The UK economy.

Pain, Nigel ; Riley, Rebecca ; Weale, Martin 等

The production of this forecast is supported by the Institute's Corporate Members: Arcadia Group plc, Bank of England, Barclays Bank plc, Dixons plc, Ernst and Young LLP, GlaxoSmithKline, INVESCO Europe Ltd, Marks and Spencer plc, Morgan Stanley Dean Witter (Europe) Ltd, Morley Fund Management, The National Grid Company plc, Nomura Research Institute Europe Ltd. Pearson plc, Rio Tinto plc, Standard Chartered Bank, UBS Warburg, Unilever plc, Watson Wyatt Partners and Willis Corroon Group plc.

Section 1. Recent developments and summary of the forecast

Ahead of the official data, we anticipate only slow growth in the first quarter of this year GDP stagnated in the fourth quarter of 2001, with continued growth in the service sector being offset by a sharp contraction of 2.2 per cent in industrial production. It appears increasingly likely that this was just a temporary pause. Whilst growth is expected to be faster later in the year, as shown in chart 1, the relatively poor performance at the turn of the year and lower projections for government spending growth this year mean that we now expect only a 1.8 per cent rise in GDP in the year as a whole, below the bottom end of the range projected by the Treasury in the recent Budget forecast. The risk of the green shoots of recovery failing to consolidate remains as a downside risk to our central forecast.

In the fourth quarter of last year export volumes declined by 1.2 per cent and private sector investment also declined. A contraction of the economy was avoided due to strong growth in both household and government consumption. The poor performance of the trade able goods sector is likely to come to an end over the course of this year. As discussed elsewhere in this Review, it is becoming increasingly clear that a robust recovery in the North American economies is well underway, improving the outlook for world trade growth. This accords with recent survey indicators from both the Chartered Institute of Purchasing and Supply and the Confederation of British Industry, which suggest that the manufacturing sector is beginning to pull out of recession, and is tentatively confirmed by the first rise since August in the monthly output of the manufacturing industries in February.

However, the imbalance between the performance of the household and company sectors prevalent in the economy last year is likely to continue during the first part of 2002. The slower than anticipated recovery of the company sector and the continued weakness of exports during January and February imply that household and government expenditures will remain the principle factors supporting growth. Although the volume of retail sales is estimated to have declined in both December of last year and January, strong growth in February combined with strong rates of growth in consumer credit in the three months to February and the high level of mortgage equity withdrawal towards the end of last year all provide signals that private consumption growth remains relatively strong.

Following increasing tension in the Middle East and unrest in Venezuela, the price of crude oil surged between the last week of February and the first week of April by $7 to $8 per barrel before falling back a little in the middle of April. We now expect the average level of oil prices to be $24.5 per barrel this year; some 14 per cent higher than the level that had appeared likely at the time of our last forecast. Simulations on our global macroeconometric model NiGEM suggest that a rise in oil prices of this magnitude, lasting for one year, would raise the rate of consumer price inflation by an average of approximately 0.15 percentage points per annum for two years. The effect on GDP would be minimal. Chart 2 illustrates the impact of a temporary and permanent 20 per cent rise in oil prices on the private consumption deflator and the level of GDP. A permanent shock would, in the first five years, raise inflation by an average of 0.15 percentage points per annum and would reduce GDP growth by a marginal 0.05 percentage points per annum. In general, the effect of the shock on the UK will be smaller than on the US or the Euro Area, owing to the United Kingdom's status as an oil producing country. On the basis of these calculations, the recent rise in oil prices appears to pose relatively little threat to the inflation outlook, even if it were to be permanent.

Inflation expectations rose by 0.3 and 0.1 percentage points in February and March as measured by the difference between the yield on 10-year benchmark government bonds and index linked bonds (chart 3). A similar rise in inflation expectations also appears to have occurred in Canada and the Euro Area this year. This could reflect a number of factors, including the rise in oil prices discussed above. The aggressive loosening of monetary policy last year and concerns that policy may be too accommodative as economic activity picks up may also have caused inflation expectations to rise. Alternatively, the weak performance of exports may have increased expectations of a future exchange rate depreciation, although this does not appear to have been priced into the market at the time of writing.

As was the case for the United Kingdom's major trading partners, export performance suffered last year. In January it appeared that the poor performance of exports could be explained by the slowdown in world trade. While this is undoubtedly an important part of the explanation for weak export growth, the decline in merchandise exports towards the end of last year and in the early part of 2002 appears to have been significantly greater than our model of the economy would normally predict on the basis of relative trade prices and the volume of world trade. However, this is not easily explained, as the weakness in exports is mainly outside the Euro Area whereas sterling appears to be relatively overvalued against the euro at present, as discussed elsewhere in this Review (page 105). It is possible that continued deregulation of product markets in the European Economic Area as a result of the Single Market Programme has helped to counteract the high level of sterling by offering UK exporters improved market acces s, but formal econometric evidence is not available to verify this hypothesis.

Monetary policy and inflation prospects

Short-term interest rates have now remained on hold at the historically low level of 4 per cent for six consecutive months. Markets continue to anticipate a rise in the base rate to 5 per cent by the end of the year, which implies an increasingly steep path for interest rates in the latter half of the year. Whilst we continue to base our forecast on market expectations of interest rates, it is quite possible that the Monetary Policy Committee may choose to raise rates more slowly and wait for stronger evidence that growth rates are returning to their long-run trend levels.

The annual rate of RPIX inflation is forecast to average 2 per cent this year, with a one in four chance of inflation falling below the level where the Governor of the Bank of England will have to write to the Chancellor of the Exchequer explaining how monetary policy will be used to raise the inflation rate. This is an upward revision from our January forecast. In part this reflects stronger than anticipated inflation in the first quarter, when the annual rate of RPIX inflation rose to 2.4 per cent, as well as the effects of higher oil prices. Although there is slightly more inflationary pressure in the world as a whole than had been anticipated at the beginning of the year, the outlook for inflation in all the major economies, including the UK, is still very benign, with wholesale prices continuing to decline and the rate of growth of unit labour costs expected to moderate.

One of the risks to the inflation outlook is the possibility of a sharper depreciation of sterling than is currently implied by the cross-country pattern of interest rates in the financial markets. This might be triggered by fears about the potential unsustainability of the UK external deficit. However; whilst the current account deficit is forecast to rise further to over 21/2 per cent of GDP this year and next, deficits of this magnitude should be easily financed and do not in themselves pose a particular threat to macroeconomic stability. But if exports fail to recover as world trade growth accelerates, the external position could deteriorate more than we presently expect.

We set out our analysis of the prospective fiscal position following the recent Budget below. This suggests that further tax rises may be required if the government is to meet its stated objectives for the level of net borrowing. If it is unwilling to raise effective tax rates further, the new plans for higher public expenditure will pose a threat to the inflation outlook in the medium term, prompting larger rises in interest rates than we currently project.

Fiscal policy

The Budget contained a significant upward revision to the planned level of public expenditure and taxation over the medium-term until 2006/7. The Chancellor also announced a number of tax changes, the most significant of these being the rise in the rates of both employers' and employees' National Insurance Contributions coming into effect at the beginning of the next financial year. The Government expects the changes to National Insurance to raise additional revenue of [pounds sterling]7.9bn and [pounds sterling]8.3bn in financial years 2003 and 2004, just under 3/4 per cent of GDP in each year. While not a hypothecated tax, it is clear that the Government wishes the rise in National Insurance Contributions to be associated with the additional funding required to modernise the National Health Service. In comparison to the Pre-Budget Report the Budget announced plans to raise current expenditure by [pounds sterling]9bn in 2003/4, [pounds sterling]l4bn in 2004/5, [pounds sterling]2lbn in 2005/6 and [pounds ster ling]24 billion by 2006/7. The planned level of net public sector investment was also raised to 2.1 per cent of GDP by 2006/7, compared to 1.8 per cent of GDP in previous plans. There were a number of additional tax and expenditure changes in the Budget, of which the most important was the introduction of a new Child Tax Credit and a Working Tax Credit from 2003/4. These replace a range of existing benefits, with an estimated additional first year cost of [pounds sterling]2.6 billion.

Despite the higher levels of expenditure, the projections for the current budget surplus in the Budget were little changed from those in the Pre-Budget Report. This was achieved partly through an upward revision to the trend rate of economic growth used when the public finance projections are made, with the average annual trend growth rate raised from 2 1/4 per cent to 2 1/2 per cent. However public sector net borrowing was projected to rise to 1.4 per cent of GDP in 2005/6 and 2006/7, compared to 1.1 per cent of GDP in previous plans, with net borrowing [pounds sterling]7 billion higher in 2006/7.

In our forecast we have assumed that current expenditure and net investment grow in line with the plans set out in the Budget. Tax receipts are however left to be endogenously determined within our model of the economy after taking into account the changes in receipts that directly relate to policy changes.

Largely as a result of the Budget changes, the state of the public finances appears less healthy than it has been for some time. In running our model we ensure that the public sector is solvent in the medium term, i.e. taxes adjust so that the deficit or surplus is stabilised. If we did not do this, interest would compound on outstanding deficits or surpluses as the national debt would eventually rise or fall without limit. This means that, in the medium term, our forecast allows tax rates to adjust if it looks as if the Government's published fiscal targets will not otherwise be met to deliver financial balances close to the Government's targets. The weakness of the public finances is expressed not by a rising fiscal deficit but by increases in tax rates, raising additional revenue amounting to 0.5 per cent of GDP by 2006/7. Without these tax increases we anticipate that revenues will be below the levels projected in the Budget. This revenue shortfall in turn arises largely because, over the period from 2002 to 2006, our model implies that tax revenues are less buoyant than the Government suggests. That said, it has to be recognised that, to this horizon, there are large margins of error associated with both our projection and the Government's.

There are, nevertheless, two other concerns about the fiscal position as it stands. First of all, an analysis, carried out by the National Institute ahead of the Budget, looked at the long-term fiscal position of the Government by comparing the discounted value of all current and future spending commitments announced prior to the Budget against the discounted value of expected future revenues. The analysis was based on official sources as far as they exist, with simple projections beyond the Government's planning horizon. The exercise, an extension of our earlier work on generational accounting (Cardarelli, Sefton and Kotlikoff, 2000), suggested that there was a shortfall on future revenues which needed taxes to be raised or expenditure cut by 0.5 per cent of GDP. Nevertheless, the deficiency was small compared to that in many other countries and it could be argued that, given the margin of uncertainty around the calculations, the position was satisfactory.

