Most discussion of the Government's fiscal position seems to focus on the immediate risks associated with a rising national debt. There is concern that the UK's credit rating will be reduced and fear that this might lead to a further fall of the exchange rate. It is sometimes suggested that if the budget deficit is not reduced sharply in the reasonably near term there will be a significant risk that the UK might default on its debt.

The lack of adequate banking regulation by supervisors and flawed assessment of risk by financial institutions over the past several years has proved extremely costly. We estimate that the level of global output declined by a cumulative 2.4 per cent between the onset of the crisis triggered by the collapse of Lehman Brothers and the first quarter of 2009, with a decline of 4 per cent in the OECD economies over the same period. This is equivalent to a loss of roughly $850 billion relative to what was then considered potential output. We estimate that government debt levels in the OECD economies have risen by about 25 per cent in aggregate, entailing many years of higher tax burdens to come, a rise in long-term real interest rates and lower levels of income-generating wealth. The level of employment in the OECD economies declined by 2.2 per cent between the second quarter of 2008 and the second quarter of 2009, and we expect a further 2.5 million people will lose their jobs in the OECD economies by early 2010. While we expect growth to resume by the end of this year in most countries, the level of output in the OECD will remain permanently lower than was expected fifteen months ago. The degree of scarring in individual economies depends on the extent to which lenders underestimated risk before the crisis and the recent rise in the economy's government debt burden. This is discussed in greater detail in a note on pp. 36–8.

The outlook for the US economy has improved modestly compared to our projections three months ago. This can be attributed largely to the unexpectedly rapid decline in risk premia, while the recovery in world trade appears to be being led by Asian markets, allowing a positive contribution to US growth from net trade in the short term. After a cumulative decline in output of 3.8 per cent in the US in the year to the second quarter of 2009, GDP probably recorded a rise in the third quarter, supported by a rise in consumer spending and a positive impact from net trade. We expect output to decline by 2.8 per cent in 2009 as a whole, and forecast a rise in US GDP of 1.3 per cent in 2010.

Output in several of the economies of East Asia fell very sharply at the turn of the year, but those countries are now leading the global recovery. This points to a strengthening of domestic demand in these largely export-oriented economies, and our forecast shows some rebalancing of global demand. This will allow the large current account surpluses in China and Japan to narrow over the next few years, and help sustain the recovery in the rest of the world. The Japanese current account is expected to approach balance by 2013, from a surplus of nearly 5 per cent of GDP in 2007, while the Chinese currrent account surplus is expected to narrow to about 8 per cent of GDP from a peak of over 12 per cent in 2007.

The macroeconomic outlook for the Euro Area has improved. The first signs of recovery have already started materialising and although the second quarter of 2009 saw GDP contract by 0.2 per cent in quarterly terms, the pace of the decline eased. The first quarter of this year, with GDP collapsing by 2.5 per cent, probably constituted the sharpest contraction in the deepest recession the Euro Area has ever experienced.

It is useful to look at the distinction between transitory and permanent effects of a crisis. Financial crises normally bring on a recession, and the output costs can be large, as Hoggarth and Saporta (2001) discuss. In the majority of cases since 1970 in the OECD countries output returns to its trend level and there is no permanent effect. However, there may have been a permanent scar on the level of output in Japan after its crisis in the early 1990s, making the crisis and subsequent recession much more costly. This may reflect the nature and length of the crisis, as the banking sector was left to flounder for some years before its rescue toward the end of the crisis period. This appears to have left a permanent scar because risk premia were subsequently higher, and real asset prices have not fully recovered.

We expect the economy to contract by 4.4 per cent this year, a prospect which has scarcely changed since our April forecast. Our early estimate suggests that output was stable in the third quarter of this year, after a fall of 0.6 per cent in the second quarter (figure 1). Measured on an annual basis the contraction is only slightly less bad than the 4.6 per cent recorded in 1931.

