Our estimates indicate that global output increased by 4.7 per cent in 2005. This followed an expansion of 5.2 per cent in 2004, and we expect further annual rises of 4¾ and 4½ per cent in 2006 and 2007, respectively. Global growth averaged just less than 3½ per cent per annum between 1975 and 2003, and exceeded 4½ per cent in only five of these years. We have not seen an extended global expansion of the magnitude expected for 2004–7 since the early 1970s. While growth in the OECD economies is expected to average 2.9 per cent per annum between 2004 and 2007, which is slightly higher than the average annual rate of 2.7 per cent experienced in 1975–2003, the bulk of the recent global strength comes from outside the OECD, as illustrated in figure 1. The acceleration of global growth can be attributed partly to developments in formerly centrally planned economies, such as Russia and other regions of the former Soviet Union. Severe recessions in these regions associated with the introduction of market forces and economic transition restrained world growth in the early 1990s. A strong rebound in these economies since the late 1990s has recently been further strengthened by rising prices for oil and gas. The former Soviet Union supplied 14 per cent of global oil in 2005 and holds over 30 per cent of proven global natural gas reserves. The high oil price is also expected to support growth in OPEC member states as well as other oil producing nations in South America and Africa. However, output growth in these regions has historically been relatively volatile, and the outlook for these economies remains a risk to our central forecast for world growth.

The world economic scene has changed little since May. Devaluation of the franc, which had seemed likely for more than a year, is now an accomplished fact. Otherwise the scene remains dominated, as it has been throughout 1969, by the widespread expectation of an upward revaluation of the deutschemark after next month's elections in West Germany and by the struggle in the United States to control inflation by monetary means. A forecast of the immediate future of the deutschemark now calls, however, for political rather than economic judgement. Similarly in France much will depend upon the rigour of deflationary measures to be introduced by the government and upon the reactions which they may evoke from the trades unions and their members. In this issue, therefore, we direct our main attention to prospects in the United States, where it is at least reasonably clear what aims the authorities will be pursuing in coming months.

Uncertainties over the prospects for the oil price mean that the short-term forecast is subject to a wider margin of error than usual. The Iraqi invasion of Kuwait could lead to a reduction of world oil production by at least eight per cent immediately and has already produced a significant rise in oil prices. Our central forecast assumes that in the short term oil prices will stay firmer, but that in the longer run there will be no major change in oil market conditions. We have assumed that oil prices (or more precisely the arithmetic average of Brent and Dubai spot prices) will be around $25 per barrel in the second half of 1990, but that they will fall thereafter. This should leave crude oil prices in the range $20–22 per barrel by the end of 1991. Annex I to the chapter investigates the effects of an oil price rise on the world economy, and looks in particular at the distribution of the effects across the major economies. The conclusion of the Annex is that a 25 per cent rise in oil prices is likely to raise inflation in the major seven economies by only a quarter to a half a per cent in the short run, and to lower output by up to a half per cent.

In Western Europe GDP appears to have fallen in the second quarter, mainly because of the strikes in West Germany and the UK. Growth in North America and to a lesser extent in Japan was slowing down but still fast enough to keep the total output of the OECD area on its upward course. For the first half of the year this was probably about 2½ per cent up on the second half of 1983 and 5 per cent up on the first half.

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

A technique for producing balanced national accounts was described by Stone, Champernowne and Meade in 1942, but there has so far been little use of the method in official publications. This article describes the experimental work undertaken recently by the Central Statistical Office and offers a personal view of the potential for further development. A variation of the original method of Stone et al, called partitioned balancing, seems likely to be useful in complex cases.

This article aims to compare the National Institute's forecasting performance with that of United States forecasters. Because of the magnitude of this task, we restrict our attention to forecasts of the principal output measure in each country—real gross domestic product in the United Kingdom and real gross national product in the United States. Results for US forecasters are taken from the detailed study by McNees (1975), where there is also information on the methods employed by these forecasters.