Secondly, our projection shows for 2006/7 a public sector deficit [pounds sterling]7bn higher than was projected in the Pre-Budget Report. If one accepts that the position set out in the Pre-Budget Report was reasonably close to long-term balance, then it is likely that a further tax increase of 0.5 per cent of GDP is needed to close this increased deficit. All told, these figures suggest that, in total, tax increases or spending cuts equivalent to 1 1/2 per cent of GDP are needed to restore the long-term solvency of the public sector. In our projections some of the necessary tax increases are delayed beyond the forecast horizon, but there are good economic arguments for keeping expected future tax rates constant and thus raising taxes now to cover future spending commitments.

These observations, and indeed the Chancellor's actions, have to be contrasted with the message which emerges from his fiscal rules. The first requires government debt to be kept to a prudent and sustainable level, taken to be 40 per cent of GDP, and the second indicates that, averaged over the cycle, the government current account must be in balance or in surplus. Even without the tax increases which we identify, these rules would almost certainly be met. Chart 4 graphs the public sector current account surplus as a percentage of GDP since the start of the current cycle in 1999 under three different tax scenarios calculated on the assumption of unchanged monetary policy. If the extra rises necessary to hit the Budget borrowing targets are postponed until 2006/7, the current account surplus reduces in 2005/6 and 2006/7 from 1/2 per cent of GDP to around zero. If in addition we exclude the rise in National Insurance contributions proposed in the Budget, the current account surplus reduces by a further 1/2 per cent of GDP on average in 2005/6 and 2006/7. Given that there is a cumulated surplus of over [pounds sterling]50bn on the government current account so far during the cycle, the rules would have tolerated a budget similar to that actually presented, but without the increases in National Insurance contributions. We do not suggest that such a fiscal policy would have been sensible, given the overall economic circumstances. But given that the rules are such a poor guide to budgetary policy, it would be sensible for the Chancellor to consider replacing them. One approach would be to have a proper fiscal target, rather like the inflation target, with the Chancellor aiming to keep the current balance within some band round the target, and accounting to Parliament for any deviation outside that band.

Summary of the forecast

It is increasingly apparent that the economy is at a turning point. Using our estimates of monthly GDP, we estimate that GDP rose by 0.2 per cent in the first quarter of this year. Although this is an improvement on the previous quarter, growth is clearly still below trend, reflecting the continuation of the slowdown which began in September last year into January. We expect a sharp pick-up in GDP growth to 0.8 per cent in the second quarter as the factors which sustained positive growth in the latter half of 2001 remain in place and as the company sector ceases to exert a drag on the economy. For the year as whole we expect GDP growth of 1.8 per cent. This is a downward revision of 0.3 percentage points from our January forecast and reflects the slower than anticipated recovery of the company sector in the first quarter as well as slower growth in the volume of government expenditure. The value of public expenditure this year is unchanged from our previous forecast, but it now appears that rather more of thi s will be taken up through higher public sector pay awards, rather than an increase in the volume of purchased goods and services. We expect GDP growth to accelerate to 2.9 per cent per annum in 2003, just below the bottom of the range forecast by the Treasury in the Budget.

Household expenditure is expected to moderate slightly this year as interest rates rise and income growth slows. The rise in taxes that comes into effect at the beginning of the next financial year will also serve to dampen income growth, and may affect expenditure this year. We estimate that the combined effect of the changes to national insurance and other personal taxes proposed in the Budget is to reduce growth in real disposable income by 1/4 percentage point in 2003. House price inflation is expected to moderate to around 6 per cent per annum over the next three years, but the housing market remains strong.

Growth in gross fixed investment expenditure is expected to pick up to 2.8 per cent this year after slowing to 0.1 per cent in 2001. The individual components of investment will perform quite differently. While growth in business investment is expected to recover gradually, it is expected to remain relatively weak despite low nominal interest rates and strong equity markets because of excess capacity, historically low rates of return on capital and the decline in the level of investment through the course of last year. Government investment is expected to add 0.4 per cent to the level of GDP this year, assuming that volumes grow by 26 per cent as set out in the Budget.

The level of exports is expected to fall further in the first quarter given trade data to February, with net exports reducing growth by 0.9 percentage points in the first quarter. The poor performance of exports at the turn of the year is somewhat puzzling, given the anticipated revival of world trade. Growth in exports is expected to gather momentum in the latter half of the year. Manufacturing output is also expected to pick up in the latter half of the year as the performance of this sector is closely linked to the performance of exports. The more rapid recovery of import growth raises the current account deficit to just over 2 1/2 per cent of GDP this year and next. Net exports are forecast to reduce the growth of GDP at constant prices by 1 1/2 percentage points this year and by 0.6 percentage points in 2003, after having reduced growth by 0.8 percentage points in 2001.

After rising towards the end of 2001, unemployment has now begun to fall back. At the same time employment is rising and the growth of average earnings has moderated significantly. This is evident in both the headline rate of average earnings and pay settlements data. These trends increasingly suggest that the impact of the recent slowdown is likely to have affected productivity and earnings rather than employment levels. We expect relatively modest employment growth this year of 0.1 per cent. This implies a slight rise in the unemployment rate to 3.4 per cent by the end of the year. Unemployment on the ILO definition is expected to reach approximately 5.4 per cent by the end of the year.

While there is little to expect in terms of inflationary pressure originating in the labour market, there is also little inflationary pressure elsewhere in the world, barring the recent rise in oil prices. We expect inflation to remain below target this year at around 2 per cent on average, rising to 2.5 per cent by the end of 2003.

Section II. The forecast in detail

Components of expenditure (table 3)

There is now mounting evidence to suggest that positive rates of growth have been restored early this year, but the recovery is likely to be somewhat slower than we had anticipated in January. Our early estimates of monthly GDP suggest that growth in the first quarter was 0.2 per cent. The pattern of monthly GDP suggests that the stagnation in economic growth which began in September last year continued into the first month of 2002, contributing to the weak rate of growth estimated for the first quarter.

This would be nevertheless an improvement on the last quarter of 2001 when the economy failed to expand. That was the lowest quarterly rate of growth since Spring 1992 when the economy contracted by 1/4 per cent. As was the case throughout the earlier part of the year, the company sector remained a drag on growth. Depressed business confidence, weak external demand and uncertainty about the outlook for the economy led to reductions in stockbuilding, reducing overall growth by 1/4 percentage point. The National Accounts quarterly alignment adjustments included in the figures for changes in inventories reduced growth by a further 0.3 percentage points. Business investment and exports continued to fall, albeit by less than in the third quarter, reducing GDP by 0.4 per cent. Strong growth in household consumption and government expenditure in particular helped to sustain growth, but not sufficiently to offset the weak performance of the company sector and the decline in net trade.

Weak trade data for the first two months of the year and the sustained fall in export volumes throughout the fourth quarter of 2001 suggest that the level of exports in the first quarter will remain below that in previous quarters. Business investment is expected to rise by a modest 1/4 per cent. The slow turnaround of the company sector combined with a slight moderation in household consumption expenditure, following weaker earnings growth, and an increase in import growth has helped to hold back the recovery to overall growth rates at the beginning of the year. Growth in household consumption is expected to have moderated from around 1 per cent per quarter in the second half of last year to around 3/4 per cent in the first quarter of 2002, but growth in government consumption is expected to remain strong, at 1.6 per cent in the first quarter

Two months into the year, improved business confidence, a range of more positive economic data and evidence of a stronger than expected recovery in the North American economies suggest that growth will accelerate in the second quarter, becoming more balanced and remaining strong throughout the year (chart 1). Exports are expected to rise again as world trade growth picks up. Business investment will rise with the improved outlook and changes in inventories are likely to be positive after a prolonged period of stock clearance. While we anticipate more modest growth in consumption than last year, we do not expect a sharp contraction in household expenditure. Growth in government consumption is expected to slow in the second half of the year as implied by the semi-annual spending plans published in the Budget.

Despite the relatively poor end to 2001, GDP was 2.2 per cent higher than in 2000. This rate of growth is not far below trend, leaving the United Kingdom as the fastest growing of the G7 economies last year. This is unlikely to be the case in 2002. We expect GDP growth to slow to 1.8 per cent per annum this year, picking up to 2.9 per cent per annum in 2003. The downward revision to our growth forecast for 2002, of 0.3 percentage points since January, reflects two factors. First, the recovery of the company sector is likely to be slower than previously anticipated. Second, government expenditure is expected to contribute 0.2 percentage points less to GDP growth than we expected in January. In projecting government expenditure we assume that the Government delivers its plans for final expenditure as set out in the latest Budget. Compared to the Pre-Budget Report, the Government's expenditure plans in the Budget allow the same level of nominal expenditure this year with a smaller rise in real expenditure. Data revisions imply a higher level of real expenditure last year and expectations of inflation in the public consumption deflator have been revised upwards for this year by around 1 percentage point. Thus the rate of growth of real expenditure this year has been revised down.

Household sector (table 4)

The relatively strong growth performance of the UK economy in 2001 was largely attributable to strong growth in household consumption expenditure. This continued into the last quarter of the year when consumption grew by 0.9 per cent, slightly below the 1 per cent observed in earlier quarters. Growth in the consumption of durables was particularly strong in the last quarter, rising by 4 per cent on the previous quarter. We expect growth in household expenditure to moderate to 0.7 per cent per quarter throughout this year as growth in real disposable income slows and as interest rates rise. Growth in the headline rate of average earnings fell to 1.9 per cent in the three months to February. Over the same period the growth in retail sales volumes slowed, providing some indication that consumers may be reining in spending. On the other hand, while retail sales volumes fell in both December of last year and January, strong growth in February could suggest that the slowdown at the turn of the year was short-lived. Other data cast similar doubt on whether consumers will moderate spending at present interest rates. Lending to individuals rose at an annualised rate of over 12 per cent in the three months to February. Most household debt is secured on dwellings, but recent rates of growth in consumer credit and mortgage equity withdrawal suggest that lending is increasingly being used as a means to finance consumption. While the cost of servicing debt remains low by historical standards, increasing debt levels do raise the risk of a sharper contraction in consumption as interest rates eventually rise.

The tax rises proposed in the Budget will provide an additional constraint on consumption growth next year. We expect the rise in employers' national insurance contributions, which comes into effect at the beginning of next financial year, to increase employee compensation by 0.3 per cent. The additional pressure on labour costs is likely to result in slower employment growth. Alternatively, employers may seek to reduce costs by reducing pension contributions, leading to lower private sector savings. The reduction in private sector savings does not come about via substitution of public for private sector saving, but is associated with a decline to national saving. The combined effect of the changes to national insurance and other personal taxes proposed in the Budget is estimated to reduce growth in real disposable income by 1/4 percentage point in 2003. Consistent with the public sector finance statistics, we have treated the new Child Tax Credit and the Working Tax Credit as negative taxation, partially off -setting the rise in taxes paid by employees that comes about via the increase in their national insurance contributions.

