The government is working on a proposal to allow universities to buy the loan book of their own graduates. While graduates of universities that opted into this scheme would continue to pay back their loans through the tax system, that part of the student loans company's assets that comprises loans made to students and graduates of a given university would be sold back to the university itself. The student loans company might expect to get a better price for this asset from the university than from other investors because the university can do things to maximise the probability with which loans are fully repaid. In other words, the university would be incentivised to optimise the labour market experience of its graduates.

An immediate issue concerns the ability of universities to afford to buy the loan book. Over a very short time, the cost associated with the loan book would swamp the finances of a typical institution. But it would be possible for institutions to borrow from the financial sector to fund their purchases - and it is reported that a large financial investor is already interested in the scheme.

Several 'top' universities are said to back this proposal. The scheme certainly does have some attractive features. One is that it shifts the risk associated with the loans system from the government onto the universities - and that is a good thing because the universities are positioned to mitigate tha extra risk by enhancing their careers support, making their courses more relvant to the needs of the labour market, and so on. Where exactly the risk resides will depend on the price at which a loan book is sold, but the likelihood is that it would be sold at a higher price under this system than under the current system.

There are two ways in which this type of scheme could work out in practice. One would be for some universities to opt into the scheme while others opt out. Amongst the former group, we would expect to see a response to incentives such that these universities' graduates become more employable - a clear gain. The value of the loan book of the second group of universities would, however, fall as adverse selection ensures that these are the universities whose graduates are least likely to repay loans in full. By reducing the averaging out effect of pooling loans across all universities, some degree of toxicity is thus introduced into the loan books of the universities that do not opt into the scheme. If employers then use this as a signal that these universities' graduates are less employable than others, the costs thus imposed could offset the benefits associated with the other universities' response to incentives.

So allowing universities to opt in or out of the scheme may not work, simply because all universities feel that they have to opt in. What if this were to happen? Selling each university its part of the loan book at a given price per £ loaned would penalise universities whose graduates are less successful in the labour market. In effect, as such graduates pay back less of their loans and as the universities would receive less net income, this would be similar to - though considerably more complicated than - a system in which universities whose graduates are less successful have to charge lower fees. All institutions would be incentivised to improve the labour market performance of their graduates, since by doing so they could recover more of the loans on the books.

The key issue that needs to be addressed in higher education finance is the long term sustainability of the funding model. The resource accounting and budgeting (RAB) charge - that part of the student loan book that will not be paid off - has risen to 45%, highlighting this concern. The proposed changes may do something to help. The present system has encouraged all institutions to charge the maximum tuition fee, and this has not encouraged discipline on costs. The proposed system, by way of contrast, might encourage universities whose graduates are less successful to reduce their costs.

So, while much of the detail remains to be worked out, the new proposals - inasmuch as they might lead to something better than we have at present - merit a cautious welcome. They promise to buy an increase in efficiency at the cost of increased complexity. Hopefully the exchange will be a beneficial one, but the proof of that pudding will be in the eating.

The industrial production statistics for April show continued healthy expansion in this sector, providing further evidence of continued economic recovery. The data continue to suggest that we are experiencing a spike in growth, however. The prospect for this year is for the rapid pace of growth to continue, but - while continued growth is likely into next year - the rate of growth is likely to slow down quite sharply as we look further ahead. The latest forecast from my neural network model is shown below.

The CBI has revised upwards its forecast of GDP growth for the current year, to 3.0%. This prediction appears reasonable. The confederation now expects growth in 2015 to be 2.7%, and that may be optimistic.

A striking feature of the detailed aspects of the CBI forecast is that - like the EY ITEM Club - it signals a substantial growth in investment during the current year. While total business investment fell by 1% in 2013, the CBI expects it to grow by 8.3% this year and by a further 9.1% next year. With growth and confidence returning, a return to growth in investment would not, of course, be surprising. But the magnitude of these estimates is striking.

The growth we are now experiencing is, of course, welcome. There are, however, aspects of the economy's trajectory that look like bubbles. The housing market is one, and business investment may turn out to be another. Some observers have suggested that the Bank of England should look to raise interest rates sooner rather than later. In light of the considerable spatial disparities that are emerging (with London booming while the recovery is still nascent in peripheral regions), an interest rate hike would be premature in the absence of substantial support to the regions. A reduction of fiscal stimulus to the core region - particularly through housing market support - may, however, be timely.

Industrial production data were published earlier today, an event that always causes me some excitement because it means I can update the forecasts produced by my neural network model. Here they are. They continue to suggest that the current rapid recovery is set to continue, but that the rate of growth will become much more modest over the next two years. The recovery is good news, but we should not get carried away - it looks a lot like blipping, and we may need to get used to slower growth than we are currently experiencing.

The latest index of house prices produced by Halifax reports an annual rate of growth of 8.7% across the UK. The rate is highest in Greater London, at 15.7%, but several other regions are now experiencing substantial increases in prices. These include the North West (12.7%), Northern Ireland (11.4%) and the West Midlands (9.6%). By way of contrast, price rises in the North have been very modest indeed (1.5%), and in Scotland prices have fallen by 1.4% over the past year. The recovery in the housing market does appear to be spreading at last, but it remains patchy.

Increases in prices in the South East have been modest relative to those in the capital - some 5.3%. Of course, prices are determined by a mix of demand and supply factors, and there is scope to raise supply in London itself.

Doing so is important - with such an uneven economic recovery, lagging regions would be ill-served by a premature hike in interest rates. Ensuring that the housing market is not constrained in areas where supply needs to expand is key to spreading the benefits of recovery to all.

The latest data indicate that, in the first quarter of this year, GDP grew by 0.8%. This implies a very healthy 3.1% growth over the course of the last year.

The performance across sectors is uneven, with particularly strong growth in manufacturing and in distribution. Manufacturing grew by 1.3% over the quarter, and by 3.5% over the year. This is clearly good news in that it addresses concerns that the UK had, before the recession, become over-reliant on services. Strong growth in manufacturing helps raises incomes, but with developments in technology making this sector increasingly capital-intensive, the progress of the sector may not be reflected in such strong employment growth. The extent to which this concern is well founded will require monitoring as the recovery progresses. The strength of recovery in the distribution sector (which includes, amongst other things, retail and wholesale industries) reinforces the extent to which this has, at least until very recently, been a recovery led by consumer spending. Recent forecasts from, amongst others, the EY ITEM group, suggest that investment is set to rise significantly this year. If it does - and there is still surely a question mark surrounding their precise forecasts - then that will strengthen the underpinnings of a recovery that has, till now, been built on rather fragile foundations.

Other metrics of the recovery, including house price changes, suggest that experience across the regions is very patchy. Data on output growth by region are produced with long lags and are not considered to be terribly reliable, but the evidence that this recovery is spatially uneven suggests that the very encouraging aggregate statistics may serve to conceal what is, in reality, a much more nuanced picture. The data on underemployment released by the Work Foundation likewise suggest that the impact of output growth on the labour market is very different to – and less comforting than - what we have experienced in the past.

Nevertheless these most recent data offer much hope that the economy is indeed recovering.

This morning's release of the latest labour market statistics provides a dose of good news all around. The unemployment rate has fallen below 7%, and earnings are rising at 1.9% over the year. The rate of earnings growth is particularly pronounced in manufacturing, where it is 2.8%, possibly reflecting the onset of skills shortages. In finance and business services, meanwhile, earnings have grown at only 0.3%, possibly reflecting in part the decline of bonuses.