The increase in UK public sector net borrowing in the past year, plotted in figure 1, has been in part a result of the decline in economic activity, and also a consequence of the change in housing and financial market transactions. The former is predictable with every 1 per cent decline in output below trend producing a decline in net revenues of of between one third and three fifths of a per cent of GDP depending upon the reason for the decline in output. The loss from the decline in asset-related revenues is harder to judge, but the April 2009 budget suggested that revenue losses might be more than 1 per cent of GDP.

We are all impatient to know what is going on in the economy ‘right now’. But given the delays in the publication of official data, effectively economists are driving looking through the rear-view mirror as they do not know where the economy is until they have driven well past it. The statistical office in the UK (the ONS), for example, publishes quarterly GDP estimates about 27 days after the end of the quarter, and this is relatively quick by international standards.

Timely availability of relevant economic information is from the users' point of view a crucial pre-requirement for effective economic and monetary policy and for accurate analysis and reliable forecasting. Unfortunately, official statistics are not always able to meet such needs. For this reason, particularly over the recent past, advanced statistical and econometric techniques have been used to complement the classical production process in order to increase the timeliness of the relevant economic information. Furthermore, official statistics do not necessarily show explicitly relevant phenomena such as the cyclical situation and the location of turning points. In order to fill this gap, indicators have to be built up to extract such relevant signals and to make them available in an easily readable and comprehensible way to all users. This paper gives a general overview of ongoing Eurostat projects, aiming to supply timely information to all users based on transparent and statistically sound methodologies. In particular this paper presents results related to the construction of flash estimates in order to increase the timeliness of official statistics as well as the construction of a timely statistical system for business cycle analysis based on a set of turning points indicators and cyclical estimates. The results obtained so far are very encouraging, especially in terms of the overall quality of the estimates and the statistical robustness of the proposed methods. Nevertheless, some improvements, particularly related to the precision of flash estimates, are needed, especially under an uncertain economic situation and regime changes.

We consider the reasons for nowcasting, the timing of information and sources thereof, especially contemporaneous data, which introduce different aspects compared to forecasting. We allow for the impact of location shifts inducing nowcast failure and nowcasting during breaks, probably with measurement errors. We also apply a variant of the nowcasting strategy proposed in Castle and Hendry (2009) to nowcast Euro Area GDP growth. Models of disaggregate monthly indicators are built by automatic methods, forecasting all variables that are released with a publication lag each period, then testing for shifts in available measures including survey data, switching to robust forecasts of missing series when breaks are detected.

This paper assesses the role of qualitative surveys for the early estimation of GDP in the Euro Area in a model-based automated procedure which exploits the timeliness of their release. The analysis is conducted using both an historical evaluation and a real-time case study on the current conjuncture.

Alternative measures of the UK output gap are considered for 1984–2007. The real-time series is strongly affected by the rolling-time estimation of the trend, and produces a picture of the business cycle which is not consistent with contemporary perceptions of the large fluctuations of the late 1980s and early 1990s. A new, ‘nearly-real’, measure developed here may be better for estimating historical reaction functions. In the context of the current recession, none of these mechanically derived measures of the output gap are useful. Policymakers should make careful estimates of the likely fall in potential output on the basis of other information.

For more than four decades, the New Zealand Institute of Economic Research (NZIER) has conducted a two-question, quarterly survey of architect forecasts of public and private sector construction expenditure. This qualitative survey is published one week after the end of each quarter and nine weeks ahead of the official quantitative data thereby giving architect opinion nowcasting status. This paper covers selected aspects of this unexplored series with particular reference to residential housing construction and the value-added information from architects as nowcasters. Specifically, we consider several qualitative-to-quantitative conversion methods, in-sample and out-of-sample performance, cyclical features and respondent dynamics. Although our work relates to architects — a sub-sector of the service industry — our results have a wider application to business survey questions using ordered qualitative responses.