After rapid growth throughout the first three quarters of 1997, the UK economy is now expected to slow to the more sedate rate of growth of about 2 per cent per annum. This would be consistent with the maintenance of rough balance between demand and supply thus preventing the build up of inflationary pressure.

Global growth appears to have been relatively strong during the last year. In the Anglo-Saxon world the economic expansion has now lasted six years. Growth in continental Europe also now appears to be relatively robust, after a significant slowdown in the first half of last year. The OECD economies are projected to grow by around 3 per cent this year. Despite this, there continues to be little evidence of emerging inflationary pressures. We anticipate that OECD inflation will average around 2 per cent in 1997, some 2–2½ percentage points lower than in the equivalent upswing in the late 1980s.

This paper considers the relative importance of investment and productivity in the growth of the G7 countries during the period 1960-89. Investment is the commitment of resources in the expectation of future returns to the investor. Productivity is identified with 'spillovers' of benefits that do not provide incentives for investment. The great preponderance of growth in the US and Canada is due to investment. Investment is more important than productivity for all of the G7 countries, except France, after 1973. Patterns of economic growth have converged for the G7 countries, but important differences remain.

Evaluations of economic performance conventionally rely on levels and rates of growth of real GDP per person. This can be misleading especially when comparing East Asia with Western Europe. Here it is especially important to allow for differences in hours worked, and when this is done, Asian countries' productivity outcomes look much less impressive than is usually thought. More generally, it is argued that real GDP/person is not a good guide to well-being in high income countries where broader measures of economic welfare are required and index number problems preclude reliable league tables.

In two very different industries—biscuit manufacturing and precision engineering—US leadership in labour productivity relative to Western European countries is found to depend heavily on greater opportunities for scale-economies of production. Inter-country differences in the age and sophistication of machinery contribute only very partially to relative productivity performance but the US does benefit from higher levels of physical capital per worker. In terms of human capital, American enterprises are well-served by access to a relatively large supply of technical graduates which helps to compensate for deficiencies at lower levels of vocational education and training. The comparisons suggest that the present development of a US-style mass higher education system in Britain could make a positive contribution to British productivity performance. However, the traditional ‘American model’ of production organisation based on a semi-skilled shopfloor workforce is not relevant to the current and future skill needs of most British manufacturing employers.

This paper argues that the greater part of economic growth can be accounted for by the accumulation of human and physical capital. The role of externalities is relatively small. This view is defended by reviewing the most sophisticated growth accounting studies and also by presenting some new evidence on the growth of total factor productivity in 53 countries over the period 1965 to 1990.