• • Global GDP will rise by 5.0 per cent in 2007 and by 4.8 per cent in 2008.

• • Chinese GDP growth will remain around 10 per cent a year in 2007 ard 2008.

• • The US economy will expand by 2.6 per cent a year in 2007 and 2008.

• • The Euro Area will grow by 2.5 per cent in 2007 and 2.3 per cent in 2008; consumer-price inflation will be fall to 1.8

• • The Euro Area fiscal deficit will narrow to 1.2 per cent of GDP in 2007, down from 3.1 per cent in 2003.

• • Japan will grow by 2.3 per cent in 2007 and 2.4 per cent in 2008.

• • Housing investment growth propects are a risk to this forecast, with Spain and the US being the most vulnerable.

The global economy expanded by 5.3 per cent in 2006, one of the fastest rates of growth in the past 35 years. We project further expansions of 5 per cent this year and 4¾ per cent in 2008. The key risks to the forecast that we highlight in this Review relate to global housing markets and the current stance of monetary policy. The US economy is restrained by the recent correction in its housing market, which is expected to continue to weigh on the economy through 2008. There is some concern that the housing investment downturn may spread to other economies, and in this report we explore the areas most at risk to such a contagion. We also consider the recent volatility in the oil price, which makes it difficult for monetary authorities to distinguish signal from noise. If too much emphasis is placed on what subsequently turns out to be noise, policy settings could turn out to be overly lax or stringent.

The US current account deficit was around 6½ per cent of GDP in 2006, having risen by 2 per cent of GDP since 2002 when the dollar reached its peak and started to decline. Between the peak in 2002 and the last quarter of 2006 the dollar fell by 13.4 per cent in effective terms using 2003 trade weights, and it might have been expected that the current account would have improved. However, over the same period the household savings rate fell by more than 4 per cent of personal incomes and private sector investment rose by 0.6 per cent of GDP. At the same time, the public sector deficit improved by around 1 per cent of GDP, but this was not enough to offset the major decline in net savings in the private sector. These domestic imbalances have been partly responsible for the deterioration in the current account, and appear to have more than offset the impacts of the decline in the dollar. In addition, since 2002 the oil price has risen and this has led to a significant deterioration in the US current account.

GDP growth in 2006 is estimated to have been 2.8 per cent per annum. This rate of growth is above our estimates of the trend rate of growth in the UK. On a quarterly basis the latest estimates suggest that growth above the trend rate occurred in the first half of 2006, with both quarters' growth rates at 0.8 per cent (see figure 1). The second half of the year saw quarterly growth rates at around the trend rate of 0.6 to 0.7 per cent. NIESR's estimate of monthly GDP implied that quarterly growth in the first quarter of this year was somewhat lower at 0.5 per cent because of a weak January. After this poor quarterly performance we expect an increase in economic growth due to household and government demand. Overall, this suggests a downward revision to our January forecast of 0.1 percentage points, although this is of little economic importance. We continue to expect the economy to moderate over the next three years. Our forecast is for GDP to grow by 2.7 per cent per annum this year, slowing to 2.6 and 2.4 per cent per annum in 2008 and 2009 respectively.

The Governor of the Bank of England wrote a letter to the Chancellor in April explaining why inflation had gone above 3 per cent in the previous month. Reaching the trigger point for a letter to be written looked likely, but not certain in January, when we said that ‘the odds are a little less than even that the Governor of the Bank of England will have to send an explanatory letter to the Chancellor.’ This probabilistic statement was based on the distribution of possible outcomes around our forecast. Inflationary pressures have been marginally higher than we might have expected, but we are not at all surprised by the event. There is also little either the Chancellor or the Governor could have done by January of this year to prevent the event happening.

My title intentionally harks back to Maurice Peston's slim, but excellent, 1980 book, entitled Whatever Happened to Macro-economics. In this book, a compilation of three lectures, Maurice asks how much then remained of traditional Keynesian macroeconomics in the aftermath of the monetarist counter-revolution, and of the development of Lucasian rational expectations. Maurice was much more impressed by the new contributions of the rational expectations school than he was of those by the more traditional monetarists.

This paper gives an overview of the construction of and preliminary results from the EU KLEMS database which contains industry estimates of output, input and productivity growth for EU countries. The paper begins with a discussion of methodology and data sources covering output and intermediates, capital and labour services. The content and scope of the database is then briefly described. This is followed by a discussion of preliminary results focusing on comparisons between the EU and US. These confirm the relatively poor productivity performance of the EU relative to the US since the mid-1990s, mostly driven by low productivity growth in market services.

The productivity performance of the UK relative to its major competitors has been a concern for much of the postwar period. There is a general perception that, in recent years, its position has improved, however, most work stops short of the period in question. Newly constructed data from the EU KLEMS productivity and growth accounts database provides an insight into UK productivity performance and that of its major competitors. This paper provides an overview of recent UK performance relative to France, Germany and the US and finds that the UK has seen a rise in output and employment growth since 1995. Growth has been particularly strong in ICT producing sectors and market service sectors. With this in mind, there are perhaps some grounds for optimism for the future of productivity growth in the UK.

Since joining the European Union in 1986, the performance of the Spanish economy has been quite remarkable, acting as a good example for new entrants of what can be accomplished in twenty years. Its ability to generate employment has been astonishing. Departing from an environment of very high unemployment (close to 25 per cent), Spain has become the country of destination most preferred by immigrants. However, it has also had a scant productivity performance. The main burden on productivity growth lies with the construction sector and almost all private service sectors with the unique exception of the financial sector. Most likely, over the next years, the continuity of the Spanish success will require a reversal of the sources of growth, shifting from labour creation to improvements in multifactor productivity.

The breakdown of the communist regime in Eastern Europe marked a historical event for countries on both sides of the iron curtain. Applying the recently released EU KLEMS database on sectoral growth and productivity measures, we study the period after the transformational recession 1995-2004 for Austria, Czech Republic, Hungary, Slovak Republic, and Slovenia and compare the performance to a group of European core economies. Our analysis reveals pronounced differences in performance but also striking similarities in terms of industrial structure. Beginning witha brief account of aggregate growth and its components, the focus is then on specialisation patterns and the varying contribution of industries characterised by educational intensity. Fianlly, we investigate the manufacturing sector in more detail, demonstrating that the Eastern European countries sucessfully specialised in higher-tech sectors which might be explained by high productivity growth rates in these sectors.

This paper considers methods to measure output and productivity in the delivery of health services, with an application to NHS hospital sector. It first develops a theoretical framework for measuring quality adjusted outputs and then considers how this might be implemented given available data. Measures of input use are discussed and productivity growth estimates are presented for the period 1998/9-2003/4. The paper concludes that available data are unlikely fully to capture quality improvements.