Economic Commentary: Recovery to gain momentum: Michael Artis foresees growth in GDP but a continuing rise in unemployment

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THE LATEST official figures bear out our earlier forecast that a mild recovery in overall gross domestic product would occur in the latter half of 1992. But the continued weakness of the economy is underlined by the fact that the output increase so far has been offshore. The onshore economy has stopped declining but has remained essentially flat.

The forecasts we have been reporting at quarterly intervals in the Independent for just one year now are produced by a Bayesian Vector Autoregression (BVAR) model. Such models are relatively little-informed by economic theory, but exploit the statistics submitted to the computer. In order to test the method, we do not 'massage' what the model produces.

The model has worked well in predicting inflation and unemployment, but much less well for the balance of payments, where it is neither better nor worse than conventional methods.

On the recovery in output (GDP), the model forecasts initially suffered from the same overoptimism as most others. From mid-year the GDP growth forecasts have been good.

We now think the recovery will spread and gain momentum. From the 0.5 per cent decline last year, GDP is expected to rise by 1.7 per cent this year and by 3 per cent next year.

Prices (the all-items RPI) may rise by only about 2.3 per cent this year, but underlying inflation will be about 1 point higher. Output growth will not be enough to prevent unemployment rising to a peak of around 11 per cent.

On the Government's targeted measure of inflation - the underlying rise in the retail price index excluding mortgages - we agree with the Bank of England's recent Inflation Report suggesting the Government might find it difficult to keep within its 4 per cent limit. We think it will scrape along the ceiling of the band, bursting through in the latter half of 1994.

Our growth prediction remains relatively buoyant, but unemployment is expected to rise throughout the current year and by the end of 1994 will still be higher than at the end of last year.

----------------------------------------------------------------- A BVAR FORECAST FOR THE UK ECONOMY ----------------------------------------------------------------- Year on year* GDP growth Unemployment RPI Current a/c PSBR*** % % % pds bn pds bn 1991 -2.6 7.9 5.8 (6.8)** -6.4 16.4 1992 -0.6 9.7 3.8 (4.7) -11.8 36.1 1993 1.7 10.9 2.3 (3.5) -16.6 41.5 1994 3.0 10.9 3.6 (4.3) -19.3 46.6 ----------------------------------------------------------------- * Year's average for unemployment and total for current account of balance of payments and PSBR. ** RPI excluding mortgage interest payments. *** PSBR excluding privatisation proceeds. -----------------------------------------------------------------

Michael Artis and his team, Robin Bladen-Hovell and Wenda Zhang, are from the Economics Faculty of the University of Manchester.