• The world economy will expand by 3.9 per cent in 2010 and 3.8 per cent in 2011.

• World trade will increase by 9.6 per cent this year and 5.7 per cent in 2011.

• The Chinese economy will grow by 9.8 per cent in 2010 and 9 per cent next year.

• Japanese GDP will expand by 2 per cent this year and 1.5 per cent in 2011.

• The US economy will grow by 2.9 per cent in 2010 and 2.7 per cent next year.

• The Euro Area will expand by 1.2 per cent this year and 1.8 per cent in 2011.

• GDP will grow by 1 per cent this year, picking up to 2 and 2.2 per cent in 2011 and 2012.

• Unemployment will peak at 2.7 million in 2011.

• Consumer-price inflation will average 3.1 per cent this year, falling back to just below 2 per cent in 2011 and 2012.

• Additional tax rises and spending cuts worth 1 per cent of GDP each are needed to put the public finances on a sounder footing.

Global output declined by 1 per cent in 2009, but the pace of recovery has been relatively rapid, especially in economies outside the OECD. We estimate that the level of global GDP regained its pre-crisis peak in the first quarter of 2010 (see figure A3 in the Appendix). The volume of world trade in goods and services remained some 6 per cent below its pre-crisis peak in the first quarter, but has rebounded by nearly 10 per cent since the trough reached in the second quarter of 2009 (see figure A2 in the Appendix). China remains a vital source of global demand. GDP increased by 11.9 per cent year-on-year in the first quarter of 2010, while imports of goods in US$ terms rose by more than 60 per cent over the same period. India also bears little scarring from the global crisis and the economy expanded rapidly throughout 2009. Other Asian economies, such as Taiwan, Hong Kong and Korea, have also recovered rapidly from the global recession, expanding by 6.3, 3.3 and 4.5 per cent, respectively, in the second half of 2009. Outside of Asia, Brazil and Mexico have seen a strong rebound in growth, although the level of output in Mexico remains well below its pre-crisis peak.

Stockbuilding is the component of the expenditure side of the national accounts that reflects the change in the stock of inventories held by firms. Firms maintain a stock of inventories in order to meet short-term demand. Storage of excess stock is costly, so while firms aim to maintain a sufficient level of inventories to meet anticipated demand, they try to avoid excessive inventory accumulation. If sales fail to meet expectations, unsold stock accumulates in warehouses and firms will cancel orders for new inventory until the desired inventory to sales ratio is restored. This can have a significant impact on GDP growth in the short term, and stock adjustment has been cited as an important factor behind the sharp drop in GDP and especially world trade experienced during the recession.

While the financial crisis of 2008 caused deep recession in most of the world's developed economies, many of the largest emerging markets weathered the financial storm comparatively well. China remains a vital source of global demand, while India is also gaining an increasing weight in the global economy. China has differed from India and Brazil in that this growth has been associated with a significant current account surplus, and this has been a major issue, particularly in discussion with the US. The Russian current account surplus has been associated with its role as an oil producer. In this section we first compare economic performance prior to and during the financial turmoil among the so-called BRIC countries (Brazil, Russia, India and China) which constitute the world's largest emerging markets. We then discuss the Chinese current account surplus and policies that might be adopted to reduce it. These involve the expansion of demand in China, along with an appreciation of the exchange rate. However, there is no real long-term improvement of global imbalances if China just repegs the exchange rate at a higher level.

The last quarter of 2009 saw the quarterly growth of GDP in the Euro Area stagnating after growth of less than half a per cent in the third quarter. This followed on from six quarters of declining output. The performance of individual economies differed, with output declining in Ireland, Greece, Italy and Spain, as can be seen from figure 18. Output stagnated in Germany and Finland and grew moderately in Slovenia, the Netherlands, Belgium and Austria. Only France exhibited growth that might be seen as near that of underlying capacity. As we can see from figure 19, in the new member states, the quarterly GDP growth in the last quarter of 2009 ranged from a decline of around 3 per cent in Romania and Latvia to growth of just over 1 per cent in Poland and just over 2 per cent in Estonia.

