Macroeconomic Developments, Prospects and Policy Challenges

Since the mid-1990s, GDP growth, inflation and unemployment have been remarkably stable in the United Kingdom (Figure 1.1). Nowhere else in the OECD has economic activity remained so consistently close to trend over this period (Figure 1.2).1 The United Kingdom has also been among the most resilient economies during the recent downturn. Apart from Canada, it is the only G7 economy, for which output has not fallen by significantly more than one percentage point below potential. Moreover, it has been one of the few European countries (large or small) to display such a high degree of robustness during the downswing (Figure 1.2).2 At the same time the unemployment rate has remained continuously close to 5 per cent. In 2003, it will be the lowest among the major seven economies, while deviations of inflation from the target have been as small as could have been reasonably expected. This impressive macroeconomic performance is a testament to the strength of the current macroeconomic policy framework as well as more than two decades of structural reform.3 It has also been an important factor behind the decision to postpone a referendum on entry into the Economic and Monetary Union (EMU) (Box 1.1). In this generally favourable context, the United Kingdom seems well placed to take advantage of the ongoing world recovery and to move towards a more broadly based growth that relies less on consumption and housing wealth, but extends to so far lagging exports, investment and manufacturing activity...