The UK and world economies have reached a position where it is not clear whether they are going to continue expanding at a reasonable trend like rate or whether the slowdown from above trend growth in 1995 is about to intensify into a recession in 1996.

There are now widespread signs that activity in the world economy has slowed sharply. This slowdown has been particularly marked within Europe, where our estimates suggest that the European Union economies may have expanded by only some 0.6 per cent in the second half of last year. Elsewhere, the Japanese economy has still to emerge from recession and growth has possibly declined in the United States to a little below trend levels (Chart 1). The perception of recent growth in the US has also changed significantly as a result of the recent rebasing of their national accounts, with the growth of real GDP in 1995 now projected to be between 2–2 1/4 per cent rather than 3 1/4 per cent as shown in our previous forecast. We discuss this issue in more detail below. Overall growth in the OECD region is now projected at 2 per cent in 1995, after 2.6 per cent in 1994. This slowdown has been reflected elsewhere within the world economy, with total world trade growth estimated to have declined to around 6 3/4 per cent last year, and the prices of many industrial raw materials having begun to weaken. For 1996, we presently expect growth of 2 1/4 per cent in the OECD region and growth of 2 per cent in both Europe and the United States.

In the twenty years since the Cultural Revolution, China has maintained fast real growth. This occurred despite China having similar problems to other transitional economies, e.g. loss-making State Owned Enterprises (SOEs), eroding fiscal revenues and inflation, (Section 3).

Although China initially adopted the Soviet central planning model, after the 1950s break Chinese planning changed towards a regionally-based system with local planning (Section 2). In contrast to the centrally-based, functionally-specialised (U-form or unitary structure) Soviet model, the Chinese economy is organised on a multi-layer-multi-regional (M-form) basis. This encour aged development of small size township and village enterprises (TVEs), the main engine of Chinese growth.

Power and control remained with the Party and the State, but was diffused much more widely, regionally and locally. This allowed initiatives at lower (political) levels to establish institutions, both in agriculture (the ‘household responsibility system’) and industry (TVEs), without state protection. Even among regionally controlled SOEs, ‘tournament rivalry’ between regions, etc., and between SOEs and TVEs provided competition.

In recent years considerable attention has been paid to the condition of labour markets in Europe. The recession of the early 1990s saw unemployment reach a post war high in a number of European countries. As Chart 1 shows unemployment has shown a secular upward trend in Germany, Italy and most notably, Spain. Real wage growth was also slower in the 1980s and 1990s than it had been in the 1970s (Chart 2).

What do we mean by a country's real income? There are in fact two different approaches here. One, which we address here, is the question of interpreting the existing definition of income. The other is the widespread view that income ought to measure ‘sustainable consumption’. The origin of the idea that income should be a measure of sustainable consumption can be traced back to Hicks (1939).

In December, 1993, the round of multilateral trade negotiations known as the Uruguay Round was at last successfully concluded, seven years after it was launched at Punta del Este in Uruguay and three years later than it was scheduled to finish. This was the eighth and, almost certainly, the last round of GATT which is likely to take place on a similar basis. Up until the last minutes, it was uncertain whether any agreement would emerge. The final agreement was formally signed by the contracting parties at a gathering of Heads of State at Marrakech, Morocco and amidst great fanfare in April 1994. On January lst, 1995, the provisions of the Agreement took effect, including the establishment of the World Trade Organisation (WTO) as the successor to the GATT.