The year-on-year change in house prices, as measured by the DTLR mix-adjusted index, fell from 10 to 4.6 per cent from the third to the fourth quarter of last year. We expect house price inflation to slow to around 6 per cent per annum over the next three years as growth in real disposable income slows and interest rates rise. Significant growth in both the Halifax and the Nationwide indices of house prices in the first months of the year suggest that house price inflation may moderate more gradually than we currently anticipate. On the other hand, the DTLR measure of house prices does not necessarily follow the pattern of these indices due to differences in weighting.

We do not expect a sharp slowdown in the housing market. Cumulative reductions in interest rates have resulted in historically low rates of mortgage interest and incomes are not expected to slow dramatically. Chart 5 illustrates the correlation across regions over the past decade between the average annual rate of house price inflation and the average annual increase in the shortage of dwellings as measured by the difference in official estimates of the growth rate of the population of households and the stock of dwellings. The stark correlation would suggest that population growth which is not accompanied by a commensurate increase in the housing stock is one of the main factors underlying house price inflation. Population projections for the next five years show the strongest rate of increase in the number of households in those regions where house prices are already high. Adjusting the rate of increase for recent housing starts in proportion to the stock of dwellings this remains the case, suggesting that a sharp slowdown in the housing market is unlikely in the near term.

Investment (table 5)

Business investment fell slightly in the last quarter of 2001 by 0.3 per cent. In light of the generally poor investment climate, and in comparison to previous quarters last year, the reduction is small. Manufacturing investment rose for the first time since the third quarter of 2000 by a modest 0.2 per cent. The increase was entirely due to an increase in investment in the engineering and vehicles industries of 17 per cent partially offsetting a reduction of more than 20 per cent in the third quarter of last year. Investment in the engineering and vehicles industries accounts for a third of manufacturing investment. Investment in all other industry groups within manufacturing fell in the fourth quarter of last year. Within non-manufacturing, investment in private sector services industries dropped throughout last year, leaving investment in the fourth quarter of 2001 9.1 per cent below the level in the fourth quarter of 2000. In total, business investment in 2001 was 1.1 per cent lower than the previous year . Given the strength of the housing market the reduction in housing investment in 2001 of 0.6 per cent is somewhat more surprising.

The poor investment climate in the company sector last year is expected to improve in 2002, but not so far as to lead to a surge in business investment. The corporate profit share fell by 0.7 per cent of GDP in 2001 and is expected to rise only slowly this year as wage pressure moderates. Net rates of return have fallen to very low levels compared to the recent past and are likely to take some time to recover to previous levels (chart 6). In the manufacturing sector net rates of return have fallen to their lowest levels since 1992, while net rates of return for service sector companies are at their lowest levels since 1995. Thus, despite relatively strong equity markets and historically low interest rates, we do not expect business investment to recover to 2000 levels until next year. The recovery of manufacturing investment to previous levels will be more protracted due to the sharp decline throughout 2001 and the over-capacity that has built up over this period. We expect housing investment to grow more rap idly at approximately 3 per cent per annum until the end of the forecast horizon, making up for the lack of investment in recent years, supported by continued strength in the housing market.

The fall in business and housing investment last year was offset by strong growth in government investment of 14 per cent. We expect government investment to continue bolstering total investment this year. In line with the investment plans in the Budget, we expect strong growth in government investment of more than 26 per cent in 2002, adding 0.4 per cent to the level of GDP. The possibility that the government will find it difficult to achieve its investment plans, as has been the case in the recent past, remains a downside risk to our projections for fixed investment.

Balance of payments (table 6)

World trade, as measured by the weighted average of import volumes in the UK's main export markets, is estimated to have fallen for the fourth consecutive quarter in the last quarter of 2001, but at a slower rate than throughout the earlier part of the year. As discussed in our chapter on the world economy, world trade is expected to bounce back this yea; led by the strong recovery of the North American economies. Exports of goods fell by 1.8 per cent in the fourth quarter of last year, leaving goods exports 3.8 per cent lower in 2001 than in 2000. Trade data to February show exports of goods in both January and February below the level in November last year, suggesting that exports are unlikely to rebound as quickly as world trade. In part this is due to the appreciation of the effective exchange rate in the first quarter of the year, resulting from the weakness of the euro. We expect exports of goods to fall by a further 1 1/2 per cent in the first quarter of 2002 before rising in the latter half of the yea r as world trade consolidates.

We assume that sterling follows a path which satisfies the uncovered interest parity condition. This implies a depreciation of the effective exchange rate of approximately 1 per cent per annum in 2003 and 2004. We expect the current account deficit to rise from 1 3/4 per cent of GDP last year to just over 2 1/2 per cent of GDP this year and next as imports are expected to grow more quickly than exports, given relatively strong growth in domestic demand. The increase in the deficit in 2004 to 3 per cent of GDP comes about not by a significant deterioration in the goods balance, but by a reduction in the surplus on the invisibles balance, reflecting in part a lower return on foreign assets.

Output and employment (tables 7 and 8)

The decline in manufacturing output continued to the end of last year. In the fourth quarter of 2001 the volume of output in manufacturing industries fell by 1.9 per cent, leaving manufacturing output 2.3 per cent lower in 2001 than in 2000. The index of production shows manufacturing output rising by 0.4 per cent in the month to February, the first rise since August last year. This provides some indication that the manufacturing sector may have begun to pull out of recession, although it is not sensible to draw strong conclusions from one month of positive growth. A number of other indicators are also suggestive of an imminent reversal of the recent trend in manufacturing. The CIPS Purchasing Managers' Index rose in the first three months of the year, rising above the no change mark in February for the first time in twelve months. In addition, the CBI Industrial Trends Survey showed a rise in demand for manufacturing goods in February, stabilising in March. We expect manufacturing output to have contracted b y approximately 3/4 per cent in the first quarter of this year and anticipate positive growth in the second quarter, gathering momentum into the second half of the year.

Output in the construction sector expanded significantly in the fourth quarter of 2001 by 1.8 per cent. Over the year as a whole construction output grew by 3.6 per cent. We expect strong growth in construction to continue this year due to strong public sector fixed investment and the anticipated pick-up in housing investment. Growth in the service industries is expected to be more subdued than in recent years due to the moderation in household consumption expenditure. Growth in public sector output is expected to rise rapidly following the ambitious spending plans proposed in the Budget.

Labour productivity growth was unremarkable last year, reflecting the decline in the manufacturing sector, traditionally the high productivity sector, as well as a deterioration of productivity within sectors. We expect productivity growth to slow further this year as the economy grows less quickly than last, picking up next year as the manufacturing sector pulls clear of its year-long recession, as economic growth accelerates and as firms attempt to restore profits.

Employment rose in the three months to February 2002 by 30,000. Over the same period, the number of ILO unemployed fell by 14,000 and the claimant count fell in each of the first three months of this year. These changes increasingly suggest that productivity and earnings may bear the brunt of the slowdown in growth rather than employment levels. For example, in contrast to the first half of 2001, the second half of the year saw whole economy output per job growing more slowly than output per hour. This pattern may be suggestive of labour hoarding as hours are easier to adjust than jobs during a slowdown. On the other hand the employment rate, measured as the proportion of the population of working age in employment, fell in the three months to February. Since the rate of ILO unemployment remained unchanged over this period, the decline in the employment rate is due to an increase in the share of inactive people amongst the population of working age. Approximately 10 per cent of the population of working age i s not in employment and wants work (chart 7). More than half of these are classified as inactive rather than ILO unemployed as they were not actively seeking work in the four weeks prior to survey.

Excess capacity and attempts to restore profits are likely to help slow employment growth this year to around 0.1 per cent. This does imply a modest rise in unemployment. We expect the claimant rate to rise to approximately 3 3/4 per cent of the workforce next year as the population of working age and the civilian workforce grow more rapidly than employment. Unemployment on the ILO definition is expected to rise to approximately 5 3/4 per cent of the workforce.

Prices and wages (table 9)

Average earnings growth slowed in the latter half of 2001, particularly in the last quarter, as the slowdown in activity affected the labour market. Provisional data to February this year suggest that the headline rate of average earnings growth decelerated significantly further at the turn of the year, from 4.1 per cent in the three months to November to 1.9 per cent in the three months to February. Much of the slowdown in earnings growth was due to cuts in bonuses this year after large bonuses paid out in the winter a year ago. However, the rate of growth in the index excluding bonuses also decelerated. The slow-down was apparent in all sectors of the economy, but was particularly stark in private sector service industries.

Pay settlements data to March 2002 produced by the IRS Pay Databank also suggest that wage pressure is particularly low at the moment, showing a marked slowdown in basic pay awards from the beginning of this year. The headline rate of pay settlements has fallen to 2.5 per cent, the lowest in two years. The slowdown is prevalent in both manufacturing and services and is widespread in the sense that three quarters of employers offered lower settlements in the three months to February compared to last year. The data reflect in part the benign outlook for inflation towards the end of 2001 and suggest that pay pressure will remain relatively subdued in the near term. January pay settlements cover approximately 20 per cent of annual settlements and often set the benchmark for settlements in April, the busiest month of the annual pay round.

The estimates of average earnings shown in table 4 are calculated from National Accounts data and are defined in terms of total labour compensation per employee. Movements in this measure of average earnings are closely correlated with movements in the headline rate of average earnings, although over shorter time periods this is not always the case (chart 8). Compensation per employee appears to have risen more rapidly than 'headline' average earnings throughout last year. We expect growth in our measure of average earnings to decrease to 4.1 per cent this year from 5.2 per cent last year Growth will pick up again in 2003 to 5 per cent per annum as the economy grows more quickly, compounded by the rise in employers' national insurance contributions in the second quarter.

Retail price inflation has been significantly stronger in the first quarter of this year than we originally anticipated in January. Underlying inflation, measured by the retail price index excluding mortgage interest payments (RPIX) was 2.4 per cent in the first quarter of the year. We expect this to fall back to just under 2 per cent for the remainder of the year returning to its target value of 2.5 per cent by the end of 2003. This is slightly higher than predicted in January, reflecting in part the recent rise in oil prices. There is still relatively little inflationary pressure in the world economy, with plenty of spare capacity following the slowdown throughout last year.

