• After falling by 1.5 per cent in 2009, world GDP will grow by 2.9 per cent in 2010.

• The recovery will be driven by emerging economies led by China, whose GDP will expand by 9.2 per cent next year.

• The Japanese economy will recover by 0.7 per cent in 2010 after shrinking by 7 per cent this year.

• The Euro Area will grow by just 0.3 per cent in 2010 after declining by 4.7 per cent this year.

• The US economy will expand by 0.6 per cent next year after contracting by 3.2 per cent in 2009.

• After contracting by 4.3 per cent this year the economy will grow by 1 per cent in 2010.

• Consumer spending will fall by 3.5 per cent in 2009 and by 1.1 per cent next year.

• Unemployment will peak at almost 3m or 9.3 per cent of the labour force in spring 2011.

• House prices will resume their fall, declining in real terms on an annual basis until mid-2012.

• After running at 12 per cent of GDP in both 2009-10 and 2010-11, public sector net borrowing will fall only gradually to 7.5 per cent by 2013-14.

In the UK already bad output figures for the first quarter were revised down in June to show a contraction of 2.4 per cent. While the national accounts indicate a larger fall (2.6 per cent) for the second quarter of 1958, methods of measurement were then different and it is probable that, were current statistical techniques used for the whole of the ONS quarterly data set which starts in 1955, the first quarter of this year would be the sharpest output fall recorded. It was probably the worst quarterly economic performance in the UK since the 1926 General Strike.

World GDP is expected to record a decline of 1.5 per cent this year, the first global decline in annual output since 1946. While this marks the deepest global recession since the Second World War, there are now signs that the crisis in the global banking system has eased. Supported by policy initiatives in economies throughout the world, there has been significant progress in restoring solvency to the global financial system, and lending conditions have started to improve modestly in many countries. While this has minimal impact on the prospects for growth this year, we see the recovery setting in earlier than expected three months ago as a result of the recent decline in global risk premia, with growth returning to most countries by early 2010. The recovery may be somewhat slower in countries such as Spain and Ireland, where housing market corrections will continue to weigh on the economy, while we expect a relatively rapid rebound in many Asian economies as rates of destocking decline and, as a result, world trade recovers from the recent slump. However, the financial crisis will leave permanent scars in most major economies, as lenders are expected to require higher risk premia than the low levels seen from 2003–7, so that the level of potential output will be permanently lower than forecast before the crisis. The magnitude of scarring will vary across countries, depending on the extent to which lenders underestimated risk before the crisis.

The financial crisis in the autumn of 2008 led to a significant increase in risk premia and this impacted quickly on investment through borrowing costs and equity prices, and hence to a very sharp slowdown in activity in the US. There has been a fiscal response in the wake of the Obama inauguration, but this will take time to feed through. Barrell, Fic and Holland (2009) estimated that the 2 per cent of GDP package in 2009 would add around 1.2 percentage points to output growth and the follow-on, worth 0.9 per cent of GDP in 2010, would add around 0.6 percentage points to GDP growth in that year. We expect the general government deficit to reach 14 per cent of GDP this year, albeit with an allowance for the cost of bank rescues, and we expect the debt stock to rise to more than 100 per cent of GDP within four years. The combination of very lax monetary policy with direct action to relieve pressure on banks has been at least as important in helping the stabilisation of output. Open market operations used to increase the money supply (often called Quantitative Easing) and the operation of the Troubled Asset Relief Programme, in combination with the Public Private Investment Programme, have led to significant falls in the cost of borrowing. Between June and September 2007 the spread between BAA corporate bond rates and government long-term interest rates, a good indicator of corporate borrowing costs in the US, rose by 200 basis points, and after the collapse of Lehman Brothers in September 2008 it rose another 300 basis points and stayed at this elevated level until April 2009. The BAA spread fell by 200 basis points between the middle of April 2009 and the middle of July 2009. Although this was partly offset by a 40 basis point increase in government long-term bond interest rates over the same period it meant the user cost of capital had begun to come down.

While quarterly output declines in some East Asian economies have been amongst the steepest in the world, the Asian and Australian banking systems have remained fairly insulated against the global financial crisis. While banks suffered from the freeze in interbank lending in the early stages of the crisis, there is little direct exposure in Asia and Australia to high-risk foreign assets, and banks have not tightened lending conditions as severely as they have in America and Europe. As a result, monetary stimulus in the East Asian and Australian economies has been more effective at reigniting growth, as banks have passed on most of the interest rate cuts to borrowers. Since mid-2008, interest rates have been cut by about 2 percentage points in China and Taiwan; 3¼ points in South Korea and 4¼ points in Australia, and this monetary easing has given an effective stimulus to these economies. In addition to monetary easing, many of the East Asian economies have implemented significant fiscal expansions, notably in both China and Japan, which should support a fairly rapid recovery in the entire region.

The output decline in the Euro Area accelerated in the first quarter of 2009, as real GDP in the single currency block dropped by 2.5 per cent on a quarterly basis as compared to the 1.8 per cent fall recorded in the final quarter of 2008. We forecast that in 2009 the Euro Area economy will contract by 4.6 per cent in annual terms. The contraction will be driven both by severe declines in domestic demand and a collapse in external demand. In 2010 growth in the Euro Area should pick up modestly. We predict that real GDP will rise by 0.3 per cent next year on the back of a gradual global recovery, the effects of recent declines in risk premia, which point to easing credit conditions, and the stimulus provided by monetary and fiscal policy measures taken to counteract the recession.