The detailed data still paint a more nuanced picture. Take productivity as an example. Output per job rose by 1.3% over the year to quarter 4 in 2013. This is a marked improvement on the 0.5% achieved the previous quarter, and certainly better than the declining productivity that was still being experienced in the first quarter of last year. However, improvement in output per hour has been considerably less impressive. This was still falling as recently as the third quarter of last year. The final quarter figures are a little more encouraging (suggesting 0.7% growth on a year earlier), but remain fairly muted.

Another aspect of the labour market which has been interesting in recent years is the dramatic rise of self-employment. Between December-February and the previous quarter, self-employment rose by some 146000, and the total now stands at more than 4.5 million. The latest figure represents a 7.1% change over the year. Self-employed workers now comprise 14.8% of the workforce. We know that much of the increase in self-employment has taken place amongst older demographic groups, and it remains unclear how much of the rise is due to entrepreneurial development as opposed to people running out of labour market options. Clearly more research is needed on this.

In sum, therefore, the statistics are encouraging. But the labour market is clearly changing rapidly, and an exclusive focus on the headline metrics risks being more than usually misleading.

The rate of growth of consumer prices in the UK has again slowed - to an annual rate of 1.6% in March. This has raised hopes that real wages, which have fallen and then stagnated over recent years, may finally have turned a corner. Earnings data become available tomorrow, but - since they are produced with a longer lag than the price data - will cover the three months to February. But clearly, if real wages do turn out to be on the rise, a major component of any explanation will be the slow increase in prices.

The low rate of price inflation thus merits some consideration. Since August of last year, the value of the pound relative to other major currencies has increased. Against the euro, it has risen over 5%, while against the US dollar it has risen by well over 20%. This has led to cheaper imports, putting downward pressure on price inflation. The fundamental basis for this appreciation is unclear - while confidence in the economy's ability to deliver growth has clearly increased, the current account balance has deteriorated sharply over the last two years.

If nominal earnings do indeed soon rise faster than prices, then that would suggest a turnaround in productivity - and that would of course be welcome. But the growth rate of productivity looks set to remain slow, well shy of its trend, for some time to come. The supply side issues underpinning low productivity still need to be addressed urgently. The labour market is still some way off returning to normal.

The latest figures for industrial production (up to February) have been released today. These allow me to report the latest forecast from my neural network model. The forecast is now for a less dramatic (but still pronounced) spike in output than previously predicted. The forecasts in the graph below cover a 24 month period, and suggest that, from early 2015, the rate of growth of output will slow down sharply. While the recent run of good news on the economy is cause for some celebration, caution about the medium term is still warranted.

The latest data on labour productivity show some positive movement. In the fourth quarter of last year, productivity grew by 0.3%, representing a 0.7% change over the course of the year.

A positive outcome on productivity is, of course, welcome following the dismal performance over the last few years. Nevertheless, this rate of growth remains below half of the long run trend.

The news coincides with the release of an important report from the Institute for Public Policy Research. This shows (Fig. 8.9, p.104) that British investment in training over the last few years has lagged way behind that of competitors. Without addressing the shortfall in human capital, productivity will remain a challenging feature of the UK economy, and will continue to pose a threat to the recovery.

The Bank of England’s Financial Policy Committee has sounded a warning about conditions in the housing market. It notes a rise in mortgage approvals of some 40% over the last year, and a record level of mortgages for which the loan is more than four times the borrower’s annual income. This warning reflects more widespread concern about the emergence of a housing market bubble.

The latest data on house prices do indeed show a rapid acceleration, with average house prices across the country growing by some 6.8% over the year January (with the Bank’s data suggesting a further sharp rise since). But this figure conceals some very substantial variations across the regions. In London, house prices are growing at a rate of 13.2%, surely unsustainable. In the South East, the increase is 7.1%. In other regions the rate of growth is much more modest – in the North East, house prices have grown by just 0.6%, and in Scotland by just 1.4%.

Regional unemployment disparities remain wide, with rates varying from 5.2% in the South East to 9.5% in the North East. Moreover, while unemployment is falling quite rapidly in the South East, the latest data record a rise in the North West, Yorkshire and Humberside, the East of England, and the East Midlands.

The latest available data on regional growth rates of gross value added – though somewhat out of date - likewise indicate a very uneven recovery. These show the South East growing at 2.5%, but most other regions growing at less than 1% per year, and with the East Midlands actually contracting.

In sum, these data indicate a considerable measure of spatial disparity. Recovery is proceeding apace in the South East, but has barely begun in some other regions. Past experience suggests that the improvement in the state of the economy will transmit across regions eventually – though it appears to be doing so more slowly this time than it has done in the past.

The extent of the disparities at this juncture is, however, a little worrying. The boom in the South East needs to be checked, but without stalling growth elsewhere. Monetary tools represent the mainstay of macroeconomic stabilisation policy, but a hike in the interest rate could not check growth in one region without causing profound damage in others. Different conditions across space call for policies that have different impacts across space. The solution to the South East housing bubble is not, therefore, to be found in macroeconomic policies – rather it is to address the supply side constraints. That means, quite simply, building more homes.

The latest report of the Office for Budget Responsibility (OBR), released to coincide with today's Budget Statement, raises the forecast for GDP growth to 2.7% for the current year. Since no forecaster has performed well in recent times, this news, in itself, is not terribly interesting. What is more interesting is the fact that the OBR forecast remains so far below that of the Bank of England - 3.4% - though the Bank does expect a somewhat more severe downward adjustment in the growth rate in 2015 than does the OBR. The discrepancy between the short term forecasts that drive judgements about fiscal and monetary policies is somewhat disconcerting; one might hope that, over time, each forecaster should learn from the other. And as things stand, the Bank of England appears to be closer in forecasting the growth spike than does the OBR.

The OBR report also provides a measure of the output gap, and this is now, at 1.4% of GDP in 2014, much closer to being in line with the Bank's assessment of the extent of spare capacity in the economy. Both measures remain low in comparison with most independent estimates, and hence support the view that a considerable portion of the government's budget deficit remains structural.

This last observation, of course, explains the continued caution of the government in producing a Budget that takes with one hand as much as it gives with the other. Work remains to be done to bring the public finances back into balance - views may differ about how much needs to be done, but it is clear that there is still some way to go. In any event, an expansionary Budget would, of course, have been inappropriate at a stage of the cycle at which growth appears to be surging ahead of trend.

The latest data from EEF (formerly the Engineering Employers' Federation) provide some very encouraging news. Much of the current recovery in the UK economy has come from increased consumer spending, and this has raised doubts about the sustainability of the upturn. But the new EEF data suggest that manufacturers are experiencing a substantial increase in orders for export - and that this increase is expected to accelerate into the next quarter. While the forecasts necessarily have an element of guesswork about them, if the export picture turns out to be close to the mark then it provides real cause for optimism.

There has, for some months, been some concern that the full cost of the new regime of tuition fees for undergraduate education in the UK was underestimated by the government at the time that it was introduced. The new regime raised the cap on tuition fees from a little over £3000 per year to £9000, and was designed to compensate universities for a severe fall in public funding - hence reducing the government's budget deficit.

