For the first time in more than a decade the question is being asked whether the growth of the UK economy this year may be, in some sense, too rapid. Fears have been expressed of ‘overheating’ leading to a rise in inflation and excessive growth in imports. Comparisons have been made with the ‘boom’ conditions of 1972 and 1973. In our view these fears are exaggerated and the comparisons misleading. Nevertheless some increase in the rate of inflation is to be expected, and the underlying position on the current account of the balance of payments seems already to have moved from surplus into deficit. We now expect the rate of the economy this year to be around 3½ per cent, compared with about 3 per cent in 1986. Thus, if we are correct, the acceleration year on year is very slight, well within the error margins of measurement. This contrasts with 1972 and 1973 when the growth rate averaged 4½ per cent for two years. Moreover unemployment was only about 1 million at the beginning of 1972 and about 1/2 million at the end of 1973 whilst last year it at over 3 million and is not expected to fall as low as 2½ million even next year. Even if inflation next year does rise from about 3½ per cent a year to about 5 per cent, as we expect, this is still not comparable with the rates of 7½ and 9 per cent experienced in 1972 and 1973. The CBI index of capacity utilisation is now not far below its peak level in 1973, but we doubt whether an index of this kind is reliable for comparision between periods so far apart in time.

Scarcely a year ago there was a good deal of discussion about whether the collapse in oil prices would bring about a boom in the world economy. Now there is widespread talk of a world recession. In both cases speculation is likely to prove unfounded. Recent pessimism has been associated with the effects of the dollar's depreciation and lower OPEC demand for manufacturing imports. We argue below that, while both factors could lead to a temporary slowdown in the aggregate level of world activity, they should not lead to a major world recession.

The middle years of this decade will go down in economic history as a period when primary products hit rock bottom, whatever method is used to illustrate their real value or purchasing power. There have been hardly any exceptions to this general decline. Petroleum (by far the most important primary product), foodstuffs, agricultural industrial materials, minerals and metals all shared the same fate, though the extent of their losses differed. The only exception has been coffee, owing to unusually adverse weather conditions.

The objective of this note is to compare the econometric performance of several different equations which attempt to model the behaviour of export volumes of manufactured goods. Such equations usually explain export volumes in terms of an index of world economic activity and an index of competitiveness. This note concentrates on the issue of competitiveness; namely, how should competitiveness be defined and measured when employed in an export volumes equation?

There has been a considerable improvement in labour productivity in UK manufacturing in the 1980s. Manufacturing output per person employed rose at an annual rate of only 0.7 per cent between 1973 and 1979 but at 4.1 per cent between 1979 and 1985. However, the cause or causes of this improvement have not been generally agreed. Muellbauer (1986) suggested five principal hypotheses to account for the improvement (see also Mendis and Muellbauer, 1984):

1. (1) Technology, in particular the of the microelectronic revolution.

2. (2) Improved industrial relations, due in part to the decline of unionism caused by the recession of the 1980s and in part to the change in the laws governing trade unions brought in by the first two Thatcher governments.

3. (3) Capital scrapping—the period 1973–80 may have been one of large-scale unrecorded scrapping, since large parts of the capital stock became obsolete after the oil price rises; slow growth of capital per person would have led to slow growth in output per person but these trends may have been reversed after 1981.

4. (4) Labour utilisation—this was low during the recession but the subsequent recovery produced a biased measure of the true productivity picture.

5. (5) Plant closures—the recession led to the closure of low productivity plants, thus automatically raising the average productivity level of the survivors. The analogy with a batting average has sometimes been drawn—if the tail-enders are not allowed to bat, the average, though not of course the total, score is likely to be higher.

How important are small firms as sources of new jobs? Research by Gallagher and Doyle, reported in British Business (1986) suggests that they are disproportionately important: in terms of employment small firms in the UK were found to be growing more quickly than large firms. In this note we examine their evidence. We conclude that their case is not proven, although there are features of recent experience which may point in that direction.

In his Budget Statement this year the Chancellor restated his medium-term financial strategy (MTFS) and in particular his objectives for the public sector borrowing requirement (PSBR). He said, ‘Since its inception in 1980 the MTFS has indicated a steadily declining path for the PSBR expressed as a percentage of GDP. We have now reached what I judge to be its appropriate destination: a PSBR of 1 per cent of GDP. My aim will be to keep it there over the years ahead. This note considers the implications of that scale of borrowing for the balance sheet position of the public sector. We are able to do this with more confidence thanks to recent publication by the CSO of new figures for the balance sheet positions of all sectors of the economy up to the end of 1985. Prior to that publication, the latest figures available for the overall balance sheet position of the public sector had referred to 1975. The new data modify the picture of recent trends, without changing their character fundamentally.

Modelling the monetary sector has long been seen as problematic. Conventional demand for money functions have typically failed to cope with the experience of the past 15 years (Judd and Scadding, 1982) and models based upon the counterparts to monetary growth have fared little better. The current interest in buffer stock money (see Cuthbertson and Taylor, 1987, for a recent survey) can be seen as a response to the failure of the more traditional approaches. We believe that the issues involved in the empirical implementation of the buffer stock hypothesis are subtle and that the literature to date has not dealt with them satisfactorily. In spite of the substantial difficulties involved, we think that a system approach to buffer stock modelling (for example, Davidson, 1987a) may be unavoidable to ensure theoretical consistency.