• We have lowered our forecast for OECD economic growth in 2003 to 2.4 per cent.

• The world economy will grow more strongly, by 3.4 per cent, helped by a strong performance by China and India.

• The United States will grow by 2.3 per cent in 2002 and by 2.5 per cent next year.

• The Euro Area will grow by just 0.9 per cent in 2002 and by 2.1 per cent in 2003.

• Germany will be the slowest growing country in the Euro Area in both 2002 and 2003 and this year's budget deficit will breach the stability pact's limit of 3 per cent of GDP.

• After shrinking by 0.6 per cent this year, Japan's economy will grow by 1.1 per cent in 2003.

• Inflation is set to be at historically low levels, but widespread price deflation does not yet appear imminent.

Global economic activity strengthened considerably in the first half of this year, helped by a rebound in trade volumes and a marked recovery in industrial production. Although the rapid growth experienced in the early part of the year has faltered, there was still broadly-based, if somewhat subdued, growth in activity in all the major economies in the second quarter of the year, with GDP rising by between 0.3-0.6 per cent in the US, the UK, the Euro Area and Japan. For the year as a whole we continue to expect global GDP growth (measured at Purchasing Power Parity exchange rates) to be around 2¾ per cent, which whilst below long-term trend levels, would be a welcome improvement on the growth of under 2¼ per cent seen in 2001.

After a pronounced slowdown at the turn of the year, economic growth has recovered during the course of 2002. Revised estimates now suggest that GDP rose by 0.6 per cent in the second quarter and, based on our monthly GDP projections, we estimate that growth was 0.5 per cent in the third quarter, marginally below trend rates. It now appears increasingly unlikely that the Budget forecast of 2-2½ per cent growth in 2002 can be attained, and we expect to see growth of 1.4 per cent for the year as a whole.

The data for the second quarter of 2002 and our own flash estimate for the third quarter of 0.5 per cent growth (which is used in this forecast) suggest that the economy is again growing at close to its trend rate. As often happens in combining quarterly movements to produce annual averages, over the four quarters to the end of this year we expect output to rise by 1.8 per cent, as compared to 1.6 per cent in the four quarters to the end of 2001. Nevertheless output at market prices this year is, on average, expected to be only 1.4 per cent higher than in 2001, while last year output grew by 2 per cent.

Recent estimates suggest that the UK business cycle is closer to the Eurozone business cycle than it was in the early 1990s. This paper investigates whether this phenomenon has been accompanied by increased correlation between UK and Eurozone business cycles. Considering a range of alternative measures of the business cycle we find, using 40 years of monthly industrial production data, no clear evidence for a sustained increase in correlation between UK and Eurozone business cycles. Instead, in the 1990s, the correlation between UK and Eurozone business cycles has been volatile relative to historical levels. It is only recently, i.e. since 1997, that the UK has become more correlated with the Eurozone, although the level of correlation is lower than against non-Eurozone countries. Importantly, the strength of these relationships is sensitive to how the business cycle is measured. Care should therefore be exercised when using business cycles estimates to test the relationship between UK and Eurozone business cycles.

We outline a number of ‘stylised’ facts on the UK business cycle obtained from analysis of the long-run UK annual dataset. The findings are to some extent standard. Consumption and investment are pro-cyclical, with productivity playing a dominant role in explaining business cycle fluctuations at all horizons. Money neutrality obtains over the long run but there is clear evidence of non-neutrality over the short run, particularly at the business cycle frequencies. Business cycle relationships with the external sector via the real exchange rate and current account are notable. Postwar, the price level is counter-cyclical and real wages are pro-cyclical, as are nominal interest rates. Modern general equilibrium macroeconomic models capture many of these patterns.

The NIESR's monthly GDP series is an innovative feature; most GDP estimates are published at an annual, or quarterly frequency at best. For purposes of dating the business cycle the availability of this series is an asset, unexploited until this paper. The paper applies a version of the standard business (or ‘classical’) cycle dating algorithm to the data, after light smoothing to remove outliers. Three classical cycles are detected in the period between the early 1970s and 2002, with turning points which are close to (but usually precede) classical cycle dating which does not benefit from the availability of monthly GDP, and instead relies on a ‘coincident’ indicator methodology. In addition the turning points of a deviation cycle are identified.

This paper discusses recent research at the Centre for Growth and Business Cycle Research on the prediction of the expansion and recession phases of the business cycle for the UK, US, Germany, France and Italy. Financial variables are important predictors in these models, with the stock market playing a key role in the US but not the European countries, including the UK. In contrast, international linkages are important for the European countries. Our models suggest that the US and German economies have now emerged from the recession of 2001, and that all five countries will be in expansion during the third quarter of this year.