The second quarter saw a marked acceleration in the economy's growth rate to 0.6 per cent per quarter and the first estimate for the third quarter suggests that this faster rate of growth has persisted. This has to be seen in the context of a situation where, for the last two years economic commentators have been talking about a “downturn” but where there is little evidence of one in the aggregate data. Since the start of the new century in 2001, output has not actually fallen in any quarter and quarterly growth at an annual rate has dropped below 1 per cent per annum only once, in the first quarter of 2003. The industrial sector has been very weak; indeed its experience has been very similar to that of the last recession, but strong service sector growth has meant that the economy as a whole has not experienced a recession. It is of course too early to be sure that we have encountered a sustained period of average or above-average economic growth. The question can be answered definitively only ex post and after due time has been allowed for data revision, but it is certainly the implication of the recent data and our forecast taken together. For this reason, we are not concerned about the fall in industrial production shown in the industrial production index in August. While it obviously affects views of growth in the quarter we do not see it as the beginning of a new downturn.

The growth outlook in our forecast reported in Table 1 looks slightly more robust than it did before the summer, with noticeable upward revisions to both 2003 and 2004, as well as to the medium term outlook. Although the prospects for the European economies are largely unchanged, output prospects look better than they did in North America, Japan and in the rest of East and South Asia. There are stronger indicators in the US, along with clear signs of impacts fromr the depreciation of the dollar and the expansionary fiscal stance. Our forecast for world growth in 2003 has been revised upward by 0.6 percentage points since July to 3.5 per cent, and we are now projecting that growth will be 4.0 per cent or more from 2004 onwards. The revision to 2003 partly stems from statistical revisions in the Japanese national accounts, whereby business investment is now estimated to have risen by 6.8 per cent in the first half of 2003 relative to the previous 6 month period, compared to our July estimate of 1.7 per cent. While we do not expect growth rates of this magnitude to persist, this burst in investment has imparted a momentum to the Japanese economy that has raised the outlook for growth throughout our forecast horizon. As a consequence, our projections for world trade growth have also been revised upward to 5.7 per cent in 2003 and 8.8 per cent in 2004, compared to previous projections of 3.2 per cent and 7 per cent, respectively. However, much of this additional trade is confined to intra-Asian and NAFTA trade, and has not necessarily raised the outlook for external demand in countries such as the UK.

Our upward revision to growth in the US in 2003 and 2004 since July reflects a stronger than expected outcome for investment in the first half of 2003 and a surge in government spending associated with the Iraq war. Private sector investment rose by 1.7 per cent in the second quarter of 2003, pointing to consolidation of the investment recovery that set in towards the end of last year. Investment in computers and peripheral equipment registered particularly strong growth of 4.4 per cent. Federal defence spending rose by 9.9 per cent in the second quarter and government expenditure projections for the second half of the year and 2004 include the $79 billion supplemental budget approved in the summer to fund the war in Iraq, but do not include the additional $87 billion request currently under negotiation.

In the first half of this year, the Euro Area economy continued to lag behind much of the rest of the world. After stagnating in the first quarter, GDP contracted by 0.1 per cent in the second quarter following an average quarterly expansion of 0.3 per cent in 2002. The appreciation of the euro is largely to blame for this development, taking a toll on exports. The weak outcome for the first half of the year, coupled with the appreciation in the nominal effective exchange rate by about 6.9 per cent over the same period and weak prospects for private investment, dampens the outlook for the year as a whole. Industrial production declined by 0.4 per cent in August, supporting our assessment that a Euro Area recovery is not yet underway. In light of the most recent evidence, we have revised our estimate for Euro Area growth in 2003 downward to just below ½ per cent. However, we continue to expect a more pronounced pick-up in growth to around 1¾ per cent in 2004, as domestic and external demand both strengthen. Output growth in the Euro Area is projected to return towards trend levels of about 2½-2¾ per cent per annum in 2005. The output gap in the Euro Area is expected to widen further in the second half of 2003, with the economy returning to capacity output in 2006.

On 14 September, Sweden voted against adopting the euro, with 56.1 per cent voting against and 41.8 per cent voting in favour of the single European currency, with a strong turnout of 81.2 per cent. This was a blow to both the government and business lobbies, who strongly favoured euro entry. While Sweden does not have a formal opt-out clause like the UK and Denmark, they have remained outside the single currency area by postponing membership of ERMII and thereby failing to meet the exchange rate criterion. Since 1999, the Swedish krona has fluctuated from a high of 9.96 krona to the euro to a low of 8.06.

