It is clear now that 1991 will be a year of slow growth for the world economy. In the United States in particular there is real fear that a contraction of credit will result in a sharp cutback of economic activity. Our central expectation is that a reduction in inflation, helped by lower oil prices, and a rather more relaxed monetary policy will prevent a deep or prolonged downturn in America. Moreover the buoyancy of investment demand in Germany will help sustain activity in the European economies. The case of the UK economy is potentially more serious, although even here it is reasonable to expect a recovery from the recession to be under way by the end of this year.

The forecasts were prepared by Bob Anderton, Andrew Britton and Soterios Soteri, but they draw on the work of the whole team engaged in macroeconomic analysis and modelbuilding at the Institute. Part One of the chapter was written by Andrew Britton, Part Two by Bob Anderton.

The start of hostilities in the Gulf in January appears to have removed some of the uncertainties surrounding the oil market, and oil prices have dropped to around 20 dollars per barrel. This development should help sustain growth and reduce inflation over the next two years. Box A sets out some calculations of the effects of the change in our oil price assumptions on our forecast. The appreciation of the D-Mark bloc and the emergence of a recession in the US driven by a wave of bank failures has persuaded us to be less optimistic then we were in our last forecast. Table 1 summarises the outlook. We are forecasting a slowdown in the rate of growth in the major economies in 1991, with some recovery in 1992 and thereafter. The slowdown has already taken place in the US, the UK and Canada, whereas in 1990 Japanese and German growth was at historically high levels. Chart 1 plots levels of capacity utilisation in the major economies. Only in the US has output clearly fallen below capacity, but record levels of utilisation in Japan, Germany and France inevitably imply some slowdown in growth from recent levels.

We all recognise environmental problems—the pollution of air and rivers, the destruction of rain forests, global warming. The article argues that environmental problems are less the result of inappropriate values than of an incorrect calculus, and that economic evaluation and economic instruments have a major role to play in the correction of that calculus.

The green prescription of lower growth as a means of reducing environmental damage is dismissed—if higher output is often the cause of the problem, it is also what enables us to afford to deal with it. Policy should start from an adequate evaluation of the costs and benefits of action and inaction; the article instances nitrate in water, where the costs of rectification seem out of proportion to any likely benefit. Market mechanisms—such as taxes and tradeable licences—are often the best way of tackling environmental problems; but economists are sometimes as naive about their general applicability as non-economists about the effectiveness of prescriptive regulation.

This article demonstrates how the use of balanced data can affect a forecasting exercise. The forecast published by the National Institute in November 1989 is revised with the constant and current price residual errors in the National Accounts being assigned to component parts in a manner consistent with the overall pattern of imbalances within the accounts at the time. One of the main results is that preliminary estimates for some components of the accounts, available at the time of the forecast, may also need to be adjusted. This is required to ensure that the forecast is consistent with both balanced data over the future and the structure of the model itself.

A technique for producing balanced national accounts was described by Stone, Champernowne and Meade in 1942, but there has so far been little use of the method in official publications. This article describes the experimental work undertaken recently by the Central Statistical Office and offers a personal view of the potential for further development. A variation of the original method of Stone et al, called partitioned balancing, seems likely to be useful in complex cases.

The idea of balancing the national accounts can be traced back to the start of national accounting in its modern form. Estimates of national income had been produced in the years before the Second World War, but the first attempt to cast economic data in an accounting framework was that of Meade and Stone (1941). A year later the first paper on balancing the national accounts (Stone, Champernowne and Meade, 1942) appeared. Had the least squares approach, which Peter Kenny at the CSO has worked on, been computationally feasible at the time, balanced accounts would probably be taken as a matter of course, and would not be seen as a slightly confusing adjunct to the conventional ways of presenting the data.