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Published online by Cambridge University Press: 26 March 2020
Comparing the first half of this year with the first half of 1987, domestic demand rose very rapidly, probably by about 8 per cent. Consumer spending, after accelerating for some years, had reached a rate of growth of around 6 per cent. This was now reinforced by a sharp rise in expenditure on fixed investment, which may have been about 10 per cent over this period. This surge in demand was met by a good response from domestic supply, gross domestic product rising by about 5 per cent. But at the same time the boom conditions contributed to a significant deterioration in the balance of payments. A small surplus on current account in the first half of last year has been turned into a deficit at an annual rate of about £11 billion.
The forecasts were prepared by Andrew Britton, Michael Joyce and Paul Gregg, but they draw on the work of the whole team engaged in macroeconomic analysis and modelbuilding at the Institute.
(1) Interest rates were raised by a further ½ per cent on August 8, too late for the forecasts to be reworked.
(2) Our forecasts refer to the growth rate of output at 1980 prices. In the CSO Blue Book to be published shortly the constant price measures of output and expenditure will be rebased on 1985. In the past this procedure has sometimes changed significantly the record of output growth over a period of several years. On this occasion there is no reason to expect major changes. (See ‘Rebasing the national accounts: the reasons and the likely effects’, Economic Trends, March 1988.)
(3) For a comparison of the total effects of interest-rate changes in several different models, see the article by K. Wallis et al. on p.69 below.