In January 1959 registered unemployment in Britain reached 620,000, 2.8 per cent of the labour force, and the highest figure since the War. The first issue of the Review appeared in the same month, and its conclusion was that if no further Government measures were introduced, a small rise in output was to be expected. In the event, even allowing for subsequent policy changes, this forecast proved to be a particularly bad one, so that for many years to come a superficial inspection of the sequence of forecasting errors was bound to suggest improvement! 1959 was to turn out to be the year in which: ‘You never had it so good’; in October, in a third consecutive General Election victory, the Conservative government increased its majority from 60 to 102. In 1959 also the yield on ordinary shares fell momentarily to 4 per cent and was subsequently to remain below the yield on Consols. Some concern was being expressed about ‘Stop-Go’ which was soon to lead to experiments in national planning, and some people were worried about the persistence of inflation, but all in all the wind seemed to be set fair for an increasingly affluent society. Confidence in the economy was matched by the assurance of economists that they knew what they were about. Economic research would put quantitative flesh on the bones of the Keynesian model which was not seriously challenged. That early forecasting error would be quickly rectified once the new team got into its stride.

The happy outcome which is looked for in closer economic integration in the world is that all countries gain. This is particularly clear for a general removal of trade barriers, such as those indicated for the whole range of products by Stoeckel et al. (1990) or for individual products, such as the ending of the Multifibre Arrangement explored by Trela and Whalley (1990). Here those who have been protecting their industries gain because the losses to producers are more than offset by the gains to consumers, those who have been discriminated against in the past gain because they can increase their exports and those foreign countries which were previously benefiting from privileged access to the protected markets gain because their loss of market share is more than offset by an expansion in the market.

Global growth appears to have been relatively strong during the last year. In the Anglo-Saxon world the economic expansion has now lasted six years. Growth in continental Europe also now appears to be relatively robust, after a significant slowdown in the first half of last year. The OECD economies are projected to grow by around 3 per cent this year. Despite this, there continues to be little evidence of emerging inflationary pressures. We anticipate that OECD inflation will average around 2 per cent in 1997, some 2–2½ percentage points lower than in the equivalent upswing in the late 1980s.

Our estimates indicate that global output increased by 4.7 per cent in 2005. This followed an expansion of 5.2 per cent in 2004, and we expect further annual rises of 4¾ and 4½ per cent in 2006 and 2007, respectively. Global growth averaged just less than 3½ per cent per annum between 1975 and 2003, and exceeded 4½ per cent in only five of these years. We have not seen an extended global expansion of the magnitude expected for 2004–7 since the early 1970s. While growth in the OECD economies is expected to average 2.9 per cent per annum between 2004 and 2007, which is slightly higher than the average annual rate of 2.7 per cent experienced in 1975–2003, the bulk of the recent global strength comes from outside the OECD, as illustrated in figure 1. The acceleration of global growth can be attributed partly to developments in formerly centrally planned economies, such as Russia and other regions of the former Soviet Union. Severe recessions in these regions associated with the introduction of market forces and economic transition restrained world growth in the early 1990s. A strong rebound in these economies since the late 1990s has recently been further strengthened by rising prices for oil and gas. The former Soviet Union supplied 14 per cent of global oil in 2005 and holds over 30 per cent of proven global natural gas reserves. The high oil price is also expected to support growth in OPEC member states as well as other oil producing nations in South America and Africa. However, output growth in these regions has historically been relatively volatile, and the outlook for these economies remains a risk to our central forecast for world growth.

This chapter brings together a brief review of the economy in 1963 and a revised forecast of the trend of demand over the next eighteen months; it then looks in particular at the implications for the labour supply and the balance of payments; and finally it draws some conclusions about economic policy. The detailed justification of the individual forecasts is given in Chapter II.

The UK is preparing to start one of the largest random assignment evaluations of a new social policy that has ever been undertaken in Europe or North America. This juncture is a useful time to examine the merits of random assignment evaluation using new results from one-of the most widely cited experimental evaluations the Self-Sufficiency Project in Canada. Random assignment experiments are the most reliable approach to measure the impacts of changes in social policy. However, they are often expensive and cannot answer all relevant research questions. The Canadian Self-Sufficiency Project demonstrates these qualities. It showed that the provision of earnings supplements to lone parents who leave welfare for full-time work can increase employment and earnings and decrease welfare receipt. The high quality of research provides credible evidence that the large, initial programme expenditure can mostly be recovered through reduced welfare payments and higher taxes.

According to the formal dating of the business cycle by the National Bureau of Economic Research (NBER), the US economy reached a peak of economic activity in December 2007, which marks the beginning of the US recession. While some economists tend to refer to a technical recession as two consecutive quarters of decline in real GDP, the NBER uses a broader definition of ‘a significant decline in economic activity spread across the economy and lasting more than a few months, normally visible in production, employment, real income, and other indicators'. The committee pays particular attention to payroll employment, which has declined by 1.9 per cent since the peak reached in December 2007, allowing the unemployment rate to reach 7.2 per cent in December 2008, the highest rate since 1992. We expect a sharper decline in US employment this year, and see the unemployment rate reaching 10½ per cent in 2010, the highest level since a brief peak in 1982.

