SUMMARY

World economy

1.01 Growth in Europe slowed in the second half of 1995 and, although it is expected to pick up in the second half of this year, forecasts for 1996 have been revised down substantially. However, with the United States continuing to expand at around its trend rate and Japan recovering after four years of very slow growth, the G7 countries as a whole could still grow by about 2 per cent this year, the same rate as in 1995. G7 growth is projected to be slightly stronger, at 2 1/4 per cent, in 1997.

Output

1.02 In the UK, GDP has been growing at an annual rate of around 2 per cent since the end of 1994. Exports were affected by the slowdown in Europe, and manufacturers have reduced their expenditure on stocks this year, following an involuntary build up during 1995. But both domestic demand and exports now seem to be strengthening and output growth is expected to pick up in the second half of the year. Over the next eighteen months, GDP is forecast to grow at an average rate of more than 3 per cent a year.

Labour market

1.03 Unemployment has continued to fall. In May, the claimant count was over 800,000 below its peak in December 1992.

Inflation

1.04 After rising slightly in response to higher import prices, underlying RPI inflation appears to have peaked at around 3 per cent towards the end of 1995. It is expected to continue to fall gradually over the coming year.

Current account

1.05 The current account deficit was little changed last year, at 3 billion pounds compared with 2 1/2 billion in 1994. The balances on trade in goods and services and investment income improved, but payments of net transfers abroad increased. Continuing small deficits, of around 1/4 to 1/2 per cent of GDP, are forecast for 1996 and 1997.

Financial conditions

1.06 The sterling exchange rate index was steady over the first four months of this year and rose by 2 per cent in May and June. The forecast is based on the conventional assumption that it remains close to recent levels from now on. Short-term interest rates have been cut by 1 per cent since the Budget, but long rates have risen broadly in line with those abroad. M0 growth slowed last year, but has picked up again in recent months. M4 has accelerated sharply since early last year.

Public finances

1.07 The PSBR in 1995-96 was 32 billion pounds, around 3 billion pounds higher than the Budget estimate because of lower than expected tax receipts. It is projected to fall to 27 billion pounds in 1996-97 and 23 billion pounds in 1997-98.