The forecasts for the world and the UK economy reported in this Review are produced using NIESR's global econometric 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 production of this forecast is supported by the Institute's Corporate Members: Abbey plc, Bank of England, Barclays Bank plc, HM Treasury, Nomura Research Institute Europe Ltd, and the Office for National Statistics.

The financial crisis and the recession it induced have wrought havoc with our understanding and decision-making on the medium-term fiscal position. The crisis will leave us with a higher debt stock and a lower level of sustainable output, and both of these will have implications for the optimal paths for spending and for taxes. If sustainable output has changed then spending plans need to be revised, even if there is no excessive accumulation of debt. If debt has been accumulated in excess of that seen as wise before the crisis, then a plan must be in place to raise taxes and reduce spending in order to return to (or towards) a desired level of debt, even if sustainable output has not been affected. In addition to adjustments in response to changes in trend output and in the debt stock, there may also be a need for an adjustment in response to any structural deficit that existed before the crisis broke.

This article compares the performance of the UK economy since 1997 with that between 1979 and 1997 and with the performance of the other G7 economies in both periods. It concludes that Britain has done relatively well in terms of productivity growth, economic growth and national income per head but not very well in terms of labour market performance. Savings rates were too low to deliver sustainable economic growth over the period 1979–97 and there has been very little improvement since then. The performance of the economy during the recession and its immediate aftermath has been disappointing relative to the other G7 economies.

This paper analyses Labour's record on monetary policy and the record of the MPC which it created. The paper begins by discussing the conceptual framework and institutions behind inflation targeting as it operates in the UK. We then discuss the successes that it enjoyed up to 2007 and debate the lessons that are being learned as a consequence of the experience since then. We then raise some of the formidable challenges that UK monetary policy must now face up to including maintaining the credibility of the inflation targeting regime in the face of greater interdependence between monetary and fiscal policy, and between monetary policy and support to the banking system and financial markets.

The incoming Labour Government of 1997 promised a new approach to the conduct of fiscal policy. Two lessons to be learnt from previous experience were: (1) adjust for the cycle and build in a margin for uncertainty; (2) set stable fiscal rules and explain clearly fiscal policy. Although the claims for novelty were exaggerated there was a serious attempt to expand the supporting explanatory material at the time of the Budget and the Pre-Budget Report (which was itself an innovation). It started well, with the most significant tightening of fiscal policy occurring in 1997–8; but it ended with a record postwar deficit, a debt/GDP ratio heading for more than 75 per cent of GDP and the suspension of the fiscal rules. While the Treasury was not alone in failing to forecast the financial crisis and its consequences, doubts about the policy were being raised before 2007. Although the fiscal rules were met over the preceding period and projected to be met in future, a succession of current budget deficits and a tendency, from 2001 onwards, for over-optimism in fiscal projections left the UK less well equipped than it might have been to meet the challenges of the crisis.

This paper argues that successive governments since the 1980s have struggled to establish the necessary foundations to enable the majority of young people to make effective and supported transitions from education to the labour market and, further, to create labour market conditions that protect and nurture young people's potential. The paper sets its analysis within a time-frame that began in 1981 and has come full circle in 2010 with the Labour Government's announcement of the Young Person's Guarantee. Whilst acknowledging that current economic conditions, and the predicted severe cuts in public spending, will make it difficult for an incoming government to make significant changes, the paper argues that new approaches are required to revitalise both the economy and individual life chances.

The recession of 2008–9 inflicted a larger cumulative loss of UK output than any of the other postwar recessions. Nevertheless, employment rates remained higher than might have been expected given the experience of previous recessions. The main reasons for this appear to be a combination of high firm profitability levels going into the recession, supportive monetary and fiscal policies during the recession, reductions in real producer wages and relatively buoyant real consumer wages. Unemployment had reached its lowest levels for 30 years going in to the latest recession and has also remained relatively subdued through the downturn, certainly compared to previous recessions. A combination of lower inflow rates into unemployment, allied with a relatively higher outflow rate into employment underlie this. As government support for the economy is scaled back, it may be however that it will take a long time for employment to return to levels last seen before the recession.