GDP growth picked up in the second quarter and has remained close to trend over the course of the summer after an initial dip in the first quarter of the year. Preliminary estimates of GDP suggest the economy expanded by 0.6 per cent in the third quarter of 2003. The recovery of growth from the relative weakness observed throughout most of 2001 and 2002 has arrived somewhat earlier than we thought at the time of our July forecast. GDP growth was revised upwards from 0.1 and 0.3 per cent per quarter in the first two quarters of the year to 0.2 and 0.6 per cent per quarter. Chart 1 shows our forecast of quarterly GDP growth to the end of 2004. We expect growth to remain close to trend over this period. For this year as a whole our central projection shows the economy expanding by 2.0 per cent this year and by 2.6 and 2.7 per cent per annum in 2004 and 2005.

Consumption behaviour in the UK is frequently seen as different from that in other countries. The relationship between the housing market and consumption is discussed at length in HM Treasury (2003). The housing market, which has been particularly cyclically volatile in the past 30 years, has contributed to cycles in consumption through its impact on housing wealth. Increased house prices increase the value of assets held, and impact on consumption, making the economy more cyclical. There is a clear relationship between the level of real financial plus housing net wealth as a proportion of income and the savings ratio (excluding adjustment for changes in net equity of households in pension funds), as can be seen from chart 1, where we plot the stock of total net assets over the flow of income to indicate just how much ‘cover’ the personal sector has on its current commitments. When wealth rises, for instance because real asset prices have risen, then individuals find themselves with more assets than they need and increase their consumption in order to return their assets to their equilibrium ratio to income. Clearly this process is not instantaneous, but cycles in wealth driven by house prices could have contributed to the cyclical nature of overall demand in the UK in the past 30 years.

The article describes some evaluation findings from a longitudinal study of young people receiving business start-up assistance, through the Prince's Trust (with financial support from the Government). Unusually for evaluations of self-employment schemes, it focuses not solely on issues of deadweight and business survival, but also looks at the impact of programme participation on the subsequent labour market outcomes of participants. It uses a matched comparison group methodology to model programme impact, and finds no statistical evidence that supported entry to self-employment has an impact on participants' subsequent ‘employability’. After controlling for other factors, those who leave the programme are no more likely than those in the comparison group to be in employment, and if in employment their earnings are no higher than those in the comparison group.

The UK is preparing to start one of the largest random assignment evaluations of a new social policy that has ever been undertaken in Europe or North America. This juncture is a useful time to examine the merits of random assignment evaluation using new results from one-of the most widely cited experimental evaluations the Self-Sufficiency Project in Canada. Random assignment experiments are the most reliable approach to measure the impacts of changes in social policy. However, they are often expensive and cannot answer all relevant research questions. The Canadian Self-Sufficiency Project demonstrates these qualities. It showed that the provision of earnings supplements to lone parents who leave welfare for full-time work can increase employment and earnings and decrease welfare receipt. The high quality of research provides credible evidence that the large, initial programme expenditure can mostly be recovered through reduced welfare payments and higher taxes.

We construct a framework for evaluating the macroeconomic impact on the UK economy of policies that are aimed at reducing the number of people receiving social security benefits by helping them into employment. By means of model simulation we evaluate the gains to the economy in terms of output, employment and improvements to the public finances of a policy that reduces the number of people claiming disability benefits or lone parents on Income Support by 5 per cent. These gains can be regarded as significant and have to be offset against the costs of the policy. We conclude that it is possible to evaluate the impact of policies to enable benefit claimants to find work using a macroeconomic model, and that such an evaluation should be included in each assessment of policy change.

The use of economic evaluation in relatively complex areas of health and social care has been limited. The level of complexity is influenced by the nature of the problems and interventions under evaluation, being dependent upon the degree of user involvement and the complexity of the inputs and outcomes. Complexity does not preclude the achievement of a good quality economic evaluation, but it can add significant difficulties. Efforts must be made to ensure scientific validity of evaluations, whilst recognising that the complexity inherent in many health and social care interventions may require deviations from and additions to traditional evaluation models. Fundamentally, the net effect will be the need for more time and money than would perhaps be required for the evaluation of a simpler intervention.