Producer prices fell in the first quarter of 2002 and input prices are still low in comparison to the recent past, reflecting a sustained period of falling demand and the weakness in the price of raw materials. We expect producer price inflation to remain subdued this year, picking up in 2003 as the world economy expands more quickly. The possibility of further rises in oil prices remains a slight upward risk to the inflation outlook.

National and sectoral saving (table 10)

Table 10 shows the balance between saving and investment in each of the institutional sectors of the economy and for the nation as a whole. An excess of investment over saving is financed by means of a financial deficit, and an excess of investment over saving for the nation as a whole is represented by the current account deficit of the balance of payments. The current account deficit increased to 3 per cent of GDP in the fourth quarter of last year due to a sharp drop in government net saving worth 2.4 per cent of GDP. We expect government gross saving to remain just over 1 per cent of GDP on average over this year and until the end of the forecast horizon. The reduction compared to the last three years reflects the strength of government spending as outlined in the Budget and the estimated weakness of tax receipts this year as economic growth weakens. We expect the government sector financial deficit to contribute approximately 1/2 percentage point of GDP per annum to the current account deficit this finan cial year and next.

Traditionally, the household sector is a net lender to the rest of the economy. But investment has exceeded saving since 1998. We expect the household sector to remain in deficit over the forecast horizon to the end of 2004. Company sector savings as a percentage of GDP decreased in the last quarter of 2001 as income suffered, but the overall deficit of the company sector remained broadly stable due to the commensurate weakness in investment. As a share of GDP, the position of the company sector is expected to improve this year and next as income growth improves and business investment remains relatively weak. Companies are expected to borrow at a net rate of just over 1 1/2 per cent of GDP per annum on average over the next three years.

The medium term (table 11)

The way in which the economy behaves over the medium term is determined in part by the shocks that hit the economy, which are inherently unpredictable. But there are other important influences that can be foreseen. These include the size and the composition of the population, forthcoming changes in the policy framework as well as adjustment to existing disequilibria. Our forecast of the medium term is thus our view of the general trends in the economy and the way in which the economy will adjust to current imbalances in the absence of further shocks.

GDP growth is presently projected to average 2.6 per cent in the longer term, with labour productivity per hour rising by around 2 3/4 per cent per annum, and the ILO unemployment rate rising to around 5 3/4 per cent. The input of labour is expected to decrease slightly in the longer term as the downward trend in average hours worked per job exceeds employment growth on average. Short-term interest rates are assumed to average 5.4 per cent in the long term. This level serves to hold annual inflation just below target on average. Long-term interest rates are also assumed to average 5.4 per cent in the long term. The absence of a return to the risk involved in longer-term investment reflects the shortage of government stock relative to the minimum funding requirement of pension funds.

The effective exchange rate is assumed to depreciate slightly by approximately 3 1/2 per cent over the longer term from 2001 levels, reflecting a UK interest rate higher than that of its trading partners. The current account deficit stabilises at around 3 per cent of GDP in 2004-5 and is then expected to fall to around 2 1/2 per cent of GDP in the longer term. Public sector net borrowing is expected to stabilise at around 1 1/2 per cent of GDP in the long term.

Forecast errors and the probability distribution (tables 12 and 13)

Table 12 gives summary information on the accuracy of our published forecasts in the second quarter of the year for selected key variables. We have included summary information on forecast errors made in comparison to outturns for the period 1989-2001. For inflation, we have used the period 1993-2001, reflecting the shift to a low inflation regime in 1993. The information on past forecast accuracy can be used in a variety of ways to help assess the uncertainty inherent in the forecast. We can construct prediction intervals for the forecasts assuming a distribution for past and future forecast errors. A rough order of magnitude can be obtained through constructing a 70 per cent confidence interval around the central forecast using plus and minus the average absolute forecast error reported in table 12. For our forecast of 1.8 per cent GDP growth in 2002 this yields a range of 1.1 per cent to 2.5 per cent. The comparable error band for growth in 2003 is 2.2 per cent to 3.6 per cent, with a central estimate of 2 .9 per cent. It is worth noting that the forecast errors provide a reasonable indication of the degree of difficulty associated with forecasting particular variables. Forecasts of investment growth are inherently more uncertain than those of consumers' expenditure for instance.

To calculate the probability distribution of our growth and inflation forecasts reported in table 13 we adopt a slightly more sophisticated approach by assuming a parametric density function for the forecasts, typically a normal distribution. This allows us to calculate more accurately the likelihood of the outturn being within a specific range. This is useful when we wish to consider recession possibilities. Also, for the targeted measure of inflation, RPIX, there are key trigger points at which the Governor of the Bank of England is expected to justify why the inflation rate has fallen outside the designated range. We calculated the standard error of the forecast and used the normal cumulative density function to evaluate the likelihood of GDP growth and RPIX inflation falling within designated bands.

We calculate that 0there is a 34 per cent chance that real GDP growth will fall between 2 and 3 per cent per annum in 2002 and a 61 per cent chance that growth will fall below 2 per cent. There is a one in a hundred chance that the average level of output in 2002 will fall below that in 2001. Our central forecast for 2003 is for growth of 2.9 per cent, with a 27 and 10 per cent chance that it falls below 2 and 1 per cent respectively.

Our central forecast for the annual inflation rate in the last quarter of 2002 is 2.0 per cent, generating a one in four chance that the Governor of the Bank of England will have to write to the Chancellor of the Exchequer explaining how monetary policy will be used to raise the inflation rate. The chance of this is slightly greater in the middle of the year. Our central forecast for the annual inflation rate in the last quarter of 2003 is 2.5 per cent, generating a 14 per cent chance of inflation rising above or below the 1 percentage point target bands around the main target.

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Table 1

Exchange rates and interest rates

 UKexchangerates Interest
 rates
 FT
 Effective Dollar Euro All-share 3-month
 index rates

1999 103.73 1.62 1.52 2918.2 5.44
2000 107.52 1.52 1.64 3045.8 6.10
2001 105.77 1.44 1.61 2681.1 4.97
2002 106.41 1.44 1.63 2555.4 4.42
2003 105.24 1.41 1.61 2678.9 5.07
2004 104.39 1.40 1.60 2809.9 5.35

2001 Q1 104.50 1.46 1.58 2898.3 5.64
2001 Q2 106.40 1.42 1.63 2799.9 5.23
2001 Q3 106.10 1.44 1.62 2543.4 4.92
2001 Q4 106.10 1.44 1.61 2482.7 4.09

2002 Q1 106.91 1.44 1.65 2513.9 4.08
2002 Q2 106.51 1.44 1.62 2538.7 4.09
2002 Q3 106.25 1.43 1.62 2569.2 4.50
2002 Q4 105.96 1.43 1.62 2600.0 5.00

2003 Q1 105.63 1.42 1.61 2631.2 5.00
2003 Q2 105.35 1.41 1.61 2662.8 5.10
2003 Q3 105.10 1.41 1.61 2694.7 5.10
2003 Q4 104.88 1.40 1.61 2727.1 5.10

Percentage changes

1999/98 -0.2 -2.3 2.1 11.1
2000/99 3.7 -6.3 8.2 4.4
2001/00 -1.6 -5.0 -2.1 -12.0
2002/01 0.6 -0.3 1.1 -4.7
2003/02 -1.1 -1.7 -1.1 4.8
2004/03 -0.8 -1.1 -0.5 4.9

2001Q4/00Q4 -1.4 -0.2 -3.2 -17.8
2002Q4/01Q4 -0.1 -1.2 0.4 4.7
2003Q4/02Q4 -1.0 -1.6 -0.7 4.9

 Interest rates

 Mortgage 10-year World (a)
 interest gilts

1999 6.41 5.08 3.22
2000 6.80 5.31 4.45
2001 5.88 4.93 3.86
2002 5.30 5.20 3.14
2003 5.80 5.36 4.01
2004 6.02 5.36 4.52

2001 Q1 6.44 4.81 4.50
2001 Q2 6.07 5.09 4.16
2001 Q3 5.83 5.04 3.81
2001 Q4 5.17 4.78 2.96

2002 Q1 5.07 5.01 2.87
2002 Q2 5.07 5.20 2.93
2002 Q3 5.33 5.30 3.20
2002 Q4 5.72 5.30 3.56

2003 Q1 5.75 5.36 3.80
2003 Q2 5.81 5.36 3.96
2003 Q3 5.82 5.36 4.09
2003 Q4 5.82 5.36 4.21

Percentage changes

1999/98
2000/99
2001/00
2002/01
2003/02
2004/03

2001Q4/00Q4
2002Q4/01Q4
2003Q4/02Q4

(a) Weighted average of 3-month interbank rates in other OECD economies.
Table 2

Public sector financial balance and borrowing requirement

[pounds sterling] billion, fiscal years

 2000-01 2001-2

Current expenditure: Goods and services 181.5 193.5
 Net social bernefits paid 116.7 124.2
 Dept interest 26.4 23.1
 Subsidies 3.8 5.2
 Other current expenditure 19.2 18.2

 Total 347.6 364.2
Gross investment 17.1 24.0
Net investment 6.7 12.3
(as a % of GDP) 0.7 1.2

Total managed expenditure 367.0 389.3
(as a % of GDP) 38.4 39.0
Current receipts: Taxes on income 160.9 165.7
 Taxes on expenditure 134.1 139.1
 Social security contributions 72.3 75.9
 Gross operating surplus 7.7 7.8
 Other current receipts 5.3 3.9

 Total current receipts 380.4 392.4
 (as a % of GDP) 39.8 39.3

Public sector current balance 20.1 15.4
Public sector net borrowing -14.5 -2.6
(as a % of GDP) -1.5 -0.3

Financial transactions 22.7 -7.9
Public sector net cash requirement -37.2 5.3
(as a % of GDP) -3.9 0.5
Public sector net dept (% of GDP) 31.5 31.8

GDP deflator at market prices (1995=100) 114.8 117.8
Money GDP 956.7 998.8

Financial balance under Maastricht 1.1 1.6
(calendar year, % of GDP)
Gross debt under Maastricht 45.2 42.4
(calendar year, % of GDP)

 2002-3 2003-4

Current expenditure: Goods and services 208.8 223.1
 Net social bernefits paid 128.7 138.6
 Dept interest 22.5 23.4
 Subsidies 7.0 7.8
 Other current expenditure 24.3 25.6

 Total 391.2 418.4
Gross investment 30.0 34.2
Net investment 14.1 20.0
(as a % of GDP) 1.3 1.8

Total managed expenditure 418.7 452.7
(as a % of GDP) 40.0 40.9
Current receipts: Taxes on income 169.1 178.1
 Taxes on expenditure 145.2 152.9
 Social security contributions 79.2 91.9
 Gross operating surplus 7.9 8.0
 Other current receipts 5.3 6.7