On the surface, it seems obvious that such a change in policy would indeed reduce the deficit. Scratch beneath the surface, however, and things are not so clear. This is because student loans are repaid through the income tax system as a proportion of graduates' incomes. And if, 30 years after graduation, a graduate has not paid off the loan in full, the remainder gets written off. This means that some proportion of the total value of the loan book will never get repaid, and the burden of financing this will fall back onto the taxpayer.

This proportion has come to be known as the Resource Account and Budgeting (or RAB) charge. The RAB is an important figure, partly because it tells us how much of a discount needs to be offered when the government sells parts of the loan book off to the private sector. Estimates of the RAB have risen over time - in 2011, the government estimated a RAB charge of 30%, but the most recent official estimate is 40%.

The most recent estimates are uncomfortably high. The Higher Education Policy Institute has estimated that, if the RAB were to reach 47%, the new fees regime would be no more favourable to the government's finances than was the old. More recent research, published this month by London Economics, suggests a similar figure - between 48 and 49%.

If the RAB turns out to be in the high forties, then clearly the new fees regime will have missed in terms of its goal of bringing down the budget deficit. Even if turns out to be slightly lower, doubts must be raised about whether the current model of undergraduate financing is sustainable beyond the short term. Sadly we are a long way from realising Vince Cable's hope that the 'imaginary black hole will very soon disappear'.

The Confederation of British Industry (CBI) has put forward a set of proposals to strengthen the skills base in Science, Technology, Engineering and Maths (STEM) subjects. It notes that the UK is facing a skills shortage in these areas. One of its proposals is to reduce university tuition fees on some courses in STEM subjects.

Clearly it is important that players in the market for education should be aware of impending skills shortages, and that they should respond to them. Typically this is achieved through the market by employers raising wages for jobs where they face a shortage of labour - thereby attracting more workers into those jobs. Such a market mechanism bypasses the problems that might arise under a system of 'manpower planning' - where government tries to play the role of an omniscient planner, but often seems to lack the requisite information.

The proposal to reduce university tuition fees is problematic for a number of reasons. Not least, the current funding system for undergraduate education in the UK is one where loans are repaid out of future income streams - and crucially involves the writing off of any part of the loan that remains unpaid after 30 years. This means that students do not know how much of their loan they will end up repaying, and are therefore likely to be insensitive even to quite large fee discounts. There is evidence that students are responsive to the award of bursaries, but that is quite a different thing.

The devil is in the detail, and, while the aim of the CBI's proposal is worthy enough, the detail would frustrate that aim if it were ever to be put into practice.

Spring is in the air, and the economy is recovering. How far it will recover after the major shock it has suffered is still open to question. A generation ago, many economists spoke of 'hysteresis' - the tendency for blips in unemployment to become long-lasting owing to the depreciation of skills and the increased potential therefore for unemployed workers' attributes not to match well with those required by firms.

Alfonso Arpaia and Alessandro Turrini have evaluated a measure of such mismatch for some 22 European countries. These results show that the efficiency with which unemployed workers are matched with jobs fell in most of these countries quite soon after the economic crisis hit.

There are some interesting exceptions - efficiency has risen inexorably in Denmark. This may be the result of the 'flexicurity' of the labour market in that country - a system where extremely high degrees of job mobility are accompanied by a robust system of social security and active labour market policies. In Romania, too, matching efficiency has risen with just a bit of a flattening out in recent years. In many countries - especially those in Eastern Europe - the fall in matching efficiency followed a sharp peak, itself probably the result of introducing more liberal labour market policies following transition.

In the UK, the efficiency of matching fell sharply with the recession, and has not recovered since. Arpaia and Turrini's findings suggest that a high incidence of long term unemployment is one of the major factors underpinning this fall in efficiency. And in the UK, long term unemployment has risen markedly since the recession. At the end of 2007, there were 383000 workers who had been unemployed for over a year; although the number fell markedly in the last quarter of last year, there are now some 845000.

It would be easy, but facile, to contend that, with the unemployment rate falling rapidly, the labour market is functioning well. (It is in some respects, and is not in others.) For the market to maintain the flexibility that is needed, the matching of workers to jobs should be as efficient as possible. While long term unemployment rates remain high, this will not happen. Just as in the 1980s - when Richard Layard and others argued in favour of helping the long term unemployed back to work because doing so would not add to inflationary pressure - helping these workers now is an imperative. There is more to Denmark than good TV.

The size of the output gap is critical for determining the appropriate stance of fiscal policy, yet it has been the subject of considerable debate amongst economists. Some new data from the Office for National Statistics provide some instructive information.

On most measures the extent of spare capacity in the UK economy has narrowed over the last year. Measures based on qualitative survey data from firms tend to suggest a narrower gap than do quantitative measures such as employment data. The qualitative data are, by their very nature, harder to interpret; while they likely reflect practitioner perceptions quite accurately, it is difficult to explain why they should differ so much from the quantitative indicators.

Of the latter, it is particularly noticeable that the proportion of part-time workers who are unable to find full-time work remains high - as does youth unemployment. To the extent that such indicators reflect spare capacity in the labour market, the constraints (such as they are) appear more likely to be related to capital. Given the low levels of investment in the UK economy in recent years, this should hardly be surprising. As, with the recovery, investment picks up, so should capacity - this means that the potential level of output that is used in calculating the output gap is something of a movable feast.

In a nutshell, the capacity constraints faced by the UK economy are much softer than some observers would have us believe.

Redistributive government policies are widely assumed to be costly in terms of their effect on growth. The argument is that redistribution blunts incentives, so that most innovative and diligent people become less so.

That might well be the case, but it is far from being obviously true. The taxes and benefits that are used to redistribute income have both substitution and income effects - they change the return to each hour of work, thus tending to make work less attractive; but they also change the length of time that people need to work in order to achieve a given income, thus tending to make work more attractive. This means that their impact on how hard people work can go either way. While some economists hold doctrinal positions on this matter, in reality it is an empirical issue.

Recent work by Jonathan Ostry, Andrew Berg and Charalambos Tsangarides provides the empirical evidence. They find that, while in extreme cases, redistribution can be harmful (unsurprisingly enough), for the most part 'redistribution appears generally benign in terms of its impact on growth'. In statistical terms, they struggle pretty hard to get any significant results at all on their redistribution variable.

Incentives are no doubt extremely important. But to imagine that they work in only one direction is to ignore some pretty basic lessons from introductory economics courses. Oh, and the evidence.

The output gap has long been the focus of debate amongst economists, with estimates of the magnitude of this key policy-relevant figure varying widely. Sadly, one of the more useful sources of information on this, the English Business Survey, will shortly stop being collected. But the latest data from the survey are out today, and offer some interesting reading.

Across the whole of England, some 7% of firms report their capital as being underutilised. But this figure varies from just 4% in London to 10% in the South West. In two other regions, the North East and the West Midlands, the figure is 9%.

The present recovery is clearly one that has begun in the South East, and its spread to other parts of the country remains slow. The benefits of the upturn should be expected to spread more widely over the coming months. In the meantime, the output gap in large parts of the country remains substantial.

The TUC has released results from an analysis of unpaid overtime. This shows that some 10% more workers are working overtime on an unpaid basis than was the case in 2007. Partly (but only partly) this is the consequence of the recent increase in employment.

Other factors include the severity of the recession, and the aftermath that that has had on behaviours in the labour market. The increase is coincident with a rise in self-employment - much of which appears to be involuntary, since earnings of the self-employed have been falling. Despite the recent signs of recovery, fear appears to be an important factor, with people feeling they must demonstrate that they are working harder in order to keep their jobs.