This article aims to compare the National Institute's forecasting performance with that of United States forecasters. Because of the magnitude of this task, we restrict our attention to forecasts of the principal output measure in each country—real gross domestic product in the United Kingdom and real gross national product in the United States. Results for US forecasters are taken from the detailed study by McNees (1975), where there is also information on the methods employed by these forecasters.

The original article, prepared in 1960 and published in September of that year, took as its initial text the statement of the National Coal Board in April 1956 : “ Even in the longer term, the problem of overproduction for the coal industry can scarcely arise ”. The article was concerned to try to explain the divergence, from 1956 onwards, in the movement of gross domestic product on the one hand, and the demand for energy and particularly for coal on the other (chart 9). The two main explanations of the divergence were that the temperature in the 1956-59 period was higher than average, and that fuel efficiency improved much faster than before. As a by-product of these calculations, some conditional forecasts were made for total energy demand and coal demand in 1965 and 1970. These forecasts took three rates of growth of gross domestic product, in real terms—2, 3 and 4 per cent—and three rates of fuel-efficiency improvements—at 1950-59 rates, at 1957-59 rates, and a further slow improvement in fuel efficiency rates. The main conclusion about the future was that “ it would need a very slow rate of efficiency improvement, and a very rapid rate of increase in national output, for the demand for energy to reach 300 million tons (coal equivalent) by 1965; this is still the official estimate. It also does not seem likely that the demand for coal will rise over the next five years ”.

Growth in the US appears to be slowing rapidly after an expansion of 4.8 per cent at an annual rate in the third quarter of 2007. As we can see from figure 5, growth dropped to almost zero per cent at an annual rate in the fourth quarter and we expect the rate to be negative in the first quarter of this year. The growth rate will be negative for the first time since the downturn in 2001, which, after data revision, no longer constitutes a technical recession.

There was some slowing down of the growth of industrial production as a whole during the summer months though the overall tendency continues firmly upwards (table 13).

France, Italy and Japan are still expanding rapidly, though in the case of France not so rapidly as in the past. In most other countries, apart perhaps from Norway, rates of growth are declining. The United Kingdom is the most prominent of this group, but the slowdown in Germany is becoming quite marked.

Crises have a common shape but not always common consequences, as Barrell and Davis (2005) discuss. Asset bubbles are associated with the run-up to most crises and regulators should respond, taking an asset bubble as a signal of a need for precautionary action. It is easy to say that fundamentals have changed an asset market, and hard to spot a bubble. It is also common to suggest that interest rate policy should be set to constrain bubbles such as those in housing markets in recent years. Not only is it difficult for the central bank to use interest rates to constrain a bubble, it is also inappropriate if inflation is under control. It is for the financial market regulator, which may or may not be in the central bank, to respond to the bubble and strengthen its precautionary measures designed to raise lending standards.

The UK economy faces more than usually uncertain times. Outside the European Union, and in an increasingly challenging global environment characterised by ageing populations, climate change, populism, protectionism, and more, the country needs to chart a new course. This may well require policymakers to consider unconventional approaches to monetary and fiscal policy and, at the very least argues for important modifications of the current policy regime, including the autonomous mandate of the Bank of England.

At some point, there will be a major slowdown in economic activity. Yet the Bank of England has very little leeway to respond by cutting interest rates, and it has already adopted an armoury of unorthodox tools that may be decreasing in effectiveness. More radical monetary approaches would be likely to be politically controversial; and are not without risks. In these circumstances it would be a mistake to rely solely, or even largely, on monetary policy to maintain demand. It would be better to conduct monetary and fiscal policy in tandem, and for discretionary fiscal policy to be required to play a much more active role in demand management than hitherto. This would, for example, imply major extension of the automatic stabilisers and efforts better to calibrate discretionary initiatives with the business cycle.

But given the long-term pressures on the public finances, more fundamental changes in the structure of spending and taxation are needed, along with a redrawing of fiscal rules and targets, under independent budgetary oversight. The current, historically low, share in GDP of public spending is itself unsustainable in light of the demand for services of an ageing population; plans should be made to raise it closer to the European average. In the most extreme circumstances it might become necessary to waive the fiscal rules entirely and for the Bank of England directly to underwrite fiscal stimulus in order to sustain aggregate demand. It would be wise for the authorities to consider the options in detail now, while the environment is still relatively stable.

Last February we suggested that the aggregate volume of national output (GNP) of the member countries of OECD would rise in 1970 by 3 per cent and the dollar value of world trade by about 9 per cent. We now estimate that the rise in output was appreciably below our forecast, at about 2½ per cent, but that the rise in the value of world trade was probably as high as 15 per cent, which would mean that it was the biggest since the Korean War 20 years ago.