World output growth continues to recover from its trough in 2001, albeit rather hesitantly. The slowdown in output growth in 2001 was largely centred in the OECD, with the US, Japan and Germany all recording growth below 1 per cent. In the last three years growth has been robust in other regions, but particularly in Asia, with China and India growing rapidly. Even Latin America is expected to show some signs of recovery this year after the currency related disruptions it experienced in 2002. It is becoming clear that 2002 saw reasonably strong output growth of 2.8 per cent in aggregate, rising from 2.2 per cent in 2001. Our forecast for 2003 is that the annual rate of output growth in the world will continue to increase, but weakness in a number of countries, including the US, at the end of 2002 suggests that it will not accelerate further into next year. The impact of the realignment of the dollar and the euro will also hold back world growth slightly this year and next. Our forecasts for output growth and inflation along with trade and oil prices are set out in Table 1.

Economic growth at the turn of the year has been relatively weak. In the last quarter of 2002 the economy expanded by 0.4 per cent and, based on our estimates of monthly GDP, we anticipate growth of 0.3 per cent in the first quarter of this year. An important factor behind this weakness has been the poor performance of UK exports. Until recently, low export volumes were easily explained by the weakness of world trade. World trade volumes shrank throughout 2001, and have since increased only gradually. But, we estimate that the volume of world trade in goods, weighted using UK export market shares, is now close to its level at the end of 2000. In contrast, the volume of UK goods exports is currently around 7½ per cent below its peak level at the beginning of 2001. The loss of export market share was not evident until the second half of 2002 and comes after a period of remarkable stability in both the real exchange rate and export market share (chart 1). While it is possible that these observations can be attributed to temporary factors, they may instead indicate that the high level of the exchange rate since 1998, and the pressure this has put on exporters' profit margins, has left British exporters less able to cope with a sustained period of lower global demand. Data for the first two months of the year do not suggest that growth in export volumes in the first quarter of 2003 will be sufficient to regain the export market share lost towards the end of last year.

Discussion around the time of the budget focuses on the state of the Government's finances, both in terms of the balance of income and expenditure, and also on their implications for the government balance sheet. Despite the wide-ranging nature of some of the budget commentary, the issue of the national balance sheet received no discussion there and attracts little attention generally.

Annual GDP in 2002 grew by 1.8 per cent as compared to a trend growth rate of about 2½ per cent. The weakness of the economy was due to falling private investment and exports. A reasonable rate of growth was sustained due to the strength of household consumption expenditure, which grew by 3.8 per cent. Our estimate of growth in the first quarter of this year of 0.3 per cent does not suggest that the economy has recovered to trend rates of growth.

The impact of recent advances in information technology on output and productivity growth has been one of the key research questions in the past few years. A consensus has emerged that the use of information and communications technology (ICT) capital has had a significant impact on aggregate economy-wide labour productivity growth through the capital deepening channel in the United States in the 1990s (see the discussion and references in the papers below). Evidence is also emerging of a delayed but nonetheless significant impact in European and other OECD economies. These findings have stimulated additional research using microeconomic data focusing on both the industry or company level.

UK manufacturing productivity has for a long time lagged behind the US. Explanations put forward for the ‘productivity gap’ include disparities in capital stock levels, the quality of the labour force and different rates of technology adoption. The questions addressed in this paper are, ‘has slower UK up-take of information technology exacerbated the productivity gap? Can this account for the slowdown in the manufacturing sector in the mid-1990s, a period when the US experienced substantial growth?’ Using the growth accounting method and industry data for the period 1988-2000, the paper indicates considerable industry heterogeneity in both the UK and the US, which aggregate sectoral analysis is likely to obscure. The results suggest that whilst the UK continues to lag behind the US in terms of ICT capital shares, differences in rates of growth of ICT capital are minor. Labour quality indicators show positive ICT and non-ICT skilled labour growth and declines in lower skilled categories in both countries, with the UK leading the US in recent years. Thus UK manufacturing has invested significantly in new technology inputs. The paper also shows there are similarities in the cross industry patterns of productivity performance in the two countries but growth rates in the UK are significantly below those in the US across the board. The paper then considers alternative explanations for the slowdown in UK manufacturing productivity in the mid to late 1990s and suggests this may be due to macroeconomic factors peculiar to that period and lags in the adjustments of firms to a changed environment.

The rapid advance and diffusion of new information technologies left pronounced imprints on the formation of human capital. Firstly, it favoured the growth of specific computer related occupations, secondly it raises the demand for higher levels of workforce education. Although IT equipment is the showcase of a general purpose technology, pervading the production process in any kind of economic activity, there is substantial heterogeneity among industries in terms of IT-labour intensity. The article demonstrates that these differences are sufficiently systematic to establish a new sectoral classification, which captures substantial portions of the total variation in the above dimensions. More specifically, the results contrast popular beliefs about a uniform dissemination of new information technologies in all sectors.

This paper provides an analysis of the trends in labour productivity and employment growth at industry level in the European Union and the United States during the 1990s. We analyse relationships for groups of industries, i.e. industries that produce ICT products and services, those that invest strongly in ICT, and those that make less intensive use of ICT. The main findings are that the inverse relationship between employment and productivity growth has been much more prominent in manufacturing industries than in services industries. Secondly, during the 1990s, this relationship has turned positive in many industries, in particular in ICT-producing industries and in ICT-using industries in the service sector. Finally, the employment-reducing effects of productivity growth have remained considerably stronger in Europe than in the US.

This paper finds substantial effects of ICT investments on productivity for a large and representative German establishment panel data set. In contrast to the bulk of the literature also establishments without ICT capital are included and lagged effects of ICT investments are analysed. In addition, a broad range of establishment and employee characteristics are taken account of in order to avoid omitted variable bias. It is shown that taking into account unobserved heterogeneity of the establishments and endogeneity of ICT investments increases the estimated lagged productivity impact of ICT investments.