The global recession has driven a surge in the number of unemployed people across the world. The ILO estimates that global unemployment in 2009 will be some 29–59 million higher in 2009 than it was in 2007, a rise of 16–33 per cent. After taking into account global population projections, this points to a rise in the global unemployment rate of 0.8–1.7 percentage points. A rule of thumb that is often used to relate unemployment to output suggests that a decline in GDP of 2–3 per cent is associated with a 1 percentage point increase in the unemployment rate (see for example Knotek, 2007). Known as Okun's rule of thumb, these estimates are based on a simple regression of the percentage change in output against the percentage point shift in the unemployment rate. These estimates vary across time and across countries, and obviously omit important factors that determine potential output. Nonetheless, the framework provides a convenient way of comparing current labour market developments with behaviour in the recent past. In figure 1 we illustrate the relationship between GDP growth and the change in the unemployment rate in the OECD as a whole, using quarterly data from 1988Q2 to 2008Q3.

The UK economy remains in the worst recession since the Second World War. Revisions to the official GDP numbers suggest that the economy contracted even more sharply than previously thought in the first quarter of this year: 2.4 per cent compared to the preliminary estimate of a 1.9 per cent contraction. Following the publication of our April Review, new data almost immediately suggested that the UK recession might have ended. However, the recovery of industrial production in April did not continue into May and our projections remain much as they were in April, although the quarterly profile has changed, as we can see from figure 1. The dating of the recession, according to official statistics, has also been adjusted. GDP growth rates have been revised back to 2004 (figure 1), and they now suggest that the start of the recession was the second quarter of 2008. This brings the quarterly profile of GDP growth into line with NIESR's monthly estimates of GDP which date the start of the recession as March or April 2008.

GDP data are published after a lag. The Office for National Statistics (ONS) in the UK, which is quicker than statistical offices in other European countries, publishes quarterly GDP estimates about 27 days after the end of the quarter. Inevitably, this means that economists and policymakers neither know where we are now, nor yet where we might be in the future.

Work absorbs a huge share of the lives of most people. It is the major source of income. How people fare at work, the conditions under which they work and the mechanisms for remedying problems at work impact subjective well-being, labour market behaviour, and mental and physical health. While economic analysis treats work as creating disutility, many people are workaholics for reasons beyond income, and one of the robust findings from the new economics of happiness is that unemployment is one of the major depressants of subjective well-being. The independent Strategic Review of Health Inequalities, headed by Professor Sir Michael Marmot, noted in its June 8, 2009 policy dialogue that “employment conditions influence health both directly and indirectly” and argued for structural interventions at workplaces, organisations and broader policies to make a significant contribution toward healthier work. As the world economy has fallen into a sharp recession, the increase in joblessness, potential delays of retirement due to reduced value of pensions, particularly in the private sector, and the probable intensification of work among those who remain employed can be expected to have major impacts on well-being and social behaviour. It is therefore timely to devote an issue of the National Institute Economic Review to work and well-being.

This study aims to assess empirically whether being employed or returning to work is beneficial for all in terms of mental health, especially for those who already suffer from a longstanding illness or disability. We use longitudinal surveys from Australia, Canada, Switzerland and the UK to estimate panel data models that link decisions regarding labour market choices to health developments. To allow for state dependence of mental health, a dynamic panel model is used. The longitudinal analysis shows that non-employment generally is worse for mental health than working. The mental-health payoff to employment varies depending on the type of employment contract and working conditions. In particular, the mental health benefits for inactive individuals who obtain a non-standard job appear to be smaller than for those moving into standard employment arrangements, even after controlling for pre-existing mental health problems.

While much has been made of the value of employment relative to unemployment, much less is known about the value of work relative to retirement. Here we use two European panel datasets to show first that psychological well-being (measured on the EURO-D and GHQ scales) barely changes on average when individuals retire. However, there is a great deal of heterogeneity in the size of this change between job type and between individuals. Some gain on leaving work, while others experience substantial falls in well-being on retiring, suggesting that they may have preferred to carry on working. We suggest that the results of these analyses can help to inform policy aiming to encourage labour supply by older workers.

This paper studies the relationship between sickness absence and spousal retirement. Swedish panel data have been used to estimate the effects of both old-age retirement and disability retirement on average sickness absence during 1996 to 2001 for men and women. Spousal old-age retirement significantly increases female average long-term sickness absence by approximately one week per year, while spousal disability retirement yields a significant increase in average sickness absence for men by approximately one week and for women by approximately two weeks per year.

Sick pay has been debated recently in several economies, including the US, Germany and Sweden. There is, however, little academic discussion of the nature of sick pay, or of how it should be structured. This paper clears the ground for such a discussion in two ways; it identifies a conceptual difference between the North American model, rooted in job protection, and the European model, which is predominantly a form of social insurance. Secondly, it argues that experience-rated sick pay provided by employers avoids the classical problems of insurance markets. US-style paid sick leave is an example of such a scheme.