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Published online by Cambridge University Press: 26 March 2020
The recovery in UK output is now clearly under way, against the background of a world recovery more rapid than we previously anticipated. Inflation has come down from 25 per cent to just below 15 per cent (both on a year earlier and on a quarterly basis). The current account deficit, after a low first quarter, appears to have worsened somewhat and is running at an annual rate of over £2 billion per annum. Looking over the next eighteen months, we can see a continuation of the current output recovery but, because of the drop in the exchange rate, inflation on a year earlier seems unlikely to fall below 10 per cent, in spite of our assumption that the next wages policy is not formally broken. The current account deficit should start to fall from early 1977; this improvement could be sufficient, on the assumption that monetary growth is held down by higher interest rates, to stabilise the exchange rate in the second half of 1977, if at a somewhat lower level than today's. Private investment should recover quite sharply in 1977, but unemployment may fall only slowly from a peak in early 1977 of about 1.3 million. This highlights the fact that this projected recovery, largely based on exports and stockbuilding, occurs in manufacturing and not also, as in 1972–3, in public and private services, which are relatively labour-intensive.
Note (1) page 8 R. W. Evely, ‘The effects of the Price Code’.
Note (2) page 8 Smithsonian parity=100; this is the ‘weighted depreciation’, published daily by the Treasury, but subtracted from 100.
Note (1) page 9 Converting import prices to foreign prices by the effective rate could be misleading if the movement of suppliers' rates is very different from the average found in the effective rate for all visible trade, but this has not been significant in the past. The conversion should now, however, allow for an inaccurate approximation in the calculation of the official effective exchange rate which causes the United Kingdom devaluation to be over-estimated by a percentage which increases with greater devaluation. In 1976 II we estimate that the corrected rate should be 63.6 (not 62.0) and the devaluation from 1976 I 9 per cent (not 10 per cent).
Note (2) page 9 The latest trade figures, for July, appear highly erratic on both the export and the import side, apart from known oil machinery imports. We have not altered our forecasts, but there could be a distorted quarterly pattern in the second half of 1976.
Note (1) page 12 A point discussed also in G. F. Ray, ‘Primary products: prospects to 1985’, National Institute Economic Review, May 1976, pp 45-53.
Note (2) page 12 Total stocks at 1970 prices (including the discrepancy between ‘expenditure’ and ‘compromise’ GDP), compared with GDP at 1970 factor cost (annual rate).
Note (1) page 17 The recent June manufacturing production estimate would imply a lower figure. But it appears to be an aberration; it may well be revised once the seasonal pattern becomes clearer.
Note (1) page 18 This model's new features are the work of C. G. Fane, E. Kiernan, P. A. Ormerod and J. D. Whitley. An account of this work will be forthcoming in a NIESR publication. Meanwhile, a listing of the model's equations and variables is available on request from NIESR.
Note (2) page 18 M. J. C. Surrey, ‘The analysis and forecasting of the British economy’, Cambridge University Press, 1971.
Note (3) page 18 A preliminary account of this work, by Miss D. Osborn and F. Teal, is available on request from NIESR.
Note (1) page 22 Some doubts have been cast on the Treasury estimate of the real burden of interest payments by the House of Commons Expenditure Committee. They depend quite critically on estimates of future inflation, which if under-stated will artificially increase the real burden.
Note (2) page 22 The full employment budget estimates given by R. Neild and T. Ward, ‘The Budgetary Situation: an Appraisal’, University of Cambridge, Department of Applied Economics, July 1976, calculate public expenditures as if the economy had been at full employment throughout the period. This specification is incorrect as regards the estimation of what expenditures will be by the time full employment is achieved. This gap between what the full employment budget would be and what it will be casts doubt on the principle of netting out cumulative counter-cyclical effects, rather than those relating to one particular year (the more usual definition). Because of the incorporation of debt interest the estimate of the full employ ment public expenditure level given here for 1979-80 (when the assumption of the White Paper is that full employment will actually obtain) implies a decline in GDP share nearly 2 per cent less than that given by Neild and Ward. A further 1 per cent less emerges from a more pessimistic estimate of underlying growth.
Note (1) page 26 See Richard Evely, ‘The effects of the Price Code’, p. 50.