• The world economy will expand by 5.0 per cent in 2010 and 4.4 per cent in 2011.

• World trade will increase by 14.2 per cent this year and 8.8 per cent in 2011.

• The Chinese economy will grow by 11.6 per cent in 2010 and 8.3 per cent next year.

• Japanese GDP will expand by 3.3 per cent this year and 1.1 per cent in 2011.

• The US economy will grow by 3.1 per cent in 2010 and 3.0 per cent next year.

• The Euro Area will expand by 1.3 per cent this year and 1.8 per cent in 2011.

• GDP will grow by 1.3 per cent this year, and by 1.7 and 2.2 per cent in 2011 and 2012.

• The saving rate will remain above 6 per cent and per capita consumer spending will not reach its pre-recession peak until 2015.

• The announced increase in VAT will keep inflation above target until 2012.

• Public sector net borrowing will fall sharply reaching 2.8 per cent of GDP in 2015–16.

• The Emergency Budget has raised the probability of a decline in output in 2011 as compared to 2010 to 19 per cent.

Global output has been rising at an annualised rate of 4¼–5½ per cent per quarter since the rebound in the second quarter of 2009. We estimate that global GDP increased at an annualised rate of 4.8 per cent in the first quarter of 2010, and forecast world growth of 5 per cent in 2010 as a whole. Asia continues to drive the global recovery, with exceptionally strong growth in China, India, Taiwan and Korea in the first quarter of the year. Japan and Hong Kong also recorded strong growth, partially closing the output gaps in these economies. In the Americas, Canada and especially Brazil expanded rapidly, with more moderate growth in the US. Europe, on the other hand, continues to lag behind Asia and the Americas, with output in the EU as a whole rising at an annualised rate of just 1 per cent in the first quarter of 2010. Within Europe, output rose more rapidly than anticipated in Ireland, Portugal, Sweden, and to a lesser extent in Italy. But only in Sweden did this reflect a recovery in domestic demand, as the recovery in most of Europe has so far relied on external demand.

Government fiscal positions in all the advanced economies suffered severe deteriorations during the financial crisis. Figure 1 illustrates the cumulative deterioration of the government budget ratio as a per cent of GDP between 2007 and 2009 in a selection of OECD economies. The sharpest declines materialised in Ireland, Spain and Finland, while public finances in Austria, Germany and Italy have held up better. Budget deficits have worsened in part because of the cyclical downturn, in part because of the policy response to the crisis, including both fiscal stimulus packages and certain fiscal costs related to government support of financial institutions, and in part because of a change in the relationship between revenue and production, which may prove longer-term.

The volume of world trade in goods and services remained some 6 per cent below its pre-crisis peak in the first quarter of 2010, but has rebounded by nearly 10 per cent since the trough reached in the second quarter of 2009. Figure 8 shows the ratio of world trade to world GDP, which plummeted by 3.2 percentage points at the height of the financial crisis. This unparalleled collapse in world trade reflected a decline in import penetration ratios (the ratio of the volume of imports of goods and services to GDP) in all the major economies, with the sharpest falls in several of the EU's new member states, as well as Hong Kong and some oil exporting economies such as Indonesia.

The recovery in Europe seems to be gradually progressing, although it remains fairly slow relative to developments in Asia and North America and uneven across countries. In the first quarter of 2010 the economy of the EU grew by ¼ per cent, marking the third consecutive quarter of growth after the deep decline of 2.6 per cent recorded in the first quarter of 2009.

The forecasts for the world and the UK economy reported in this Review are produced using NIESR's model, NiGEM. The NiGEM model has been in use at the National Institute for forecasting and policy analysis since 1987, and is also used by a group of about 50 model subscribers, mainly in the policy community. Most countries in the OECD are modelled separately, and there are also separate models of China, India, Russia, Hong Kong, Taiwan, Brazil, South Africa, Estonia, Latvia, Lithuania, Slovenia, Romania and Bulgaria. The rest of the world is modelled through regional blocks so that the model is global in scope. All models contain the determinants of domestic demand, export and import volumes, prices, current accounts and net assets. Output is tied down in the long run by factor inputs and technical progress interacting through production functions, but is driven by demand in the short to medium term. Economies are linked through trade, competitiveness and financial markets and are fully simultaneous. Further details on the NiGEM model are available on http://nimodel.niesr.ac.uk/.

The financial crisis that started in mid-2007 enveloped the world economy and caused a serious recession in most OECD countries. It is widely believed that it has also left a scar on potential output because it will have raised perceptions of risk and hence reduced the sustainable capital stock people wish to hold. It is inevitable that policymakers should ask what can be done to reduce the chances of this happening again, and it is equally inevitable that the banks would answer that it is too costly to do anything. There are four questions one must answer before it is possible to undertake a cost-benefit analysis of bank regulation. The first involves asking what are the costs of financial crises? The second involves asking what are the costs of financial regulation? The third involves asking what causes crises? The fourth, and perhaps the most important, involves asking whether regulators can do anything to reduce the risk of crises? Our overall approach to these issues is spelled out in a report written for the FSA in the aftermath of the crisis (see Barrell et al., 2009).