An important implication of the figures released by the TUC is that, since the extent to which hours worked are underreported has risen over time, the stagnation of productivity (which is calculated as output divided by hours worked) has been even more pronounced than we had thought heretofore.

The Office for Fair Trading is calling for a full inquiry into competition in the university sector. It has legitimate concerns about applicants to undergraduate programmes being able to apply for only five universities and about the bar on them applying both to Oxford and Cambridge.

A further concern is the level of tuition fees, which are set by most institutions at the maximum of £9000. The OFT considers this to be evidence that universities are operating in collusion with one another. That, however, reflects a lamentable misunderstanding of the way the funding mechanism works.

Students take out loans to pay their fees, and these loans are repaid on an income-contingent basis once the students graduate. Any part of the loan that is not repaid after 30 years gets written off, and is paid by the taxpayer. This means that students do not know how much they will ultimately pay for their tuition - a rise in the 'ticket price' of that tuition is not tantamount to an increase in the amount that they will ultimately pay. Consequently, students prefer the certainty offered by bursaries that they might be offered while they are studying. This means that the best way for universities to attract students is to charge the full fee, and spend as much as they can of the revenues on bursaries. This being so, the fact that universities almost always charge (home undergraduates) £9000 is a million miles away from being evidence of collusion - it is simply the logical outcome of the funding mechanism that is in place.

None of the above is rocket science. If - as newspaper reports suggest - the OFT has indeed failed to grasp it, one wonders whether it is has the competence to advise on the inquiry.

Economic forecasters have received a rough ride in the media, often for good reason. The Great Recession was not well predicted by many economists - though there are some notable exceptions. In general GDP growth was overestimated both at the onset of the recession and over subsequent years - only more recently, in the UK, have the forecasts (very markedly) underestimated the extent of growth.

The OECD has produced an evaluation of their own forecasts over this period. Two findings are of particular note. First, forecasts for economies that were particularly open to external shocks were relatively prone to large errors. The impact of contagion of the financial crisis was underestimated. The global interlinkage of financial markets is a feature of the microeconomy that macroeconomic models - even those (maybe particularly those) with strong microfoundations - were not particularly well equipped to handle. This implies that forecasters need to learn a lesson about this aspect of their models (and to some extent they have already done so).

Secondly, forecasts were unusually error prone in economies that, before the recession, had more rigid regulation in their product and labour markets. In such economies, rigidities generate more extreme variations in employment and output than in economies where prices can bear the brunt of economic fluctuations. The modelling of such impediments to the free movement of prices calls for quite detailed understanding of institutional arrangments within the economies under study, and it is clear that this understanding needs to be improved if forecasters are to better their performance.

It should, however, be borne in mind that - while many observers like to judge economists on the basis of their forecasting ability - forecasting is far from the be all and end all of economics. Understanding the past and present is arguably more instructive (and - given the uncertainties that the future inevitably brings - more achievable) than accurately reading the statistical tea leaves.

The latest forecasts from my neural network model, using data to December of last year and forecasts for the next 2 years, are shown below.

The current recovery is starting to look a lot like the recovery of the late 1960s, with a sharp spike in growth followed by more moderate growth over an extended period. In the 1960s, the spike was stimulated by the November 1967 devaluation of the pound. The current increase in output has not been stimulated by such a discrete policy intervention - but the acceleration in consumer spending (that started in the last quarter of 2012 and which has continued since) has been remarkable.

The Institute of Fiscal Studies and Oxford Economics document to which I have referred in an earlier post contains an estimate of the magnitude of the output gap - the gap between current levels of output and the levels that would obtain were the economy working at full capacity. This estimate suggests that currently output is running at 5% short of its potential level.

This figure may be contrasted with that produced by the Office for Budget Responsibility - which is just 2.2%. The difference is important. If the output gap is, as the OBR suggests, small, then the economy is already operating near capacity and the bulk of the government's budget deficit is structural. If, on the other hand, the output gap is relatively large, relatively little of the deficit is structural, and so there is less need for austerity to reduce it.

The danger of excessive retrenchment is a theme that I have alluded to frequently in this blog over recent years. Fortunately policy has followed a rather more pragmatic course than the rhetoric would suggest. While the government may still claim that there is no plan B, the speed of austerity has, for the most part, suggested otherwise - and that it has been pursued. Good.

Falling real wages have been the topic of much debate in recent months, but forecasts recently produced by Oxford Economics and the Institute of Fiscal Studies suggest that the corner will soon be turned. Their prediction is that 'the combination of strengthening earnings growth and low inflation should be sufficient to ensure that real wages begin to increase again by the middle of this year'.

There are good reasons to suppose that this forecast is close to the mark - to be sure inflationary pressure is currently low. Moreover the sharp upturn in the economy has brought about increased employment in relatively high wage sectors such as finance.

However, stagnant productivity continues to present a challenge. Structural change was not a primary cause of the collapse of productivity in the first place - it fell in some industries (notably finance and pharmaceuticals) more than others, but it's these falls within industries rather than switching activity between industries that have proved problematic. A lasting cure will require us to address the innovation deficit - exemplified by a startling decline in patents issued in the UK in several key industries over recent years. Successful innovation requires a little luck, but also a lot of design. It is crucial to strike the right balance between beneficial regulation (such as patent protection) and harmful regulation (stifling creativity - might high marginal tax rates be an example?). Successful innovation also requires a context within which thinking big, and capturing the public imagination, is encouraged. In that, there is a role to be played by both private and public sectors.

The unemployment rate has been falling fairly steadily since its peak in the last quarter of 2011. Until the last three months of last year, this fall was unspectacular; at its peak the unemployment rate was 8.4%, and as recently as the three month period to last September it was still as high as 7.6%. The latest figures released today show that, in the three month period to November, the rate fell to 7.1%.

The latest data on GDP growth pertain to the third quarter of last year, and suggest a quarter-on-quarter growth of 0.8%. This is high - it suggests an annualised growth rate of 3.2%, well above the consensus forecast. In that quarter, growth within the construction sector was particularly striking. With GDP growth now apparently above the trend rate, it is not altogether surprising that unemployment should fall.

Yet questions remain about the source of this growth. Business investment grew in the third quarter of last year, but this only partially made up for a fall in the previous quarter, and the total level of such investment remained below the figure realised a year earlier. Investments in dwellings and other buildings likewise accelerated in the third quarter, but this only partially made up for recent falls. Consumer expenditure, meanwhile, has been rising steadily since the depths of the recession in 2008, and has accelerated sharply since the beginning of 2013.

The fall in unemployment and rise in output both represent very welcome news. As more people find jobs, the increase in consumption becomes more sustainable and the recovery becomes more secure. A key challenge that remains, however, is to raise productivity back to pre-recession levels and hence to restore real wage growth.

The ITEM (Independent Treasury Economic Model) club (supported by Enrst and Young) have issued their latest forecast for the UK economy. They conclude that growth in 2014 will accelerate to 2.7%, but caution that the recovery is very much led by consumer spending and that, until real wages rise, interest rates should be held at their current low level.

It would be hard to disagree with the ITEM club - at least as a short term forecast. Their predictions for the years beyond 2014 show the reversion to a steady state growth rate of around 2.5% that is characteristic of models of the type that they use - and recent experience suggests that we should be sceptical of that.

