There were three forces behind the expansion that got underway last year. There was a burst of consumer spending, probably because inflation was falling and credit more easily obtainable. Fixed investment rose, chiefly because housebuilding was stimulated by lower interest rates and public investment increased. And there was a changeover from a substantial decumulation of stocks to moderate accumulation.

The growth of US GNP, which in the first quarter was responsible for the greater part of an increase of the order of 1½ per cent in the output of the whole OECD area, slowed down somewhat in the second quarter but it was still exceptionally fast. With the help mainly of sustained growth in Japan it probably kept total OECD output growing, despite the depressing effects of major strikes in West Germany and the UK. The deceleration in the US mainly reflected a reduction in stockbuilding, which in the first quarter had made the biggest contribution to the growth of demand both there and in West Germany and France.

The National Institute has a long history of analysing its forecasting record; recent Reviews have contained accounts of the accuracy of our forecasts of inflation (February 1984) and GDP (Savage 1983). Earlier studies include Brooks and Cuthbertson (1981) and Osborn and Teal (1979). Such studies ask two fundamental questions: how good have our forecasts been in the past, and how much confidence can we hold for our forecasts for the future? In the case of the first question the above-mentioned studies provide an almost complete answer. The second question can only be answered by such studies on the assumption that our past record will be maintained in the future. This note approaches the second question from an entirely different viewpoint. An estimate of confidence bands for the National Institute's Model 7 will be derived by the use of stochastic simulations of the model. Just as the earlier studies offer only a partial guide to the accuracy of our forecasting ability in the future, so this note is also only a partial answer to the question. This is because our forecasts do not consist simply of a mechanical model run; instead the basic model forecast is supplemented by much other information. A good example of this is the recent miners' strike which could not have been included in the forecast on the basis of a purely mechanical model forecast. We would therefore expect the model to have a larger error bound than our final published forecasts. The scope of this note, it must be stressed, is strictly only applicable to the model we use to forecast and not to the finally published forecasts.

The Treasury Bill rate is regarded as an exogenous policy instrument in the National Institute's forecasting model. Other interest rates in the model are linked to this rate by term-structure equations. This approach, while justifiable for forecasting, has limitations when the model is used for policy simulations since it ignores the responses of interest rates to changes in economic conditions. This note shows how the properties of the model are affected when interest rates are treated as endogenous.

In May 1984 unemployment was, officially, 3.1 million. Critics of the count put the true figure at between 1.7 million and 4.4 million, depending on their point of view. In Section 1 I examine what the statistics do and do not measure and highlight recent changes in coverage and counting. Estimates of the long-run rate of unemployment are given in Section 2. These estimates imply that injudicious macroeconomic policy accounts for a large fraction of current unemployment. In Section 3 Britain's unemployment is put into an OECD context. It is shown that our comparatively high level of unemployment is not due to problems with the labour supply or lack of adaptability on the part of the workforce. Finally, Section 4 addresses the question ‘where are the new jobs coming from?’ There is general agreement that manufacturing will not be a source of net new jobs, but private services are unlikely to generate jobs on the scale required to make a dent in unemployment.