Risks of a US driven slowdown in world activity have receded in the past few months, as US consumer demand remains robust. However, a worsened outlook for Germany and Japan suggests that the recovery will be more gradual than previously anticipated, in part as a consequence of the strengthening of the euro and the yen against the dollar in recent months. We estimate that world growth recorded a modest improvement in 2002, rising to 2.7 per cent from 2.2 per cent in 2001. However, regional cyclical variation increased last year. While 2001 saw a sharp slowdown in growth across all the major regions of the world, with the world's three largest economies recording outright recessions, growth accelerated last year in the US, China and Dynamic Asia, but slowed further in the EU, Japan and South America.

The underlying pattern of growth over the course of last summer has proven difficult to interpret from the national accounts data. What at first appears to be a recovery, from the low rate of growth seen at the beginning of last year, gaining momentum over the summer, is instead likely to be an initial bounce back in the second quarter followed by further weakness in growth. The Office for National Statistics estimates that without the disruption associated with the Jubilee holiday, quarterly GDP growth would have decelerated from 0.8–1.3 per cent in the second quarter to 0.2–0.5 per cent in the third quarter last year. This is in contrast with the acceleration in growth from 0.6 to 0.9 per cent per quarter over the same period suggested by the national accounts, portraying a rather different picture of the economic recovery. Preliminary estimates of GDP suggest that the economy expanded by 0.4 per cent in the fourth quarter of last year. This is as we anticipated when preparing the forecast, which was completed before the fourth quarter estimates of GDP were released. Taken together, the figures for the fourth quarter and the estimates of growth in the absence of the disruption associated with the Jubilee holiday suggests that the recovery has been slow to gather pace in the second half of the year. In the year as a whole, GDP grew by an estimated 1.7 per cent.

All forecasts are hedged around with uncertainties, and for some time we have been publishing error bands on our forecasts. The National Institute was the first mainstream forecaster to provide an indication of the chances that two key forecast variables, output growth and inflation, would be in particular ranges. The error ranges we used were calculated from past forecast errors and on the assumption (consistent with the data) that these errors were normally distributed. Shortly after we began publishing our probability bands, the Bank of England started to provide its own indication of the error range for its inflation forecasts and, some time later, for its projection of output growth. The Treasury, by contrast, provides no indication of the chance that the Government current account will be in any particular range although this is arguably the most important variable discussed in the Pre-budget Report.

Preliminary estimates of GDP suggest that the economy expanded by 0.4 per cent in the fourth quarter of last year, bringing the level of output in the year as a whole to 1.7 per cent above the level of output in 2001. Domestic demand is estimated to have grown by around 2½ per cent in 2002. However the weakness of the external sector exerted a drag on growth, reducing GDP by almost 1 per cent. As a result overall growth remained below trend. We expect the external sector to recover as world trade is forecast to grow more strongly this year and next and due to the expected depreciation of sterling following the strength of the euro. Nevertheless, the external sector is expected to remain a significant drag on growth this year, again reducing GDP by around 1 per cent.

In this paper we investigate whether differences we observe in European labour market transmission mechanisms matter for monetary policy design. We are particularly concerned with the robustness of the choice of rule by the European Central Bank (ECB) but we also comment on the choice of rules in the UK. Three different models of labour markets are constructed, one where the relationships are estimated separately, one where the most statistically acceptable commonalities across countries are imposed and one where common relationships are imposed across all countries. Panel estimation techniques are used to test for commonalities. These models are embedded into the National Institute's Global Econometric Model, NiGEM, and stochastic simulations are run to evaluate different monetary policy rules.

There are differing views about the need for economic policy coordination in the EU and about the adequacy of the system that has evolved under EMU. This article examines the case for such policy coordination, then describes and assesses the current arrangements for both ‘hard’ coordination — epitomised by the much-maligned Stability and Growth Pact (SGP) — and the ‘soft’ forms of coordination that have evolved in the EU to complement formal rules. Although the system achieves more than is sometimes recognised, it is shown to have weaknesses. Options for reforming the SGP and other facets of the system are discussed.

In nominal terms, the fall in global share prices since 1999/2000 bears a close resemblance to that experienced worldwide in the years following 1972/3. This article seeks to compare the two periods of market weakness in the G-7 countries in terms not only of share prices but also focusing on macroeconomic trends, financial market developments, sectoral patterns of shareholding and potential wider economic consequences of falling share prices. It is shown that the earlier period was much more severe in terms of adverse economic developments, in particular high inflation. But the current situation also presents some risks, in particular a disruptive correction of US sectoral imbalances.

The business cycle has an importance in the popular debate which can tend to run ahead of the problems in measuring it. This paper provides a survey of the main statistical techniques that are used to measure the cycle. An application to the UK illustrates that the choice of what measure, or measures, to use is more than a dry academic issue. Inference about the business cycle is potentially sensitive to measurement. Fortunately, however, there is an element of consensus.