The sharp rise in the real price of oil has taken it up to or above the levels seen after the second oil crisis of the late 1970s (depending on the currency considered) and has been, to say the least, somewhat disruptive to a world which had anticipated relatively cheap oil, probably for the indefinite future. At the very least, it is hard to imagine that some major consuming countries would have saved as little as they did, had they given proper attention to oil's status as an exhaustible resource. In this commentary the current situation is viewed from that perspective. The short-term impact of high oil prices is discussed on pp. 34–8.

In interesting times several things may happen simultaneously, and they may have connected roots. The financial turmoil that developed initially in the US banking sector had its roots in financial innovation that had made available cheap finance and increased demand for housing. This wave of low cost finance had spread to Europe, and house prices rose in a correlated way. The increase in demand in the world economy that resulted from strong growth in lending and high asset values helped raise output growth outside the OECD, and this in turn put upward pressure on oil prices. Markets sometimes work slowly, and the effects of the increase in demand on prices appear to be coming through just as the asset bubble is collapsing. The sequence of events was not inevitable, as low personal sector saving in the US and the UK as well as elsewhere could have been offset by tighter fiscal policy, and better prudential regulation of lenders would also definitely have helped. The desire to move financial regulation from the central bank, as in the UK, may have been for good, competition based, reasons, but it has meant that financial sector oversight has not taken account of the macroeconomic implications of a wave of lending that rested on risky financial innovation and therefore it has not properly addressed the issue of systemic risk (see Barrell and Davis, 2005). The resulting financial turmoil has meant that banks have made losses, and have been unable to trust each other's solvency when making deals. As a result three month interbank rates have risen well above central bank intervention rates, as can be seen in figure 1.

The US economy appears to have avoided a technical recession this year. In the June issue of the quarterly accounts, which are considered as the first full estimate for the first quarter, first quarter GDP rose by 1 per cent on an annual basis, compared with 0.6 per cent growth recorded the quarter before. The relatively good growth was driven by net trade, with exports expanding at an annual rate of 5.3. The first-quarter contribution of net exports to GDP growth accounted for 0.8 percentage points of GDP growth expressed in annual terms.

Output growth in the economies of East Asia, including Japan, remained firm in the opening months of this year, in line with relatively resilient GDP growth in the US and in Europe. Hong Kong's economy continued to boom despite the cooling-off of China's economy. Real GDP grew at an annual rate of 7.2 per cent, faster than the 6.9 per cent growth in the final quarter of last year, supported by exports which have benefited from the effective devaluation that has come from the fixed link to the US dollar. Domestic demand continued to expand briskly, registering a 7.0 per cent gain on an annual basis. In South Korea, domestic demand growth decelerated somewhat to 3.6 per cent per annum in the first quarter, but strong export performance meant that the economy as a whole grew by a respectable 5.7 per cent on an annual basis. Elsewhere, strong credit growth and rampant infrastructure spending have been supporting domestic demand growth across the region in general. We continue to expect output growth to moderate somewhat but to remain healthy this year in much of East Asia and Australia. Following strong output growth of 3.6 per cent in the first quarter, Australian GDP is forecast to expand by about 3¼ per cent per annum this year, down from 3.9 per cent recorded last year. Korean growth is expected to accelerate partly in response to the recent 10 per cent fall in the effective exchange rate. We expect growth to exceed 6 per cent this year and inflation is expected to accelerate in response to high oil prices and the weak exchange rate. Chinese growth is forecast to moderate only slightly this year, as the last minute preparations for the Beijing Olympics and the event itself are expected to provide a boost to domestic demand in the second half of the year. Output growth in Taiwan is likewise expected to moderate to about 4¾ per cent on an annual basis.

The Euro Area economy grew by 0.8 per cent in the first quarter of this year, and is proving more resilient than anticipated in our April forecast. We were then expecting a markedly less robust outturn of an increase of 0.4 per cent. However, despite this positive start, we still anticipate a downturn in the Euro Area's year-on-year economic growth. After peaking at 2.9 per cent in 2006, real GDP growth is projected to slow down to around 2 per cent over the forecast period. Sluggish domestic demand and diminishing contributions from net trade both contribute to this downturn. Household consumption is forecast to expand by 1 per cent in the short term, down from 1.6 per cent in 2007. Consumption growth is expected to be considerably weaker than in 2007 due to accelerating inflation and the slowdown in the growth of housing wealth, particularly in France, Ireland and Spain as well as elsewhere. Moreover, real disposable income growth is expected to slow down from 2 per cent in 2007 to about 1¼ per cent this year. Nominal wages are expected to rise by 3½ per cent on average this year, and HCP inflation is likely to pick up strongly to slightly more than 3¾ per cent per annum, 1½ percentage points above the level of last year.