The happy outcome which is looked for in closer economic integration in the world is that all countries gain. This is particularly clear for a general removal of trade barriers, such as those indicated for the whole range of products by Stoeckel et al. (1990) or for individual products, such as the ending of the Multifibre Arrangement explored by Trela and Whalley (1990). Here those who have been protecting their industries gain because the losses to producers are more than offset by the gains to consumers, those who have been discriminated against in the past gain because they can increase their exports and those foreign countries which were previously benefiting from privileged access to the protected markets gain because their loss of market share is more than offset by an expansion in the market.

In this Review, as a response to comments from readers, we have replaced the consumer price index by the retail price index as a measure of annual price inflation in our Summary table of our forecast for the home economy. This note therefore sets out the differences between the two series in order to make the nature of the change clear.

According to the formal dating of the business cycle by the National Bureau of Economic Research (NBER), the US economy reached a peak of economic activity in December 2007, which marks the beginning of the US recession. While some economists tend to refer to a technical recession as two consecutive quarters of decline in real GDP, the NBER uses a broader definition of ‘a significant decline in economic activity spread across the economy and lasting more than a few months, normally visible in production, employment, real income, and other indicators'. The committee pays particular attention to payroll employment, which has declined by 1.9 per cent since the peak reached in December 2007, allowing the unemployment rate to reach 7.2 per cent in December 2008, the highest rate since 1992. We expect a sharper decline in US employment this year, and see the unemployment rate reaching 10½ per cent in 2010, the highest level since a brief peak in 1982.

• After growing by 3 per cent in 2014 the economy will grow by 2.3 per cent in 2015.

• Unemployment will drop below 6 per cent later this year.

• CPI inflation will be close to target this year and next; we expect interest rates to begin to rise gradually early next year.

Global growth appears to have been relatively strong during the last year. In the Anglo-Saxon world the economic expansion has now lasted six years. Growth in continental Europe also now appears to be relatively robust, after a significant slowdown in the first half of last year. The OECD economies are projected to grow by around 3 per cent this year. Despite this, there continues to be little evidence of emerging inflationary pressures. We anticipate that OECD inflation will average around 2 per cent in 1997, some 2–2½ percentage points lower than in the equivalent upswing in the late 1980s.

Money is held to economise on the high cost of conducting transactions in a barter economy, to provide a ‘precautionary’ reserve in case of unforeseen expenses and for speculative reasons, such as bearish expectations about shares or government securities. But if conventional money changes in value rapidly it ceases to serve all these purposes. In these circumstances it may become more convenient to conduct future transactions in terms of index-linked contracts which have the effect of changing the unit of account into a given basket of goods by specifying that future payments in terms of nominal pounds are to be scaled up or down by an amount which depends on the changes in an index of average prices.

There was some slowing down of the growth of industrial production as a whole during the summer months though the overall tendency continues firmly upwards (table 13).

France, Italy and Japan are still expanding rapidly, though in the case of France not so rapidly as in the past. In most other countries, apart perhaps from Norway, rates of growth are declining. The United Kingdom is the most prominent of this group, but the slowdown in Germany is becoming quite marked.

The turmoil in East Asia over the last six months has led to major realignments of many currencies in the region, whilst domestic equity and property markets have collapsed. Though each of the directly affected economies had some unique problems, all shared the key factors behind the collapse, an over-rapid growth in domestic investment, declining external competitiveness and inefficient and loosely regulated financial institutions.

Crises have a common shape but not always common consequences, as Barrell and Davis (2005) discuss. Asset bubbles are associated with the run-up to most crises and regulators should respond, taking an asset bubble as a signal of a need for precautionary action. It is easy to say that fundamentals have changed an asset market, and hard to spot a bubble. It is also common to suggest that interest rate policy should be set to constrain bubbles such as those in housing markets in recent years. Not only is it difficult for the central bank to use interest rates to constrain a bubble, it is also inappropriate if inflation is under control. It is for the financial market regulator, which may or may not be in the central bank, to respond to the bubble and strengthen its precautionary measures designed to raise lending standards.

Good evening. It is a pleasure and an honour to be here at NIESR to give the annual Dow lecture. We are very lucky in the UK to have high-quality independent institutions such as NIESR focusing on the policy landscape, and in my time on the MPC I have always valued their commentary and research.