But the note of caution that is sounded here, suggesting that the recovery is fragile while it remains so heavily dependent on consumer spending, is well made. If growth does indeed accelerate to 2.7% this year, an outcome in 2015 of 2.4% (which is what the ITEM club is currently predicting) would be a rather better outcome than I would expect.

The recent surge in output in the UK has been noted by many commentators. Indeed, it seems quite remarkable.

The latest forecasts produced by my neural network model, using the most recently available data (up to September) suggest that a spike in output growth is likely - though the magnitude of the spike is moot - with the rate of growth falling back quickly to (much) more modest levels as we move into 2015.

Clearly much will depend on policy. Even though the output gap is still substantial, growth of the kind being predicted above is unlikely to last long without a build up of infationary pressure as workers seek to recover the lost ground of recent years. This could provoke an interest rate hike sooner rather than later - and that could bring output growth down sharply.

Jim Heckman and Tim Kautz have provided an intriguing analysis of ways in which individuals' characters influence their economic outcomes, and of how character can be changed by various interventions. They view character as something that can change over time, something that is shaped by the individual's environment, and something that can be developed by interventions.

Opportunities for such interventions exist at many points over the life cycle, but are particularly rich during the early stages of life. Non-cognitive skills are developed at this stage, but this does not mean that character is fixed thereafter - describing these soft skills as personality traits is therefore misleading, and they are better described as skills. Skills can be honed over time.

The importance of such skills in the labour market is clear. Conscientousness, extraversion, emotional stability, agreeableness and openness - in that order - are known to be positively correlated with job performance. The evidence on the ability of interventions to affect character, and thence subsequent attainment, comes from a variety of sources, but one of the most persuasive concerns the effects of the Perry preschool programme.

These are important findings. The way in which various options affect the characters of stakeholders needs to be addressed in the design and subsequent evluation of policies.

The Confederation of British Industry has estimated that the net benefit of the UK's membership of the European Union amounts to somewhere between £62 billion and £78 billion per year - that is between 4% and 5% of Gross Domestic Product. This benefit comes from access to European markets, the dismantling of tariffs and other barriers to trade, and the consequent realisation of economies of scale. Further benefits come from the improved access to sources of finance that arise from EU membership, and from increased investment from outside the EU from firms wishing to locate within the common economic area.

The figures cited by the CBI are almost completely meaningless. To evaluate the benefits of membership of the EU, it is necessary to have an idea of what non-membership would look like. Were the UK to leave the EU, for example, it would most likely do so on a basis that retained freedom of trade. So to include the impact of free trade in any calculation of the benefits of the EU seems strange.

There is, of course, a case for staying in the European Union. But exaggerating the numbers does not serve to strengthen that case.

New work by Pablo Brañas-Garza, Antonio Espín and Shoshana Neuman examines the effect of religiosity on the extent to which people's behaviour is pro-social. Based on games frequently used in experimental economics, the results, based on quite large samples of individuals, are striking. Active participation in religious activities appears to be strongly associated with more altruistic behaviour. Looking into the future, as adherence to faith declines, so (in the absence of countervailing measures) might the extent of pro-social activity.

The mechanism underpinning this finding is complex – it is likely to be partly the direct result of religious teaching, but partly also the result of the development of a sense of community that is engendered by frequently meeting neighbours at a religious institution. The latter should be seen alongside other developments – such as the growth of home entertainment – that together may reduce social cohesion.

Altruism, it seems, needs institutions. If our society lets the old institutions go more quickly than it lets go of its need for altruism, then new institutions will need to develop to plug the gap. These new institutions may be virtual – social networking, for example. But it remains to be seen whether the connection between the virtual world and the real world is sufficiently strong to serve the need.

In a fascinating study of the impact of corporate culture on company performance, Luigi Guiso, Paola Sapienza and Luigi Zingales have found a strong positive effect of managerial integrity and ethics. This should not be surprising, but it is immensely reassuring. In competitive markets, bad behaviour should be competed out of existence.

Òscar Jordà, Moritz Schilarick and Alan Taylor have produced one of the more interesting analyses of recession following financial crisis. As is by now well known, the severity of such recessions greatly exceeds that of a typical recession. Figure 6 of their study demonstrates this vividly. Following a financial crisis, output falls further and takes longer to recover than in a normal recession; this follows from the fact that investment - which is barely affected in a normal recession - falls drastically and recovers very slowly; this is reflected also in lending data, which show very slow recovery in the credit market.

The recent recession was triggered by an increase in debt. As the international evidence reported in Figure 1 of the study shows, this debt increase was primarily a characteristic of the private sector – indeed public sector debt had been falling as a proportion of GDP in the decade leading up to the crisis. Notwithstanding that, the ability of governments to respond to financial crisis necessarily depends on their own debt position; clearly this has deteriorated in the wake of the crisis, and contributes to the overall level of indebtedness. An adjustment was necessary – and the low levels of bank lending that have served to prolong the recession represent a part of that adjustment.

Another part is fiscal retrenchment. Hopes that this would of itself be expansionary (owing to a ‘confidence fairy’ effect) always appeared fanciful. The trick to recovering the government’s financial position must to phase fiscal policy so that retrenchment is achieved over a reasonable time horizon, but without proceeding so quickly as to damage the recovery that now seems under way.

Gordon McCord and Jeff Sachs have provided a fascinating analysis of the determinants of economic growth. This is an area in which I too have dabbled in the past, and many of their results - concerning the effects of landlock, openness etc. - reassuringly resonate with mine.

Surprisingly, though, McCord and Sachs find that the number of years of schooling typically received by men serves to dampen growth - though the schooling of women increases it. There are many possible explanations why female education should have a stronger positive effect on growth than male education - for instance, women may be more effective in passing their knowledge onto younger generations. But the finding that male education actually reduces growth appears perverse. I would argue that it is one that should be treated with caution - there is surely a high degree of collinearity between the amounts of schooling that men and women receive, and this could be distorting the result. This is a case of a study where further detail would be welcome.

The latest industrial production data, released this morning, reveal a drop in (seasonally adjusted) output in August. Nevertheless, feeding these data into my neural network forecasting model reveals that there remain grounds for cautious optimism about the likely trajectory of the economy over the next couple of years. The forecasts appear below.

Opposition leader Ed Miliband has rattled some cages in recent days with his criticism of energy companies. To be sure, where companies are behaving in an anti-competitive fashion there is scope for regulation. But the precise proposal here seems curious. The threat to freeze energy bills after the general election will surely encourage the energy companies to raise prices beforehand, having exactly the opposite effect to the one intended.

The Bank of England's inflation report contains (on p.38) a GDP forecast that confirms the general view that recovery is now under way. From the end of this year, the Bank expects growth of around 2.5% per year. This is welcome news.

Also welcome is the Bank's stated intention 'not to raise Bank Rate from its current level of 0.5% at least until the ... unemployemnt rate has fallen to a threshold of 7%' (subject to certain conditions on inflation and financial stability, p.7). This should provide sufficient certainty to ensure that market rates of interest are anchored, allowing, for example, lenders to offer longer term loans at fixed, low interest rates, and thus boosting the economy.

Under such conditions of stable and low interest rates, the Bank expects unemployment to fall gradually from its current level of 7.8%, reaching 7% around the middle of 2015. It should be noted, however, that 7% remains a couple of percentage points above the Bank's own estimate of the long run equilibrium (p.29). There remains a lot of slack in the economy.

