for European deficits. Although there are many issues to consider, we conclude that cyclically adjusted target deficits of 1 per cent of GDP would ensure that governments seldom had to borrow more than 3 per cent of GDP, especially if they stood ready to raise taxes when the deficit deteriorated either for reasons separate from cyclical developments or because supply shocks had occurred. Offsetting the automatic stabilisers when supply shocks occur is shown to help stabilise output volatility.

Under annualised hours' contracts (AHCs), workers and management agree to the length and scheduling of working hours over a 12-month period. Such contracts have been widely seen as a potentially important way of achieving greater labour market flexibility and enhanced efficiency in work organisation. There exists very little empirical work on these contracts and this study is intended to provide insights into their British labour market role and potential. Especially for workers who are not in management or a profession, the costs of switching to AHCs are substantial. The enterprises that are likely to gain from the switch are those that (a) experience significant fluctuations in output/service demand and (b) desire to utilise plant and space more intensively over the calendar year. In this latter respect, plants incorporating complex shift operations are particularly associated with AHCs.

This paper analyses the domestic performance of UK multinational firms from two perspectives: (i) their productivity relative to foreign multinationals, domestic exporters and non-exporters, and (ii) their ability to benefit newly acquired affiliates. Nonparametric analysis shows that the productivity distribution of UK multinationals is dominated by their foreign counterparts (especially US firms), and quantile regressions reveal that the performance disadvantage of UK multinationals is more pronounced at the higher end of the productivity distribution. Using a difference-in-differences methodology, it is found that, unlike foreign acquisitions, take-overs of domestic non-exporting firms by UK multinationals do not appear to lead to any productivity improvements.

This paper uses the Workplace Employee Relations Survey panel for 1990–1998 to investigate the relationship between foreign ownership, skill-structure and use of microelectronic technologies in British establishments. We find that foreign-owned establishments are early adopters of new microelectronic technologies and employ more non-manual workers (more senior technical professional workers, less skilled manual workers). Because foreign-owned establishments are early adopters of new technology, an increase in foreign ownership can partly explain a recent improvement in the relative position of skilled workers in Britain.