Global economic growth is forecast to pick up from 3.0 per cent in 2016 to 3.1 per cent in 2017 and 3.5 per cent in 2018 – a slightly weaker acceleration than projected last November.

The unexpected result of the US presidential election has dominated recent financial market developments, with hikes in bond yields, a further appreciation of the US dollar, and rises in stock market prices reflecting expectations of US tax cuts, infrastructure spending, deregulation and trade measures.

Our forecast assumes established policies. Potential policy changes in the US and any response in the rest of the world therefore pose significant risks to our projections.

GDP growth is expected to slow from 2 per cent in 2016 to 1.7 per cent in 2017 and 1.9 per cent in 2018.

We forecast consumer price inflation to average 3.3 per cent in 2017 and 2.9 per cent in 2018.

We expect the MPC to ‘look through’ this temporary period of above target inflation.

The new fiscal mandate is for the government to reduce cyclically adjusted public sector net borrowing to below 2 per cent of GDP by 2020–21. We expect the government to meet this target with relative ease.

The production of this forecast is supported by the Institute's Corporate Members: Bank of England, HM Treasury, Mizuho Research Institute Ltd, Office for National Statistics, Santander (UK) plc and by the members of the NiGEM users group.

EU Member States, particularly in the Euro Area, have been pushed to adopt more extensive and intrusive fiscal rules, but what is the evidence that the rules are succeeding? The EU level Stability and Growth Pact (SGP) has been – and remains – the most visible rule-book, but it has been complemented by a profusion of national rules and by new provisions on other sources of macroeconomic imbalance. Much of the analysis of rules has concentrated on their technical merits, but tends to neglect the political economy of compliance. This paper examines the latter, looking at compliance with fiscal rules at EU and Member State levels and at the rules-based mechanisms for curbing other macroeconomic imbalances. It concludes that politically driven implementation and enforcement shortcomings have been given too little attention, putting at risk the integrity and effectiveness of the rules.

In this article, I evaluate the challenges related to the European Commission's output gap method of calculating the structural budgetary position, and assess its bottom-up alternatives in the EU's fiscal framework using the Finnish data for the years 1984–2014. The results reinforce the impression of the limited capacity of the output gap method to predict cyclical changes in real time and suggest that using the output gap method to steer fiscal policy tends to lead to a procyclical policy (stimulus in upturns and austerity in downturns). The bottom-up assessment methods that are based on discretionary fiscal policy measures appear to work better, and using them to steer fiscal policy could make the policy more effective.

The EU established an early warning system by introducing the Macroeconomic Imbalance Procedure (MIP) in the wake of the recent recession. Nevertheless, it has been found by some authors to be rather vague when launching the Excessive Imbalances Procedure. Performed analysis reflects on such views and treats the MIP indicators as a system while assessing the significance of all particular variables separately. This assessment was accomplished by applying a multivariate unbalanced logit model, utilising all 14 MIP headline indicators, using time horizons ranging from one to three years before crisis, which was represented by periods with output gap lower than negative 2 per cent. The approach was confronted with the estimates of a linear probability model to provide an idea about the robustness of the results. In the short term, activity rates, youth unemployment rates and private sector debt are the best performing indicators, complemented by current account balances in the long term.

The Euro Area recommendations endorsed by the European Council in 2016 called for a differentiation of the fiscal effort by individual Member States, taking into account spillovers across Euro Area countries. This article shows model-based simulations of an increase in public investment in Germany and the Netherlands and their spillovers to the rest of the Euro Area. While spillovers in a monetary union may be small when monetary policy reacts by raising interest rates, when rates are kept constant and the stimulus is accommodated, spillovers can be sizeable. An increase in (productive) spending in Germany and the Netherlands can boost GDP in these countries and also have significant positive spillovers on the rest of EA GDP, while the effects on current accounts are likely to be small. Effects can be even larger when investment is directed to the most productive projects. With low borrowing costs at present, the increase in government debt for surplus countries will be modest, while there could be an improvement in debt ratios in the rest of the Euro Area.