The latest set of official statistics and survey evidence suggests that activity remained subdued in the first half of this year, with the optimism apparent in post-election business and consumer sentiment proving to be ephemeral. However it is not unusual for there to be some delay before movements in survey responses are reflected in measured expenditure. On balance it does appear as if output has begun to stabilise and we expect a modest recovery over the second half of this year, although it is difficult to be confident about the pace at which the recovery will proceed. Any potential recovery is unlikely to prove sufficient to prevent a further year-on year fall in the level of GDP and the aftermath of the recession, in the form of rising unemployment, repossessions and business failures, can be expected to persist into 1993.

Three major features dominate our forecast. First, the collapse of the Japanese stock market has not yet had a major impact on the rest of the world, but it is expected to slow activity down in that country. Second, the continuing public sector deficits in Germany in combination with above target money supply growth have caused the Bundesbank to tighten its monetary policy, and this has been acting as a break on output growth throughout Europe. High short-term and long-term interest rates have had major consequences. They have been a major factor behind the strains that have been re-emerging in the ERM, and the possibility that a realignment has to take place cannot be ignored. Third, high nominal real interest rates in Europe also appear to be a factor behind the weakness of the dollar. The current German-US interest differential is higher now than at any time since the end of the Bretton Woods system, and the continual monetary easing in the US has been a major factor behind the fall in the dollar effective rate.

Little of what has been visibly happening in the former Soviet economy over the past two years reflects the intentions of its policymakers. Central planning has been abrogated and many prices freed, but the Russian authorities are struggling to establish financial stability and to create the legal and institutional framework for extensive privatisation of large enterprises. National output has fallen sharply (as elsewhere in Eastern Europe), because the disciplines and incentives of central planning have been removed, while those of the market are not yet in existence. The economy has been kept going at a lower level with the help of a much expanded barter network among enterprises. Prospects for avoiding economic collapse and anarchy are reasonably good, but a fully-fledged market economy remains a long way off.

The Fundamental Equilibrium Exchange Rate (FEER) is that value of the real exchange rate that is consistent with macroeconomic equilibriumo This article uses the long-run trade equation elasticities from the models of Her Majesty's Treasury, the National Institute of Economic and Social Research and the Bank of England to examine the FEER calculation. The sensitivity of the results to changes in the key elasticities and to the possibility of a recent improvement in UK trading performance is considered. Historical comparisons are made between the FEER and the actual real exchange rate. All the results suggest that the real exchange rate was above the FEER at the time of ERM entry. The fixing of the nominal exchange rate removes a possible mechanism by which the economy might reach equilibrium and therefore convergence requires a period where UK inflation is lower than that of its trading partners.

On 1st July 1992 the UK took over the rotating six month Presidency of the Council of Ministers of the European Community from Portugal at a crucial stage in the history of the European Community: a time when the Community faces a number of challenges which will determine the future direction and development of European integration. These challenges include ratification of the Maastricht Treaty, negotiation of the Delors II package on future financing of the Community, completion of the single market by 31 December 1992, enlargement, establishment of a common foreign and security policy, and progress on the Social Action Programme. This list is not exhaustive: there are certain to be other problems and crises both inside and outside the Community in the coming months which are impossible to predict, and to which the UK Presidency will be expected to coordinate a Community response.

From time to time the Institute has published in the Review assessments of its economic forecasts based on statistical analysis of their relation with the outturn data. The most recent examples are Savage (1983) for GDP forecasts and NIESR (1984) for inflation. A more extensive analysis has now been carried out covering quarterly forecasts over the period from 1968 to 1991 for a range of economic variables. The full results are reported in Pain and Britton (1992). This note summarises some of the main findings.

The purpose of this note is to discuss the role of forward-looking behaviour in wage formation in the major economies, and to analyse the implications for policy analysis using the National Institute Global Econometric Model, NIGEM. Our policy analyses are directed at issues relating to the ERM. The first section of the note discusses nominal inertia and staggered contracts (see Taylor, 1980), whilst the second discusses bargaining and wage formation, using the analysis discussed in Layard, Nickell and Jackman (1991). The third section discusses some empirical work on wages undertaken at the Institute, whilst the fourth section analyses the implications of forward-looking wages for our model NIGEM. The final section concludes.

There have been few attempts to compare and explain inter-country contrasts in the efficiency and performance of service industries. This largely reflects the inapplicability to services of productivity comparison techniques developed for manufacturing industries, relying as they do on physical output measures and focussing essentially on labour inputs. A study for the National Institute, shortly to be published, endeavours to break new ground by comparing the performance of the British commercial and merchant banks with that of the relevant financial institutions in our major competitor countries on the basis of the shares obtained by these institutions in selected international financial markets.