Since our last forecast in April 2008 there have been further increases in oil prices, as is illustrated in figure 1, which tracks oil price projections in our forecasts this year, and compares them to the projection we made in January and July 2007. Over the past eighteen months oil prices have risen from around $60 per barrel to a currently projected level of $123 in 2009. Oil prices have recently reached a peak of $145.6 a barrel before falling back to around $134. Our projection for the short term is based on those of the US Energy Information Agency and uses information from forward markets as well as an evaluation of supply conditions. In the longer term we presume that real oil prices will rise in line with the real interest rate, as is discussed on pp. 4–7 of this Review. This note looks at the impacts of recent increases in oil prices on the path for real wages by investigating the share of fossil fuels in costs. It also evaluates the impact of the rise in prices since our last forecast, and investigates the impact on oil prices of the growth in demand outside the OECD.

The economy is slowing as expected. NIESR's estimate of monthly GDP suggests that the rate of economic growth slowed from 0.3 per cent in the first quarter of this year to 0.2 per cent in the second quarter of this year (figure 1), the weakest rate of growth since the second quarter of 2001. Recent data on the state of the economy is mixed. Retail sales volume growth surged to 1.8 per cent per quarter in the three months to May 2008, up from a rate of growth of 1.2 per cent in the preceding three months. The index of production, however, recorded a fall of 0.5 per cent in the three months to May 2008. The index of services suggests services output growth has continued to be relatively subdued. The quarterly rate of growth in the three months to April was 0.3 per cent, half the rate of growth in the final quarter of 2007. While the retail sales data are not yet consistent with a consumer led slowdown, the decline of hotel and restaurant output in the three months to April suggests that other components of consumer spending are slowing.

This note reviews recent Institute work on the factors that might affect the future evolution of consumption. Drawing on Barrell and Davis (2007), it discusses the evidence for the effects of housing wealth on consumption, and shows that there has been strong and well supported evidence for a link for some time. This evidence suggests that a fall in house prices will cause consumption growth to slow. The discussion also covers evidence from Barrell, Davis and Pomerantz (2006) on the effects of financial crises on consumption behaviour. They suggest that there are large and significant negative effects on consumption during banking crises that are over and above the effects on consumption of the crisis-induced changes in income and wealth. Much of this work is embedded in our structural model, NiGEM, and it is possible to estimate the effects of house price declines and financial crises on consumption and income using the model. The note also gives a set of ready reckoners for the impacts of house price declines on output and of a given associated fall in the level of housing wealth on the level of consumption.

There is growing evidence that differences in children's intellectual, emotional and behavioural development by parents' socio-economic status emerge at early ages and that these differences cast a long shadow over subsequent achievements. This article demonstrates with the Millennium Cohort Study that differences by parents‘ income group in cognitive and behavioural development emerge by the child's third birthday. It shows that an important part of these differences can be accounted for by ‘what parents do’ in terms of educational activities and parenting style.

This paper examines the influences of parental social status, childhood cognitive ability, school motivation and education on social status attainment in early adulthood. Using Structural Equation Modelling (SEM), a pathway model of transgenerational status attainment is conceptualised, taking into account the context as well as the timing of individual status transitions. The subjects were 3104 men and 3229 women who participated in the 1958 National Child Development Study and 3049 men and 2692 women from the 1970 British Cohort Study, following their lives from childhood to their mid-thirties. The findings suggest that in both cohorts the number of years spent in full-time education is by far the most important determinant of status attainment among men and women and that there are persistent social inequalities in status attainment. The findings furthermore confirm the hypothesis that social background and cognitive ability are partially mediated through school motivation and education, opening up leverage for possible interventions.

We present analyses of intergenerational social class mobility based on data from representative samples of the British population from 1972 to 2005. We distinguish throughout between absolute and relative rates of mobility. As regards absolute rates, we find little or no change in total mobility rates over the period covered. In the case of men, there is also little change in rates of upward and downward mobility — in contrast with the middle decades of the twentieth century when upward mobility steadily increased while downward mobility fell. This latter pattern does, however, prevail in the case of women. As regards relative rates, we again find, for men and women alike, an essential constancy over time. This, then, indicates that such changes as are apparent in absolute rates derive from shifts in class distributions rather than from any significant increase or decrease in social fluidity. Our results are contrary to the prevailing view in political and media circles that in Britain today the level of social mobility is in decline, although for men the pattern of mobility has become less favourable. We end with some remarks on policy implications.

This article seeks evidence on trends in intergenerational income for cohorts born after 1970. As many of these cohorts have not yet joined the labour market, we must look at relationships between intermediate outcomes (degree attainment, test scores and non-cognitive abilities) and parental income to forecast forward from these to estimates of intergenerational earnings correlations. We find no evidence that the relationship between these intermediate outcomes and parental income have changed for more recent cohorts. Evidence from the earlier 1958 and 1970 cohorts shows that as mobility declined in the past the relationship between intermediate outcomes and parental income strengthened. We therefore conclude that, under realistic assumptions and in the absence of any significant unanticipated changes, the decline in intergenerational mobility that occurred between 1958 and 1970 birth cohorts is unlikely to continue for cohorts born from 1970 to 2000. Mobility is therefore likely to remain at or near the relatively low level observed for the 1970 birth cohort.