SUMMER FORECAST IN BRIEF - 1996
The UK economy is entering its fifth year of economic expansion. Output is now almost 11 per cent higher than in early 1992.
GDP grew by 2½ per cent last year, close to its long-run trend rate.
Claimant unemployment has continued to fall and in May it was over 800,000 below its December 1992 peak. Employment rose by over 300,000 in the year to winter 1995-96 and vacancies are at their highest level since the end of 1989.
After rising slightly last year in response to higher import prices, underlying RPI inflation appears to have peaked at around 3 per cent towards the end of 1995.
Interest rates have been cut by 1 per cent since the Budget and mortgage rates have fallen by almost 1½ per cent over the past year to their lowest level for 30 years.
The current account deficit widened slightly last year to £2.9 billion from £2.4 billion in 1994, but remained small as a proportion of GDP (½ per cent).
The Public Sector Borrowing Requirement was £32.2 billion in 1995-96, around £3 billion above the Budget forecast, reflecting lower than expected tax receipts.
Activity in Europe slowed in the second half of last year. But signs are already more encouraging. Recovery is expected in the second half of this year, and should continue next year despite fiscal tightening.
The United States appears to be growing close to its trend rate, while Japan has been growing strongly since the middle of last year.
Against this background, overall output of the major seven economies could grow by 2 per cent this year, picking up to 2¼ per cent in 1997. Meanwhile, inflationary pressures in the major countries remain weak.
GDP is expected to grow by 2½ per cent in 1996 and 3¼ per cent in 1997.
Consumers’ expenditure is likely to be a major expansionary force both this year and next. Disposable income and wealth are being boosted by tax cuts, lower mortgage rates, buoyant share prices, rising house prices and ‘windfalls’ from building society mergers and flotations and electricity rebates. Maturing TESSAs will also add to households’ liquidity.
Business investment was up by 7¼ per cent in the year to the first quarter of 1996 and orders and surveys point to a further increase during the course of this year. And if European growth strengthens, exports should pick up further.
The prospects for inflation remain favourable. There is little inflationary pressure from import costs. Wage pressures remain subdued and settlements have flattened off since the start of the year. And competition in the retail sector is expected to continue to put downward pressure on prices.
RPI ex MIPs inflation is forecast to fall to 2½ per cent in the fourth quarter of 1996. It is forecast to fall further to 2¼ per cent in the second quarter of 1997 and remain there in the second half of the year.
The current account deficit is expected to remain fairly small at around ¼ to ½ per cent of GDP in both 1996 and 1997.
On current tax rates and public expenditure plans, the PSBR is projected to fall from £32 billion in 1995-96 to £27 billion in 1996-97 and £23 billion in 1997-98.
Percentage changes on a year earlier unless otherwise stated
1996 Panel of independent forecasters, July 1996
SEF Average Range
Gross domestic product
1996 2 1/2 2 1 3/4 to 2 1/2
1997 3 1/4 3 1/2 3 to 4 1/2
RPI excluding mortgage interest payments
1996 Q4 2 1/2 2 1/2 2 to 2 3/4
1997 Q2 2 1/4 2 1/2 2 to 2 3/4
Current account (billions of pounds)
1996 -3 1/2 -3 -4 1/2 to -1
1997 -1 1/2 -4 1/2 -7 to 1/4
PSBR (billions of pounds)
1996-97 27 26 1/2 24 1/2 to 28 3/4
1997-98 23 22 1/4 15 to 28
The ultimate objective of the Government’s economic policy is to promote rising prosperity through sustained economic growth.
Structural policies, such as labour market reform and privatisation, are required to improve the long-term performance of the economy.
Monetary and fiscal policies are designed to achieve a stable macroeconomic environment, with permanently low inflation. Specifically:
Monetary policy is set to achieve the Government’s target of reducing underlying inflation to 2½ per cent or less by the end of the present Parliament, and keeping it there.
Fiscal policy is set to maintain sound public finances, the objective being to bring the PSBR back towards balance over the medium term. GDP is expected to grow by 2½ per cent in 1996 and 3¼ per cent in 1997.