 Total current receipts 406.8 437.6
 (as a % of GDP) 38.9 39.5

Public sector current balance 2.1 4.9
Public sector net borrowing 12.0 15.1
(as a % of GDP) 1.1 1.4

Financial transactions 3.1 3.1
Public sector net cash requirement 8.9 12.0
(as a % of GDP) 0.9 1.1
Public sector net dept (% of GDP) 30.9 30.3

GDP deflator at market prices (1995=100) 120.5 124.1
Money GDP 1045.7 1106.9

Financial balance under Maastricht 1.0 -1.3
(calendar year, % of GDP)
Gross debt under Maastricht 39.0 38.6
(calendar year, % of GDP)

 2004-5 2005-6

Current expenditure: Goods and services 237.3 251.9
 Net social bernefits paid 148.6 157.9
 Dept interest 24.2 25.3
 Subsidies 8.2 8.6
 Other current expenditure 26.6 27.6

 Total 449.9 471.4
Gross investment 37.7 39.9
Net investment 22.7 24.1
(as a % of GDP) 1.9 2.0

Total managed expenditure 482.6 511.3
(as a % of GDP) 41.4 41.6
Current receipts: Taxes on income 190.7 204.6
 Taxes on expenditure 161.0 169.0
 Social security contributions 97.2 102.4
 Gross operating surplus 8.1 8.2
 Other current receipts 7.3 7.6

 Total current receipts 464.3 491.9
 (as a % of GDP) 39.8 40.0

Public sector current balance 4.4 4.7
Public sector net borrowing 18.3 19.4
(as a % of GDP) 1.6 1.6

Financial transactions 4.1 5.1
Public sector net cash requirement 14.2 14.4
(as a % of GDP) 1.2 1.2
Public sector net dept (% of GDP) 30.0 29.6

GDP deflator at market prices (1995=100) 127.3 130.6
Money GDP 1165.8 1229.2

Financial balance under Maastricht -1.3 -1.7
(calendar year, % of GDP)
Gross debt under Maastricht 37.6 37.1
(calendar year, % of GDP)

 2006-7

Current expenditure: Goods and services 266.8
 Net social bernefits paid 168.2
 Dept interest 25.7
 Subsidies 8.8
 Other current expenditure 28.0

 Total 497.4
Gross investment 43.6
Net investment 27.0
(as a % of GDP) 2.1

Total managed expenditure 541.0
(as a % of GDP) 41.8
Current receipts: Taxes on income 219.4
 Taxes on expenditure 177.4
 Social security contributions 107.9
 Gross operating surplus 8.2
 Other current receipts 8.0

 Total current receipts 521.0
 (as a % of GDP) 40.2

Public sector current balance 6.9
Public sector net borrowing 20.1
(as a % of GDP) 1.6

Financial transactions 5.5
Public sector net cash requirement 14.6
(as a % of GDP) 1.1
Public sector net dept (% of GDP) 29.2

GDP deflator at market prices (1995=100) 134.1
Money GDP 1295.0

Financial balance under Maastricht -1.7
(calendar year, % of GDP)
Gross debt under Maastricht 36.7
(calendar year, % of GDP)

Note: Public sector current balance is total current receipts less total
current expenditure and depreciation.

(a) General government.
Table 3

Gross domestic product and components of expenditure

[pounds sterling]billion, 1995 prices, seasonally adjusted

 Final consumption Gross capital
 expenditure formation

 Gross
 Households General fixed in-
 & NPISH (a) gov't vestment

1999 536.5 149.1 150.5
2000 558.6 154.0 156.4
2001 580.2 158.1 156.6
2002 599.0 163.3 161.0
2003 617.3 168.6 166.5
2004 634.5 174.2 172.7

2001 Q1 142.9 39.6 39.2
2001 Q2 144.3 39.5 39.4
2001 Q3 145.8 39.2 38.9
2001 Q4 147.2 39.8 39.1

2002 Q1 148.2 40.4 39.5
2002 Q2 149.2 40.8 40.0
2002 Q3 150.2 41.0 40.5
2002 Q4 151.5 41.2 40.9

2003 Q1 152.6 41.5 41.2
2003 Q2 153.8 41.9 41.5
2003 Q3 154.9 42.3 41.8
2003 Q4 155.9 42.8 42.1

Percentage changes

1999/98 4.2 2.8 0.9
2000/99 4.1 3.3 3.9
2001/00 3.9 2.7 0.1
2002/01 3.2 3.3 2.8
2003/02 3.1 3.3 3.4
2004/03 2.8 3.3 3.7

2001Q4/00Q4 4.0 3.0 -4.0
2002Q4/01Q4 2.9 3.5 4.5
2003Q4/02Q4 3.0 3.9 2.9

 Gross capital
 formation


 Changes in Domestic Total Total final
 inventories (b) demand exports expenditure

1999 5.2 841.2 258.9 1100.2
2000 2.9 871.9 285.6 1157.1
2001 1.5 896.4 288.4 1184.5
2002 1.1 924.3 283.0 1207.1
2003 2.2 954.6 298.2 1252.5
2004 2.2 983.6 313.7 1297.0

2001 Q1 0.5 222.2 74.7 296.8
2001 Q2 0.8 224.0 72.7 296.6
2001 Q3 0.7 224.6 70.9 295.4
2001 Q4 -0.5 225.6 70.1 295.6

2002 Q1 -0.1 228.0 69.1 297.0
2002 Q2 0.1 230.1 70.1 300.1
2002 Q3 0.6 232.2 71.5 303.7
2002 Q4 0.6 234.1 72.3 306.2

2003 Q1 0.6 235.9 73.2 309.1
2003 Q2 0.6 237.8 74.1 311.8
2003 Q3 0.6 239.6 75.1 314.6
2003 Q4 0.6 241.3 75.8 317.0

Percentage changes

1999/98 12.2 3.4 5.4 3.9
2000/99 -43.6 3.6 10.3 5.2
2001/00 -48.5 2.8 1.0 2.4
2002/01 -30.5 3.1 -1.9 1.9
2003/02 109.1 3.3 5.3 3.8
2004/03 1.8 3.0 5.2 3.6

2001Q4/00Q4 -370.5 2.1 -4.9 0.3
2002Q4/01Q4 -217.5 3.7 3.1 3.6
2003Q4/02Q4 0.0 3.1 4.9 3.5



 Adjust-
 GDP at ment to GDP at
 Total market basic basic
 imports Residual prices prices prices

1999 297.2 0.0 803.0 88.7 714.3
2000 329.7 -0.4 827.4 91.1 736.3
2001 338.8 -0.3 845.7 94.4 751.3
2002 346.2 -0.3 860.9 96.1 764.8
2003 366.6 -0.3 885.9 98.9 787.0
2004 387.4 -0.3 909.6 102.0 807.6

2001 Q1 86.6 -0.1 210.2 23.0 187.2
2001 Q2 85.4 -0.1 211.2 23.4 187.9
2001 Q3 83.3 -0.1 212.1 24.0 188.2
2001 Q4 83.5 -0.1 212.1 24.1 188.0

2002 Q1 84.5 -0.1 212.6 23.9 188.6
2002 Q2 85.7 -0.1 214.4 23.9 190.5
2002 Q3 87.4 -0.1 216.2 24.0 192.2
2002 Q4 88.5 -0.1 217.7 24.2 193.5

2003 Q1 89.8 -0.1 219.3 24.4 194.9
2003 Q2 91.0 -0.1 220.8 24.6 196.2
2003 Q3 92.3 -0.1 222.2 24.8 197.4
2003 Q4 93.4 -0.1 223.6 25.0 198.6

Percentage changes

1999/98 8.9 2.1 2.7 2.1
2000/99 10.9 3.0 2.7 3.1
2001/00 2.8 2.2 3.7 2.0
2002/01 2.2 1.8 1.8 1.8
2003/02 5.9 2.9 2.9 2.9
2004/03 5.7 2.7 3.1 2.6

2001Q4/00Q4 -2.6 1.6 5.2 1.1
2002Q4/01Q4 6.0 2.6 0.4 2.9
2003Q4/02Q4 5.5 2.7 3.2 2.6

Notes: (a) Non-profit institutions serving households.

(b) Including acquisitions less disposals of valuables and quarterly
alignment adjustment.
Table 4

Household income and expenditure

Seasonally adjusted

 Compen- Gross
 Average (a) sation of disposable
 earnings employees income
 [pounds sterling] billion,
 1995=100 current prices

1999 118.4 494.2 604.3
2000 123.1 522.0 634.0
2001 129.5 553.3 675.7
2002 134.9 577.3 703.4
2003 141.6 607.9 742.9
2004 147.8 637.6 776.8

2001 Q1 127.8 136.4 165.5
2001 Q2 128.9 137.7 167.7
2001 Q3 130.2 139.1 170.9
2001 Q4 131.1 140.2 171.6

2002 Q1 132.4 141.7 172.2
2002 Q2 134.0 143.4 174.8
2002 Q3 135.7 145.2 176.8
2002 Q4 137.3 147.0 179.6

2003 Q1 138.8 148.7 182.4
2003 Q2 141.1 151.3 184.9
2003 Q3 142.6 153.0 187.0
2003 Q4 144.0 154.8 188.7

Percentage changes

1999/98 4.8 6.4 5.0
2000/99 4.0 5.6 4.9
2001/00 5.2 6.0 6.6
2002/01 4.1 4.3 4.1
2003/02 5.0 5.3 5.6
2004/03 4.4 4.9 4.6

2001Q4/00Q4 4.6 5.0 6.3
2002Q4/01Q4 4.7 4.9 4.7
2003Q4/02Q4 4.9 5.3 5.1

 Real Final consumption
 household expenditure
 disposable
 income (b) Total Durable
 [pounds sterling] billion, 1995 prices

1999 549.3 536.5 68.8
2000 573.0 558.6 73.8
2001 601.9 580.2 83.4
2002 617.8 599.0 91.1
2003 639.3 617.3 98.1
2004 653.0 634.5 103.2

2001 Q1 148.7 142.9 20.0
2001 Q2 149.5 144.3 20.5
2001 Q3 151.7 145.8 21.0
2001 Q4 152.0 147.2 21.8

2002 Q1 152.0 148.2 22.1
2002 Q2 153.9 149.2 22.5
2002 Q3 155.0 150.2 23.0
2002 Q4 156.8 151.5 23.5

2003 Q1 158.3 152.6 23.9
2003 Q2 159.6 153.8 24.4
2003 Q3 160.4 154.9 24.7
2003 Q4 160.9 155.9 25.0

Percentage changes

1999/98 3.4 4.2 8.6
2000/99 4.3 4.1 7.3
2001/00 5.1 3.9 13.0
2002/01 2.6 3.2 9.3
2003/02 3.5 3.1 7.7
2004/03 2.2 2.8 5.2