A variety of recent statistical releases suggest that the economy is, at last, recovering. The latest run of my neural network forecasting model, based on industrial production data up to June of this year, is reported below.

This indicates a marked recovery, indeed so marked that it will quickly be followed by a downturn. This prediction should be treated with a great deal of caution (and even scepticism). The sharpness of the recovery is probably exaggerated, and so too, therefore is the likelihood of a quick reversal. I suspect that this - and the considerably less sanguine predictions that I reported on 17 July - reflect some inaccuracies in the published data for May. At that stage, the industrial production index had remained static for four months; the June figure, alongside various other indicators, renders the figure for May suspect.

Other positive statistics released recently include the second quarter estimate for GDP growth (0.6% over the quarter) and a rapid growth of retail sales noted by the British Retail Consortium.

Added note: If the industrial production figure for May is indeed downwardly biased, then that has implications for the forecast reported here. Supposing the value of the industrial production index in May should have been 95.5 (rather than 95.3), the forecaster would still lead us to expect recovery over the coming year, but it is much more modest and short lived. This serves to reinforce the point that, while several indicators give grounds for optimism, caution is still needed in interpreting the data.

The Office for Budgetary Responsibility has produced a fascinating report on the impact of migration on the public finances. The report presents the government with something of a challenge.

Chart 3.14 on page 100 tells the story. The central projection shows that we can expect the net public sector debt as a proportion of GDP to rise towards 100% by the 2060s. Increasing immigration can reduce this burden quite substantially - since migrants tend to be younger than the population as a whole, and hence are more likely to be working, they generate substantial tax revenues. Reducing immigration has a severe impact on the national debt; indeed reducing net migration to zero is projected to cause the public sector net debt to rise to around 150% of GDP by the 2060s.

It is difficult to place too much credence on figures that look so far into the future. But the overall message from the Office for Budgetary Responsibility is clear: reducing the national debt without accepting an increase in immigration is likely to be an unrealistically tough ask.

The latest unemployment statistics, for the three month period to May of this year, present some good news. The unemployment rate appears to be falling, with the total number of unemployed workers some 57000 lower than in the previous period.

This appears to sit alongside other recent encouraging signs - including the upgrade to the forecast produced by the International Monetary Fund, which now predicts 0.9% growth in the current year.

Other data suggest that we should remain cautious, however. Industrial production has been flatlining in recent months, and remains stubbornly lower than it was a year ago. The forecasting model that I report here from time to time, based on these industrial production data, was, until recently, predicting a modest recovery, but is now pointing to a renewed bounce along the bottom.

For sure, some statistics are encouraging. Overall, however, the picture remains one of fragility.

The proposal to impose a minimum per unit price on alcohol sales in England and Wales appears to have been scrapped, apparently following an adverse public opinion survey.

This is not an altogether straightforward issue, as the statistical evidence on the effects of minimum pricing paints a rather confused picture. Estimates of the elasticities of health outcomes with respect to the minimum price of alcohol vary widely. Much of the best evidence comes from Canada - and Canadian researchers have studied also the UK situation. However, all the serious studies of which I am aware report significant (albeit widely divergent) beneficial outcomes from the imposition of a minimum price.

The proposal for a minimum price was a great example of a 'nudge' policy that offered the prospect of remarkable social benefits - it is regrettable that it has fallen victim to politics.

Cristina Cattaneo, Carlo Fiorio and Giovanni Peri have conducted an important study into the impact that immigrants have on the job prospects of native workers. This is, of course, a politically sensitive topic.

The findings of their analysis may provide some observers with a surprise: they find the 'native Europeans are more likely to upgrade their occupation to one associated with higher skills and better pay when a larger number of immigrants enter their labour market'. Their detailed empirical results suggest why this might not be the general perception. In their simplest model, it takes up to four years for the beneficial impact to become apparent. In more sophisticated models, which make allowance for issues arising from the direction of causality, the effect is immediate, but becomes more pronounced over time.

It is usually, though admittedly not always, the case that free markets serve us well. The labour market is no exception.

Ernst Fehr, Holger Herz and Tom Wilkening have produced a fascinating study, based on experimental work, of how bosses do (and do not) delegate. They find that bosses tend not to delegate enough - that both their own and their subordinates' interests would be served by more delegation. By retaining authority and failing to delegate, bosses support an under-supply of effort by their subordinates which is not in the organisation's interest - and hence not ultimately in the bosses' interests either. It seems that organisations stand to gain much if they can find incentive mechanisms that reward bosses in such a way that they delegate more appropriately. Such mechanisms would need to compensate bosses for their distaste for being overruled.

Fehr, E., Herz, H., & Wilkening, T. (2013). The Lure of Authority: Motivation and Incentive Effects of Power American Economic Review, 103 (4), 1325-1359 DOI: 10.1257/aer.103.4.1325

Evidence from the Institute of Fiscal Studies and the Trades Union Congress shows the extent to which wages have fallen over the course of the recession. The TUC reports that real wages have fallen by 7.5% overall, and by more than 10% in some parts of the country. This, according to the IFS, is a sharper fall than over any other five year period in recorded history.

The fall in wages has allowed unemployment to remain at much lower levels than might have been expected given the severity of the recession. The IFS attribute this flexibility of wages in part to a continued high level of labour supply - with many workers who would, in previous recessions, have quit the labour market as 'discouraged workers' opting instead to remain in the labour market this time - and in part to the effect of union legislation.

As the economy recovers, it would not be surprising to see wage pressure increase, as workers seek to recapture some of the losses they have made over the last few years. Unless such demands can be rigourously controlled, this could lead to an escalation of wages that feeds through into price inflation, and at the same time the braking force on unemployment could wither. While we now appear to be witnessing the beginnings of recovery, this could be frustrated by stagflation if discipline is not maintained.

The latest forecasts from my neural network model are shown below. The picture has changed relatively little over the last 3 months, though it does suggest that we should be a little more optimistic about the rate of growth that will be achieved in 2014.

The taxes due to be imposed on savings deposited in banks in Cyprus represent a response to the vulnerability of the banking system in that country. They have been defended on the grounds that depositors would ultimately bear the burden of any rebalancing. True though that might be, there are some serious problems with this type of solution.

The legitimacy of any tax rests on the idea that people understand that they will be liable to pay the tax if they do certain things. If I earn income, I expect to pay income tax; if I purchase goods and services, I expect to pay value added tax, excise duties and the like. It is not usual, or fair, to introduce new taxes where the payments are made by people who can reasonably be supposed to have behaved differently had they known the tax was on the way. One might describe the tax as legalised (but not legitimate) theft.

The proposed Cypriot tax is being imposed on all deposits - including those below €100K which are supposedly protected from bank collapses. It is not, therefore, a tax primarily aimed at big Russian depositors, as has been claimed (although many of the large deposits do of course come from Russia). One might describe it as theft from the poor.

The tax sends a signal to all savers in Europe that their savings are, quite simply, not safe. One hopes that the furore that this has attracted will prompt a rethink and that small depositors will be protected. Otherwise, the authorities may well have triggered bank runs throughout southern Europe. It is not a smart move.

The Bank of England has published its latest forecasts for the UK economy. These suggest that output is set to recover in the latter part of this year, rising quickly to a growth rate of around 2 per cent by the end of 2014. The Confederation of British Industry has made a similar forecast.