The Office for National Statistics' (ONS) Preliminary Estimate of GDP suggests the quarterly rate of growth accelerated rapidly this year, from 0.3 per cent in the first quarter to 1.1 per cent in the second quarter (figure 1). This positive news should not be taken as a strong indicator of the prospects for the next year, as a quarter of strong growth is often matched by a subsequent weak quarter. In the first quarter of this year demand was driven by government spending and the continued moderation in the rate of inventory reduction, contributing 0.5 and 0.3 percentage point, respectively to GDP growth. Data for the second quarter of this year suggest that the expansion was spread relatively evenly, with a particularly robust contribution from the construction sector. Since the estimates are derived on an output measure we have little information by way of the sources of demand. We expect that much of the demand came from the same sources as in the first quarter. It is possible that some output was delayed from the first to the second quarter due to the bad weather, while retail sales were perhaps boosted by expenditure on electrical goods related to the World Cup in South Africa. We forecast a sharp moderation in the rate of growth in the second half of this year, as figure 1 shows.

The UK is restructuring the fiscal policy framework once again, with an intention to move toward independent assessment and forecasting in the budget process. At the same time a large-scale, if delayed, fiscal consolidation is planned at a time when there is significant spare capacity in the economy. Economic growth is also projected to be below trend, at least this year and perhaps next. It is unusual to see a fiscal tightening when the output gap appears to be widening. These policy settings should be seen in the context of the most radical change in the nature of the relationship between the government and the economy for at least thirty years. This note assesses the impact of the new programme on the economy as well as setting out a projection for the medium-term public finances.

Immigration has become one of the most discussed and controversial topics in recent public and political debates. This is true not just in the United Kingdom (UK), but also elsewhere in Europe, as well as in many other advanced economies, most notably the United States (US). For example, immigration became a major discussion point during the recent general election campaign in the UK, in spite of what appeared to have been an initial reluctance of some participants to engage in such debates. The importance of immigration is demonstrated by the strong attitudes that are displayed by the public. For instance, race and immigration has consistently been viewed as one of the most important issues facing Britain in recent years according to IPSOS/Mori's monthly Issues Index. Typically, more than 30 per cent of those questioned since 2002 have considered race and immigration to be the most important issue. This peaked at over 40 per cent in late 2007 and early 2008, which corresponds with the time when migration from Central and Eastern Europe to the UK was at its highest. This made it the top ranked issue for the British public, since when it has been replaced by concerns over the economy. Attitudes have also been found to vary by skill group, with Scheve and Slaughter (2001) reporting a significantly greater preference for limiting immigrant flows to the US amongst less skilled workers.

The UK, with its relatively liberal immigration policies following recent enlargements, has been one of the main recipients of migrants from new EU member states. This paper poses the questions: what is the effect of immigration on a receiving economy such as the UK? Is the effect beneficial or adverse for growth? Does emigration have brain drain effects on sending economies? How differently would skilled (or unskilled) migration affect both receiving and sending economies? What factors would contribute to immigration/emigration benefits/costs and economic growth driven by migration? Who are the winners and losers in both the sending and host regions? We utilise a two-bloc endogenous growth model with labour mobility of different skill compositions to address these questions. We show that migration, in general, is beneficial to the receiving country and increases the world growth rate. With remittances, the sending country in aggregate can also benefit. The only exception is in the case of unskilled migration, which can actually have a detrimental impact on the world growth rate. This possibility however seems to be unlikely by our examination of migration trends. Winners are migrants, and the skill group in the region that sees its relative size decrease.

The freedom of movement of persons is one of the core tenets of the European Union. Immigration however is often seen as a cause for concern amongst native workers, as rising labour supply may threaten jobs and create downward pressure on wages. National politicians are increasingly under pressure to guard against it — in times of recession particularly. Despite this, there is evidence that highly-skilled migrant labour has the potential to raise competitiveness significantly and in theory this may feed into productivity. In this paper, we explore first the composition of inward migration to the EU and within the EU, concentrating specifically on the role of the highly-skilled and the extent to which migrants are overqualified within their jobs. We then analyse whether migrant workers affect productivity at the sectoral level. We find under-utilisation of skilled foreign labour and there is little evidence in general to suggest that migrants have raised productivity which may in part be attributable to over-qualification. However, we find robust evidence that migrants — particularly highly-skilled migrants — play a positive role in productivity developments in industries which are classified as ‘skill intensive’.

Rising immigration has undoubtedly been one of the most significant demographic developments experienced by the United Kingdom over the past fifteen years. This article reviews the evidence on the effects of immigration on the UK labour market. On average, it seems that immigration has not had much of an effect on either employment or pay. However, there may be some evidence of downward pressures on pay and jobs impact in the low skill sector, though these effects are not large.

Using data from a large-scale survey of employees in Ireland, we estimate the extent to which people who have emigrated from Ireland and returned earn more relative to comparable people who have never lived abroad. In so doing, we test the hypothesis that migration can be part of a process of human capital formation. We find through OLS estimation that returners earn 7 per cent more than comparable stayers. We test for the presence of self-selection bias in this estimate but the tests suggest that the premium is related to returner status. The premium holds for both genders, is higher for people with postgraduate degrees and for people who migrated beyond the EU to the US, Canada, Australia and New Zealand. The results show how emigration can be positive for a source country when viewed in a longer-term context.