2001Q4/00Q4 4.5 4.0 13.4
2002Q4/01Q4 3.2 2.9 7.4
2003Q4/02Q4 2.6 3.0 6.7

 Net
 Savings House financial
 ratio (c) prices (d) assets

 per cent 1995=100 [pounds sterling] billion

1999 4.7 139.4 2446.3
2000 4.3 160.2 2303.7
2001 5.4 173.2 1932.8
2002 5.0 183.3 1938.2
2003 5.4 196.0 2024.1
2004 5.0 206.9 2141.0

2001 Q1 5.7 166.5 2091.5
2001 Q2 5.5 172.5 2057.4
2001 Q3 5.3 178.7 1825.1
2001 Q4 5.2 175.1 1932.8

2002 Q1 4.5 178.7 1915.0
2002 Q2 5.1 181.9 1910.6
2002 Q3 5.1 184.8 1920.7
2002 Q4 5.4 187.9 1938.2

2003 Q1 5.6 191.3 1955.2
2003 Q2 5.6 194.5 1975.4
2003 Q3 5.4 197.6 1997.6
2003 Q4 5.1 200.5 2024.1

Percentage changes

1999/98 10.9 19.4
2000/99 14.9 -5.8
2001/00 8.1 -16.1
2002/01 5.8 0.3
2003/02 6.9 4.4
2004/03 5.6 5.8

2001Q4/00Q4 4.6 -16.1
2002Q4/01Q4 7.3 0.3
2003Q4/02Q4 6.7 4.4

 Total
 net
 worth



1999 4176.5
2000 4159.6
2001 3803.4
2002 3894.0
2003 4076.0
2004 4278.5

2001 Q1 3918.5
2001 Q2 3932.3
2001 Q3 3750.1
2001 Q4 3803.4

2002 Q1 3809.2
2002 Q2 3825.8
2002 Q3 3855.1
2002 Q4 3894.0

2003 Q1 3936.2
2003 Q2 3981.0
2003 Q3 4027.2
2003 Q4 4076.0

Percentage changes

1999/98 17.5
2000/99 -0.4
2001/00 -8.6
2002/01 2.4
2003/02 4.7
2004/03 5.0

2001Q4/00Q4 -8.6
2002Q4/01Q4 2.4
2003Q4/02Q4 4.7

Notes: (a) Average earnings equals total labour compensation divided by
the number of employees in employment.

(b) Deflatted by consumers' expenditure deflator.

(c) Includes adjustment for change in net equity of households in
pension funds.

(d) Department of Transport, Local Government and the Regions, mix
adjusted.
Table 5

Forecasts of fixed investment

[pounds sterling] billion, 1995 prices seasonally adjusted

 Business investment Private
 Manufact- Non-manu- Total housing (a)
 uring facturing

1999 17.8 95.1 112.9 26.2
2000 17.8 100.0 117.8 26.3
2001 16.9 99.6 116.5 26.1
2002 16.0 100.4 116.4 26.9
2003 16.1 102.7 118.8 27.9
2004 16.3 105.9 122.2 28.6

2001 Q1 4.5 25.1 29.6 6.6
2001 Q2 4.4 24.7 29.1 6.6
2001 Q3 4.0 24.9 28.9 6.5
2001 Q4 4.0 24.8 28.9 6.4

2002 Q1 4.0 24.9 28.9 6.6
2002 Q2 4.0 25.0 29.0 6.7
2002 Q3 4.0 25.2 29.2 6.8
2002 Q4 4.0 25.3 29.3 6.8

2003 Q1 4.0 25.4 29.5 6.9
2003 Q2 4.0 25.6 29.6 6.9
2003 Q3 4.0 25.8 29.8 7.0
2003 Q4 4.0 25.9 30.0 7.0

Percentage changes

1999/98 -14.1 5.3 1.7 -1.3
2000/99 0.1 5.2 4.4 0.4
2001/00 -5.0 -0.5 -1.1 -0.6
2002/01 -5.4 0.9 0.0 3.1
2003/02 0.6 2.3 2.1 3.6
2004/03 1.3 3.1 2.8 2.5

2001Q4/00Q4 -9.7 -7.0 -7.4 3.8
2002Q4/01Q4 -0.7 1.9 1.5 6.0
2003Q4/02Q4 0.9 2.6 2.3 3.7

 General Total User cost Corporate
 government of capital profit share
 (%) of GDP (%)

1999 11.4 150.5 11.4 24.3
2000 12.3 156.4 11.4 24.6
2001 14.0 156.6 11.1 23.9
2002 17.6 161.0 11.1 23.9
2003 19.8 166.5 11.2 24.2
2004 21.9 172.7 11.2 24.5

2001 Q1 3.1 39.2 10.9 24.0
2001 Q2 3.6 39.4 11.1 23.6
2001 Q3 3.4 38.9 11.2 24.3
2001 Q4 3.9 39.1 11.1 23.8

2002 Q1 4.0 39.5 11.0 23.8
2002 Q2 4.3 40.0 11.1 23.8
2002 Q3 4.5 40.5 11.2 24.0
2002 Q4 4.8 40.9 11.2 24.1

2003 Q1 4.9 41.2 11.2 24.2
2003 Q2 4.9 41.5 11.2 24.2
2003 Q3 5.0 41.8 11.2 24.3
2003 Q4 5.0 42.1 11.2 24.3

Percentage changes

1999/98 -1.4 0.9
2000/99 7.6 3.9
2001/00 14.0 0.1
2002/01 26.2 2.8
2003/02 12.2 3.4
2004/03 10.7 3.7

2001Q4/00Q4 12.4 -4.0
2002Q4/01Q4 24.2 4.5
2003Q4/02Q4 4.9 2.9

(a) Includes private sector transfer costs of non-produced assets.
Table 6

Balance of payments: current account

Seasonally adjusted

 Exports Exports Imports Imports
 of manu- of goods of manu- of goods
 factures factures

 ([pounds sterling] billion at 1995 pices) (a)

1999 164.2 189.5 199.3 234.1
2000 184.9 211.5 225.5 262.2
2001 189.8 216.0 233.0 270.8
2002 181.7 207.8 237.5 276.9
2003 192.5 219.5 253.7 295.2
2004 204.7 232.6 268.7 312.5

2001 Q1 49.6 56.3 60.1 69.6
2001 Q2 48.2 54.6 58.9 68.5
2001 Q3 46.4 53.0 57.2 66.4
2001 Q4 45.5 52.0 56.8 66.4

2002 Q1 44.7 51.2 57.5 67.1
2002 Q2 44.8 51.3 58.8 68.6
2002 Q3 45.8 52.3 60.2 70.1
2002 Q4 46.4 53.0 61.1 71.1

2003 Q1 47.1 53.8 62.0 72.2
2003 Q2 47.7 54.4 63.0 73.3
2003 Q3 48.5 55.2 63.9 74.4
2003 Q4 49.2 56.1 64.7 75.3

Percentage
changes

1999/98 5.3 4.4 8.7 7.8
2000/99 12.6 11.6 13.2 12.0
2001/00 2.6 2.1 3.3 3.3
2002/01 -4.3 -3.8 1.9 2.3
2003/02 6.0 5.6 6.8 6.6
2004/03 6.3 6.0 5.9 5.9

2001Q4/00Q4 -5.9 -5.4 -3.5 -3.0
2002Q4/01Q4 2.0 1.8 7.4 7.2
2003Q4/02Q4 6.2 5.9 6.1 5.8

 Terms of Export Goods Invisibles Current
 trade (b) price balance balance
 competi-
 itiveness (d)
 ([pounds sterling] billion

1999 107.5 115.5 -27.5 8.4 -19.1
2000 108.8 117.0 -30.0 13.0 -17.0
2001 109.5 116.5 -33.0 15.6 -17.4
2002 112.1 117.4 -41.8 13.5 -28.2
2003 115.1 117.0 -41.4 12.6 -28.9
2004 116.5 116.4 -41.9 8.1 -33.8

2001 Q1 109.6 114.9 -7.7 5.5 -2.3
2001 Q2 109.2 116.4 -8.9 3.7 -5.2
2001 Q3 108.7 117.2 -8.1 5.7 -2.4
2001 Q4 110.7 117.6 -8.4 0.8 -7.6

2002 Q1 110.8 118.7 -9.6 1.6 -8.1
2002 Q2 111.8 117.2 -10.7 2.3 -8.4
2002 Q3 112.7 116.9 -10.7 4.6 -6.1
2002 Q4 113.2 116.8 -10.8 5.1 -5.6

2003 Q1 114.1 116.9 -10.6 4.2 -6.4
2003 Q2 115.0 117.0 -10.4 3.2 -7.2
2003 Q3 115.6 117.1 -10.3 2.6 -7.7
2003 Q4 115.8 116.9 -10.2 2.6 -7.6

Percentage
changes

1999/98 0.7 1.8
2000/99 1.1 1.3
2001/00 0.7 -0.4
2002/01 2.4 0.8
2003/02 2.6 -0.4
2004/03 1.2 -0.5

2001Q4/00Q4 1.7 1.4
2002Q4/01Q4 2.3 -0.7
2003Q4/02Q4 2.3 0.1

 Current World
 balance trade (c)
 (% of GDP)

 1994=100

1999 -2.1 145.1
2000 -1.8 162.6
2001 -1.8 162.1
2002 -2.7 168.8
2003 -2.6 181.2
2004 -2.9 195.5

2001 Q1 -0.9 166.1
2001 Q2 -2.1 162.8
2001 Q3 -1.0 160.1
2001 Q4 -3.0 159.5

2002 Q1 -3.2 165.0
2002 Q2 -3.3 167.5
2002 Q3 -2.4 170.0
2002 Q4 -2.1 172.5

2003 Q1 -2.4 176.0
2003 Q2 -2.7 179.4
2003 Q3 -2.8 182.8
2003 Q4 -2.7 186.4

Percentage 6.2
changes

1999/98 12.1
2000/99 -0.3
2001/00 4.1
2002/01 7.4
2003/02 7.9
2004/03 -5.2

2001Q4/00Q4 8.2
2002Q4/01Q4 8.1
2003Q4/02Q4

Notes: (a) Balance of payments basis.

(b) Ratio of average value of exports of goods to imports of goods, 1995
= 100.