The latest results of my neural network forecaster (based on growth of industrial output) paint a similar picture of eventual recovery, although the prognosis for growth is more modest. The red line below shows the forecast to the end of next year - and suggests that growth during 2014 will be around 1.5%.

Sometimes it's nice, and reassuring, to see some unsurprising results emerge from statistical exercises. Brian Jacob, Brian McCall and Kevin Stange have recently produced a paper that analyses the determinants of college choice in the US. Amongst these determinants are college expenditures (per full-time equivalent student) on amenities (what the authors term 'country club' facilities) and on instruction. Unsurprisingly, spending on amentites attracts students. But it is a less strong attractor for the ablest students. Spending on instruction, meanwhile, positively attracts only the ablest students (and actually puts other students off). This means that different colleges' spending patterns can be rationalised by looking at the types of students that they are attracting (and are looking to attract in future).

Today marks the tenth anniversary of this blog. It's been an exciting ten years for observers of the economy. But listing some of the early topics covered in the blog provides a remarkable insight into how the world has changed over this time.

-student tuition fees raised to £3000 - and Conservative party plans to scrap tuition fees

-the congestion charge introduced in London (at a daily rate of £5) and the first motorway toll road opened

-the five economic tests for UK membership of the euro assessed

Inevitably, though, in looking back over the last decade, it is the Great Recession that stands out as an economic event of magnitude. The crisis, presaged in the UK by Northern Rock and reaching a climax with the collapse of Lehmans, has lasted over 5 years and output is still well below pre-crisis levels. The 6 September 2012 policy change by the European Central Bank has been instrumental in reducing interest rate spreads across the continent, and offers some hope that we may finally enter a period of sustained recovery. Nevertheless policymakers are still walking a tightrope - they must encourage growth while still attending to the fiscal deficit and guarding against inflation. The impact of deficit reduction policies, alongside the still fragile international economic environment, will mean that recovery is a slow process. So economics is, for better or worse, likely to remain interesting well into the next ten years.

In a recent paper, Robert Gilhooly, Martin Weale and Tomasz Wieladek have shown that the application of different estimation methods lead to widely varying conclusions about how output growth has been affected by (i) demand and (ii) productivity over the recent past. While traditional measures suggest that, for the UK, demand deficiency is almost uniquely responsible for slowdown, the application of a more refined method suggests that demand and productivity effects are equally responsible.

Essentially, the method proposed by Gilhooly, Weale and Wieladek is designed to compensate for biases that result from the fact that the fortunes of different sectors of the economy are intertwined at any point in time. Traditional methods that are used in this context do not work well when the time period under consideration is short, but these authors finesse this problem by adopting Bayesian methods. They argue that superior forecasting properties of their model suggest that its results should be taken more seriously than those of exercises based on other methodologies.

An important question then remains: if as much as half of the drop in output has been due to a fall-off in productivity, how can this fall-off have happened? If the findings imply that, over the course of the recession, we have unlearned the lessons of how to produce efficiently, then it is reasonable to question how such amnesia can occur.

To some extent, the decline in real wages may have allowed firms to retain labour while tolerating a fall in productivity - a fall that in itself reflects a drop in demand for the firms' output. Labour hoarding of this kind is readily explained in a context where firms expect a rapid return to growth and anticipate future labour shortages. It is not clear that this is the case now.

Another explanation may be that high productivity sectors have declined for secular reasons - for example, as natural resources have been depleted, the output of the extractive industries has fallen. This might suggest that there is a more permanent element to the decline in productivity, and that we should not output to grow rapidly to its previous high level.

It is possible, therefore, to put a rationale on the findings of Gilhooly et al. that productivity decline has been an important driver of recession. More work is probably needed before it is safe to conclude that this explains as much of the drop in output as the authors suggest. But their research certainly serves a purpose in reminding us that there is work to be done on the supply side of the economy as well as on the demand side as we seek to climb out of recession.

Some fascinating research by Ed Lazear, Kathryn Shaw and Christopher Stanton has evaluated the importance of a good boss. They find a substantial effect - a finding that has important implications for both the debate about remuneration of senior bosses and the more general question of how marginal productivity should be measured.

The Chancellor of the Exchequer presented his Autumn Statement earlier today. At the time of the last election, the main parties offered economic policies that differed in terms of how quickly they would tackle the budget deficit. The reality is now that the deficit will be closed more slowly than either party planned. This throws into pretty sharp relief the extent to which wiggle room has vanished.

A major difficulty over the last two years has been the continued weakness of the Eurozone. This has hit growth, and consequently had an adverse effect on tax receipts.

Taxpayers know that the deficit must be paid off sometime. The trick is to phase the austerity measures in such a way that, in time, they result in a reduced burden of debt, while not choking off the growth that is essential to the repayment of that debt. Current forecasts suggest that it will be the latter half of next year before any significant growth resumes, and this makes the balancing act particularly difficult. In this context it is particularly important that fiscally neutral changes in tax and government spending should be tilted to favour growth - this means that the raising of tax allowances and the investments in infrastructure are both to be welcomed.

Meanwhile, the statement points to the spending review that is to take place in the first half of 2013. The plans for deficit reduction, and specifically for government spending, in this statement indicate that the review will need to take a draconian stance. The extent to which that turns out to be feasible in practice will depend heavily on the broader macroeconomic context. If the European economy remains fragile beyond 2013, further fiscal retrenchment at home is likely to prolong still further the return to significant levels of growth. Indeed, the extent of retrenchment that is anticipated in today's statement may prove infeasible.

The latest results from my neural network forecaster for the UK continues to suggest that economic recovery is likely to be consolidated only in the latter part of next year - and the indications are now that the rate of this recovery will be quite slow.

The fragility of the economy in the Eurozone remains a concern - regardless of conditions within the UK itself, there are still some significant downside risks.

Fiscal Studies has published a special issue on higher education finance, and has made the contents freely avaiable for download. It's a good read. I particularly like the paper by Chowdry et al. Two things in their paper strike me as particularly interesting:

(1) 'The proportion of graduates who reach the new debt write-off point of 30 years increases to 56 per cent' - in other words most graduates will never repay the full amount of their loan. Indeed, 'the average female graduate will pay back just over half of what they borrow, compared with 87 per cent for the average male graduate'. This, of course, means that many (if not most) students are indifferent about the precise level of fees that they are charged, and this in turn incentivises many universities to charge at the cap of £9000. Another implication of this is that the taxpayer ends up having to bear the burden of the unpaid debt, so that the exchequer savings of the new scheme are not as great as might have been hoped. On the assumption that growth raises graduate earnings by 1.5% per year, the exchequer savings amount to £500m per year - which represents a relatively minor reduction in the public sector deficit.

(2) The paper does not produce revised estimates of the rate of return to higher education. It does point out that the average graudate 'will in futre make repayments totalling £25830 over their lifetime - an increase of 52%' compared with the system that existed before 2012. Meanwhile, 'the average student enjoys an increase in cash support during their degree of some 12 per cent, amounting to £19580 in total'. For some students at the margin, the rate of return to higher education has presumably fallen to such an extent that the investment is no longer worthwhile.