(c) UK export market weights.

(d) A rise denotes a loss in UK competitiveness, 1994 = 100
Table 7

Output and productivity

Seasonally adjusted, 1995=100

 Sectoral output (a)
 Manufac- Public Distri- Business Construct-
 turing bution services ion

 (0.218) (0.224) (0.145) (0.142) (0.052)

1999 103.1 106.9 112.1 130.4 107.8
2000 105.1 109.3 115.2 137.7 109.7
2001 102.7 111.3 119.5 146.7 113.7
2002 99.8 114.0 122.0 154.1 117.3
2003 101.7 117.4 125.0 160.9 119.0
2004 103.8 121.1 127.6 167.9 120.4

2001 Q1 105.3 110.6 118.3 142.7 111.5
2001 Q2 103.4 111.0 119.1 146.7 113.1
2001 Q3 102.0 111.4 120.1 147.5 114.1
2001 Q4 100.0 112.2 120.6 149.7 116.2

2002 Q1 99.2 113.0 121.1 151.6 116.6
2002 Q2 99.4 113.8 121.6 153.3 117.1
2002 Q3 100.1 114.3 122.3 155.0 117.6
2002 Q4 100.6 114.7 123.1 156.7 118.1

2003 Q1 101.1 115.8 123.9 158.4 118.5
2003 Q2 101.5 116.9 124.6 160.1 118.8
2003 Q3 102.0 117.9 125.3 161.8 119.1
2003 Q4 102.4 119.0 126.0 163.4 119.4

Percentage
changes

1999/98 0.3 1.4 2.3 4.4 0.8
2000/99 1.9 2.2 2.8 5.6 1.8
2001/00 -2.3 1.9 3.8 6.5 3.6
2002/01 -2.8 2.4 2.1 5.1 3.2
2003/02 2.0 3.0 2.4 4.4 1.4
2004/03 2.0 3.2 2.1 4.4 1.2

2001Q4/00Q4 -5.8 1.8 3.1 6.9 6.4
2002Q4/01Q4 0.6 2.3 2.1 4.6 1.6
2003Q4/02Q4 1.8 3.7 2.3 4.3 1.1

 Sectoral output (a) GDP (b)
 Oil Rest Total Per Manufact-
 hour (c) uring pro-
 ductivity (c)
 (0.021) (0.198)

1999 112.2 113.5 111.6 106.7 104.0
2000 110.7 118.2 115.1 109.5 109.1
2001 105.2 120.3 117.4 110.8 110.4
2002 104.6 123.0 119.5 113.3 110.9
2003 108.2 126.8 123.0 116.3 114.8
2004 109.9 129.1 126.2 119.0 119.1

2001 Q1 102.3 120.9 117.0 110.5 111.6
2001 Q2 108.0 120.1 117.4 110.5 110.6
2001 Q3 109.3 120.5 117.6 110.8 110.3
2001 Q4 101.0 119.6 117.5 111.3 109.2

2002 Q1 99.6 120.0 117.9 111.8 110.4
2002 Q2 105.1 122.3 119.1 112.9 110.3
2002 Q3 106.7 124.4 120.1 113.8 110.8
2002 Q4 107.1 125.5 120.9 114.6 112.1

2003 Q1 107.5 126.2 121.8 115.2 113.2
2003 Q2 107.9 126.7 122.6 116.0 114.3
2003 Q3 108.4 127.0 123.4 116.6 115.3
2003 Q4 108.8 127.3 124.1 117.3 116.4

Percentage
changes

1999/98 4.4 2.5 2.1 1.5 3.9
2000/99 -1.3 4.1 3.1 2.6 5.0
2001/00 -5.0 1.8 2.0 1.1 1.2
2002/01 -0.5 2.3 1.8 2.3 0.4
2003/02 3.4 3.0 2.9 2.7 3.5
2004/03 1.6 1.8 2.6 2.3 3.8

2001Q4/00Q4 -1.1 -0.2 1.1 1.1 -2.4
2002Q4/01Q4 6.0 4.9 2.9 2.9 2.7
2003Q4/02Q4 1.6 1.4 2.6 2.4 3.8

Notes: (a) 1995 share of output in parentheses.

(b) Gross value added at constant 1995 basic prices.

(c) Including self-employment.
Table 8

The UK labour market

Seasonally adjusted, millions

 Employment, thousands (a)


 Self
 employ- Training
 Employees ment schemes Total

1999 25133 3460 335 28929
2000 25519 3407 325 29251
2001 25725 3405 303 29432
2002 25770 3402 291 29463
2003 25839 3423 291 29553
2004 25964 3446 291 29702

2001 Q1 25693 3398 314 29405
2001 Q2 25727 3408 307 29443
2001 Q3 25738 3408 296 29442
2001 Q4 25740 3404 295 29439

2002 Q1 25767 3398 291 29456
2002 Q2 25766 3400 291 29456
2002 Q3 25768 3403 291 29462
2002 Q4 25781 3408 291 29480

2003 Q1 25803 3414 291 29507
2003 Q2 25828 3420 291 29539
2003 Q3 25850 3425 291 29566
2003 Q4 25876 3431 291 29599

Percentage changes

1999/98 1.6 -1.6 -2.4 1.1
2000/99 1.5 -1.5 -3.0 1.1
2001/00 0.8 -0.1 -6.8 0.6
2002/01 0.2 -0.1 -4.0 0.1
2003/02 0.3 0.6 0.0 0.3
2004/03 0.5 0.7 0.0 0.5

2001Q4/00Q4 0.4 -0.1 -7.8 0.3
2002Q4/01Q4 0.2 0.1 -1.4 0.1
2003Q4/02Q4 0.4 0.7 0.0 0.4

 Claimant Participation,
 thousands
 unemployment,
 thousands
 Civilan
 Long- work-
 Total term (c) force (d) Inactive

1999 1248 522 30177 5466
2000 1088 422 30340 5442
2001 969 347 30402 5624
2002 998 387 30462 5736
2003 1098 407 30651 5729
2004 1146 424 30848 5716

2001 Q1 996 313 30402 5557
2001 Q2 973 371 30416 5611
2001 Q3 948 348 30391 5639
2001 Q4 959 357 30398 5688

2002 Q1 945 344 30401 5728
2002 Q2 981 401 30437 5752
2002 Q3 1018 392 30480 5741
2002 Q4 1049 410 30529 5722

2003 Q1 1070 386 30578 5734
2003 Q2 1088 413 30627 5746
2003 Q3 1110 411 30676 5728
2003 Q4 1126 417 30725 5710

Percentage changes

1999/98 -7.4 -13.5 0.7 -1.8
2000/99 -12.8 -19.2 0.5 -0.4
2001/00 -11.0 -17.6 0.2 3.3
2002/01 3.0 11.3 0.2 2.0
2003/02 10.0 5.2 0.6 -0.1
2004/03 4.3 4.4 0.6 -0.2

2001Q4/00Q4 -7.8 -13.3 0.0 3.8
2002Q4/01Q4 9.4 14.9 0.4 0.6
2003Q4/02Q4 7.4 1.7 0.6 -0.2

 Participation, Underutilisation % (b)
 thousands
 ILO Claim- Popul-
 Popul- unem- ant un- ation
 ation ploy- employ- not em-
 of work- ment ment ployed
 ing age rate rate rate

1999 36206 6.0 4.1 20.1
2000 36362 5.5 3.6 19.6
2001 36599 5.1 3.2 19.6
2002 36804 5.3 3.3 19.9
2003 36991 5.6 3.6 20.1
2004 37178 5.7 3.7 20.1

2001 Q1 36513 5.1 3.3 19.5
2001 Q2 36575 5.0 3.2 19.5
2001 Q3 36631 5.1 3.1 19.6
2001 Q4 36677 5.1 3.2 19.7

2002 Q1 36734 5.1 3.1 19.8
2002 Q2 36796 5.2 3.2 19.9
2002 Q3 36827 5.3 3.3 20.0
2002 Q4 36859 5.4 3.4 20.0

2003 Q1 36921 5.5 3.5 20.1
2003 Q2 36983 5.5 3.6 20.1
2003 Q3 37014 5.6 3.6 20.1
2003 Q4 37046 5.7 3.7 20.1

Percentage changes

1999/98 0.4
2000/99 0.4
2001/00 0.7
2002/01 0.6
2003/02 0.5
2004/03 0.5

2001Q4/00Q4 0.6
2002Q4/01Q4 0.5
2003Q4/02Q4 0.5

Notes: (a) Includes self-employed, excludes HM Forces. Average figure
per quarter.

(b) The population not employed is defined as the ratio of the inactive
population plus ILO unemployment to the population of working age.

(c) Over six months.

(d) Employment plus claimant unemployment.
Table 9

Price indices

Secondary adjusted, 1995=100


 Whole-
 Unit sale World Consumer
 labour Imports price oil price
 costs deflator index (b) price index
 ($) (c)

1999 114.4 85.0 101.6 17.3 110.0
2000 117.3 85.5 102.4 27.1 110.6
2001 121.7 85.2 102.6 23.5 112.3
2002 124.7 86.8 103.0 24.5 113.9
2003 127.6 88.1 104.5 23.3 116.2
2004 130.4 89.9 106.1 23.3 119.0

2001 Q1 120.7 85.7 102.5 24.6 111.3
2001 Q2 121.2 86.6 102.6 26.1 112.2
2001 Q3 122.0 84.9 102.7 24.5 112.7
2001 Q4 122.9 83.7 102.7 18.7 112.9

2002 Q1 124.0 84.3 102.6 20.5 113.3
2002 Q2 124.4 87.1 102.8 26.5 113.6
2002 Q3 124.9 87.8 103.1 26.0 114.0
2002 Q4 125.6 88.2 103.4 25.0 114.6

2003 Q1 126.1 88.0 103.9 24.0 115.2
2003 Q2 127.4 87.9 104.3 23.0 115.8
2003 Q3 128.1 88.1 104.7 23.0 116.5
2003 Q4 128.7 88.6 105.2 23.1 117.3

Percentage changes

1999/98 4.2 -2.5 -0.3 40.2 1.6
2000/99 2.5 0.5 0.8 56.3 0.6
2001/00 3.7 -0.3 0.2 -13.3 1.5
2002/01 2.5 1.9 0.3 4.3 1.4
2003/02 2.3 1.5 1.5 -5.0 2.1
2004/03 2.2 2.0 1.5 0.0 2.4

2001Q4/00Q4 3.4 -3.1 0.0 -34.1 1.7
2002Q4/01Q4 2.2 5.3 0.7 33.4 1.5
2003Q4/02Q4 2.5 0.5 1.7 -7.6 2.4

 Retail price index (a)
 Harmon-
 ised Excluding Excluding
 index of All mortgage mortgage
 consumer items interest interest &
 prices indirect taxes

1999 104.8 111.0 111.1 108.7
2000 105.6 114.2 113.4 110.7
2001 106.9 116.3 115.8 113.3
2002 108.2 118.2 118.1 115.6
2003 110.1 121.6 120.8 118.2
2004 112.5 124.9 123.6 121.0

2001 Q1 105.7 115.2 114.2 111.5
2001 Q2 107.3 116.7 116.2 113.6
2001 Q3 107.3 116.7 116.4 114.0
2001 Q4 107.4 116.6 116.6 114.2

2002 Q1 107.3 116.7 116.9 114.6
2002 Q2 108.2 118.0 118.3 115.7
2002 Q3 108.4 118.5 118.3 115.8
2002 Q4 108.8 119.5 118.9 116.3

2003 Q1 109.3 120.0 119.3 116.8
2003 Q2 109.8 121.5 120.7 118.1
2003 Q3 110.4 122.1 121.3 118.7
2003 Q4 111.0 122.7 121.8 119.2

Percentage changes

1999/98 1.4 1.6 2.3 1.6
2000/99 0.8 2.9 2.1 1.8
2001/00 1.2 1.8 2.1 2.4
2002/01 1.2 1.6 2.0 2.0
2003/02 1.8 2.9 2.3 2.2
2004/03 2.1 2.7 2.4 2.4

2001Q4/00Q4 1.0 1.0 2.0 2.4
2002Q4/01Q4 1.3 2.5 2.0 1.9
2003Q4/02Q4 2.0 2.7 2.5 2.5


 GDP GDP
 deflator deflator
 (basic (market
 prices) prices)


1999 111.3 112.2
2000 113.0 114.2
2001 116.5 117.0
2002 119.4 119.7
2003 123.0 123.3
2004 126.4 126.5

2001 Q1 114.7 115.5
2001 Q2 116.4 116.9
2001 Q3 117.0 117.4
2001 Q4 117.9 118.1

2002 Q1 118.5 118.7
2002 Q2 118.9 119.2
2002 Q3 119.7 120.1
2002 Q4 120.6 120.9

2003 Q1 121.6 121.9
2003 Q2 122.6 122.9
2003 Q3 123.6 123.8
2003 Q4 124.4 124.5

Percentage changes

1999/98 2.3 2.6
2000/99 1.6 1.8
2001/00 3.1 2.4
2002/01 2.5 2.4
2003/02 3.0 2.9
2004/03 2.7 2.6

2001Q4/00Q4 3.5 2.7
2002Q4/01Q4 2.2 2.3
2003Q4/02Q4 3.2 3.0

Notes: (a) Not seasonally adjusted.

(b) Excluding food, drink, tobacco and petroleum.

(c) Per barrel, OPEC average.
Table 10

National and sectoral savings

As a percentage of GDP

 Household sector Company sector Government
 sector

 Saving Investment Saving Investment Saving

1999 3.3 4.2 9.8 12.6 2.6
2000 2.9 4.0 9.8 12.5 2.9
2001 3.8 4.3 8.8 11.7 2.7
2002 3.5 4.2 9.4 11.0 1.0
2003 3.8 4.2 8.9 10.7 1.3
2004 3.5 4.3 9.1 10.5 1.1

2001 Q1 4.0 4.4 9.1 11.9 3.1
2001 Q2 3.8 4.5 8.3 12.0 3.4
2001 Q3 3.7 4.2 9.3 12.0 3.3
2001 Q4 3.6 4.0 8.4 10.9 1.1

2002 Q1 3.2 4.1 9.2 10.9 0.8
2002 Q2 3.5 4.2 9.1 11.0 0.7
2002 Q3 3.5 4.2 10.0 11.1 1.0
2002 Q4 3.8 4.2 9.5 11.0 1.4

2003 Q1 3.9 4.2 9.1 10.9 1.4
2003 Q2 3.9 4.2 8.7 10.7 1.3
2003 Q3 3.8 4.2 8.8 10.7 1.2
2003 Q4 3.5 4.3 9.2 10.6 1.1

 Government Whole economy Finance
 sector
 from
 Investment Saving Investment overseas

1999 1.0 15.7 17.8 2.1
2000 1.1 15.7 17.5 1.8
2001 1.2 15.4 17.2 1.8
2002 1.5 13.9 16.7 2.7
2003 1.7 14.0 16.6 2.6
2004 1.8 13.7 16.6 2.9

2001 Q1 1.0 16.3 17.2 0.9
2001 Q2 1.3 15.7 17.8 2.1
2001 Q3 1.2 16.5 17.4 1.0
2001 Q4 1.4 13.3 16.4 3.0

2002 Q1 1.4 13.2 16.4 3.2
2002 Q2 1.5 13.3 16.6 3.3
2002 Q3 1.6 14.5 16.9 2.4
2002 Q4 1.6 14.7 16.8 2.1

2003 Q1 1.7 14.3 16.7 2.4
2003 Q2 1.7 14.0 16.6 2.7
2003 Q3 1.7 13.8 16.6 2.8
2003 Q4 1.7 13.8 16.6 2.7
Table 11

Long-term projections

All figures percentage change unless otherwise stated

 1999 2000 2001 2002 2003

GDP (basic prices) 2.1 3.1 2.0 1.8 2.9
Average Earnings 4.8 4.0 5.2 4.1 5.0
GDP Deflator (basic prices) 2.3 1.6 3.1 2.5 3.0
RPIX 2.3 2.1 2.1 2.0 2.3
Manufacturing productivity 3.9 5.0 1.2 0.4 3.5
Whole economy productivity (a) 1.5 2.6 1.1 2.3 2.7
Labour input (b) 0.5 0.5 0.9 -0.5 0.2
ILO Unemployment rate (%) 6.0 5.5 5.1 5.3 5.6
Current account (% of GDP) -2.1 -1.8 -1.8 -2.7 -2.6
Total managed expenditure (%of GDP) 37.9 38.2 38.8 40.0 40.6
Public sector net borrowing (% GDP) -1.2 -1.6 -1.0 1.2 1.2
Effective exchange rate (1990=100) 103.7 107.5 105.8 106.4 105.2
3 month interest rates (%) 5.4 6.1 5.0 4.4 5.1
10 year interest rates (%) 5.1 5.3 4.9 5.2 5.4

 2004 2005 2006-10

GDP (basic prices) 2.6 2.7 2.6
Average Earnings 4.4 4.3 4.3
GDP Deflator (basic prices) 2.7 2.7 2.4
RPIX 2.4 2.5 2.4
Manufacturing productivity 3.8 3.7 3.9
Whole economy productivity (a) 2.3 2.3 2.8
Labour input (b) 0.3 0.4 -0.2
ILO Unemployment rate (%) 5.7 5.7 5.7
Current account (% of GDP) -2.9 -3.1 -2.4
Total managed expenditure (%of GDP) 41.3 41.6 42.2
Public sector net borrowing (% GDP) 1.6 1.6 1.5
Effective exchange rate (1990=100) 104.4 103.8 103.3
3 month interest rates (%) 5.4 5.4 5.4
10 year interest rates (%) 5.4 5.4 5.4

Notes: (a) Per hour.

(b) Total hours worked.
Table 12

Average absolute errors, NIESR forecasts made in April/May (*)

All figures per cent unless otherwise indicated

 Current year

 Average error Error range

Real GDP growth 0.7 0.1 - 1.8
Domestic demand growth 0.7 0.1 - 2.2
Consumers expenditure growth 0.8 0.0 - 2.2
Investment growth 2.1 0.2 - 8.9
Export volume growth 2.9 0.3 - 5.0
Import volume growth 2.9 0.1 - 6.1
Real personal disposable income growth 1.2 0.0 - 2.5
Current account ([pounds sterling]bn) 6.0 1.2 - 19.7
Public sector borrowing requirement 10.6 1.2 - 31.1
 ([pounds sterling]bn) (a)
Retail price inflation (Q4) 0.6 0.2 - 1.2

 Next year

 Average error Error range

Real GDP growth 0.9 0.0 - 4.1
Domestic demand growth 1.2 0.1 - 4.5
Consumers expenditure growth 1.1 0.1 - 3.5
Investment growth 3.1 0.1 - 10.3
Export volume growth 3.1 1.0 - 6.4
Import volume growth 3.9 0.1 - 8.4
Real personal disposable income growth 1.5 0.4 - 3.0
Current account ([pounds sterling]bn) 5.9 0.9 - 14.9
Public sector borrowing requirement 15.9 1.8 - 42.6
 ([pounds sterling]bn) (a)
Retail price inflation (Q4) 1.0 0.1 - 2.5

 Average
 outturn
 1989-2001

Real GDP growth 2.2
Domestic demand growth 2.4
Consumers expenditure growth 2.7
Investment growth 2.5
Export volume growth 5.6
Import volume growth 5.9
Real personal disposable income growth 3.0
Current account ([pounds sterling]bn) -13.0
Public sector borrowing requirement 9.8
 ([pounds sterling]bn) (a)
Retail price inflation (Q4) 2.5

(*) All errors defined by subtracting the forecast from the outturns for
1989-2001; retail price inflation errors calculated from outturns for
1993-2001.

(a) Financial year.
Table 13

Probability distribution of growth and inflation forecasts

Inflation: probability of 12 month RPIX inflation falling in the
following ranges

 2002Q4 2003Q4

less than 1.5 per cent 26 14
1.5 to 2.0 per cent 24 15
2.0 to 2.5 per cent 24 21
2.5 to 3.O per cent 16 21
3.0 to 3.5 per cent 7 15
more than 3.5 per cent 3 14
 100 100
Central projection 2.0 2.5
Standard deviation 0.79 0.91
Growth: probability of annual growth rate falling in the following
ranges

 2002 2003

less than 0 per cent 1 2
0 to 1 per cent 13 8
1 to 2 per cent 47 17
2 to 3 per cent 34 26
3 to 4 per cent 5 24
more than 4 per cent 0 23

 100 100
Central projection 1.8 2.9
Standard deviation 0.74 1.48

ACKNOWLEDGEMENTS

We are grateful to Ray Barrell for helpful comments and suggestions. The forecast was completed on 22 April, 2002.

REFERENCE

Cardarelli, R., Sefton, J. and Kotlikoff, L. (2000), 'Generational accounting in the UK', Economic Journal, 110, 467, PP. 547-74.