Chowdry, H., Dearden, L., Goodman, A., & Jin, W. (2012). The Distributional Impact of the 2012-13 Higher Education Funding Reforms in England* Fiscal Studies, 33 (2), 211-236 DOI: 10.1111/j.1475-5890.2012.00159.x

The latest World Economic Outlook publication by the International Monetary Fund offers interesting evidence on fiscal multipliers. While 'fiscal multipliers were near 0.5 in advanced economies during the three decades leading up to 2009', the report finds that 'multipliers have actually been in the 0.9 to 1.7 range since the Great Recession'. Simon Wren-Lewis has recently provided a compelling analysis of what this means for the UK. While the global economic environment has done little to help, the double dip may well have been avoidable.

The 1% increase in GDP achieved in the third quarter of this year represents tremendously welcome news. Part of this increase is surely due to the effect of the Olympics, part to the subdued second quarter (with its glut of public holidays), and it is possible that part could be wiped away as more information comes in and revisions are made to the statistics. Nonetheless, it is difficult to perceive this as anything but an encouraging result. The return to growth has come a little earlier than many (myself included) expected. It does contribute towards an explanation of the encouraging employment figures that were released last week.

There remain uncertainties in the economic environment that suggest that the celebrations need to be tinged with some caution. But Mario Draghi's announcement of the European Central Bank's new stance has been helpful, and interest rate spreads in Spain, Italy and Portugal have fallen markedly - and stayed down. They are still too high for comfort, but the position is markedly more encouraging than it was just 6 weeks ago.

Paul Gregg and Steve Machin have recently examined the way in which the sensitivity of the real wage to unemployment rates has become stronger over the last decade or so. I have noted this in an earlier blog post, though I would argue that the change slightly predated the 2003 point identified by Gregg and Machin. Whether, as the economy begins to recover, real wage restraint will continue is moot. If wage pressure returns over the next twelve months or so - before the recovery is consolidated - it may well be the case that interest rate hikes will be needed sooner rather than later in order to prevent a stagflation.

Mario Draghi's announcement of the European Central Bank's new policy on bonds has had a positive effect on interest rate spreads. This is encouraging news, finally. Here are the data for the spread between German and Spanish interest rates.

The news that the European Central Bank will pursue outright monetary transactions (OMTs) - purchases of bonds issued by eurozone member countries - as a means of reducing borrowing costs for these countries is very welcome. The conditions under which such transactions will take place remain unclear; the ECB intends to purchase bonds only when it perceives serious distortions to the market, where these distortions are based on what it deems to be unfounded fears. Moreover, the ECB's intervention will be conditional upon the action being part of the European Stability Mechanism, making the availability of such support dependent on countries' compliance with fiscal discipline requirements. This last condition is critical, but the binary nature of any judgement about compliance means that pressure will inevitably come to bear in instances where the judgement is marginal. A better solution would be to offer support on a sliding scale, making support more costly where discipline is weaker. This would effectively be the solution offered by conditional bonds.

Nevertheless, the new initiative is a major step forward. It had been anticipated by the markets - the interest rate spreads for countries such as Spain and Italy had already fallen dramatically over the last day or so. In itself, this is a welcome outcome, though the spreads still have a long way to fall.

Some time ago, I reported on the differences between recent UK and US experience in terms of changes in productivity levels. A similar theme has emerged in recent work by Abigail Hughes and Jumana Saleheen. These authors identify some interesting sectoral patterns. Prior to the financial crisis, productivity growth in the services sector in the UK appeared to be strong; the crisis had an obvious adverse impact on (particularly financial) services, and many of the pre-crisis gains were subsequently lost. There has, since, been a modest recovery in productivity in this sector, however.

Meanwhile, productivity in the energy sector - where North Sea reserves are rapidly being depleted - has declined. In this context, driving the UK towards sustainable productivity growth is likely to be a challenge.

Investment in physical and human capital, and policies to foster innovation are conventional cures for productivity malaise. Business investment requires access to finance and also requires confidence that demand will grow into the future.

Continued uncertainty about the macroeconomic outlook - and especially about the outcome of the Euro crisis - is, in the absence of a quick resolution, likely to continue to frustrate hopes of a speedy return to healthy productivity growth.

Abigail Hughes, & Jumana Saleheen (2012). UK labour productivity since the onset of the crisis - an international and historical perspective Bank of England Quarterly Bulletin, 138-146

The latest results from my neural network forecasting model, based on industrial production (K222) in the UK are presented below - the data are outturn rates of growth up to June of this year (in blue) and forecasts for the following 24 months (in red).

It is clear that the medium term outlook remains grim. While the growth rate has by now pretty much bottomed out, these data suggest that the return to a positive rate of growth will not come until late next year.

Of course, such a simple model cannot take into account the plethora of uncertainties surrounding the Euro crisis and its ramifications for economic conditions in our major export markets. The risks there, however, remain predominantly on the downside.

The public finance data for July were disappointing; a prolonged recession is likely to mean dampened government revenues and increased government spending on welfare, so, while output struggles to recover, the outlook for deficit reduction is poor.

As I wrote last month, the news from Spain provides a cold shower. The recent movement of the spread showing the difference between interest rates at which the Spanish authorities can access debt and the German counterpart has been alarming. With the spread now well over 6 per cent, Spain's debt is becoming unsustainable, and a bail-out is looking increasingly inevitable.



A rescue package for an economy the size of Spain's will inevitably put strain on other European economies. With this scenario as the backdrop, the news that Moody's credit rating agency has announced negative outlooks for Germany, the Netherlands and Luxembourg, is unsurprising.

News that BPP, the for-profit university college, is launching cut-price degrees in nursing and psychology comes side by side with some warnings from economists who have studied the for-profit higher education sector in the United States. Kevin Lang and Russell Weinstein find that, while the returns to studying for a degree from a traditional insititution of higher education are considerable, those associated with degrees (and other qualifications) from for-profits are negligible. Similar observations have been made by Nobel prizewinner Joe Stiglitz. As the UK for-profit higher education sector branches out into health, prospective students receive a health warning about such ventures.

The contrasting experiences of the UK and US over recent years, in terms of changes in labour productivity, has been noted for a while. Now, Abigail Hughes and Jumana Saleheen have produced an analysis that shows that UK productivity - having grown strongly in the run-up to the Great Recession - has been sluggish since, in comparison not only with the US but also with other major European economies. 

The relatively strong productivity growth in some other economies - particularly in southern Europe - may well be due to the rapid increase in unemployment, with relatively low productivity workers losing their jobs. But the sluggish growth productivity in the UK has to be a source of concern. It reflects, in part at least, a lack of confidence in future prospects, and a consequent failure of businesses to invest.

While demand factors likely dominate the economic situation in the short term, in the longer term supply factors are clearly of paramount importance. The supply side issues that underpin the underperformance of the UK in international comparisons of productivity therefore warrant urgent attention. 



Abigail Hughes and Jumana Saleheen (2012). UK labour productivity since the onset of the crisis — an international and historical perspective Bank of England Quarterly Bulletin, 52 (2), 138-146

Much of the debate about the merits of austerity policies concerns an empirical issue: how effective can fiscal policy be in stimulating the growth that can later help pay off deficits? Some new evidence on this comes from a paper by Karel Mertens and Morten Ravn (nicely summarised here). It suggests that the medium term response of national output (around 2 years after a shock) to a change in the tax take is quite substantial. Over the long run, of course, it is real things (such as productivity) that affect output growth - but over the short and medium term, fiscal policy can give the economy a substantial kick.

Arguing in favour of a fiscal injection that would, in the short term, serve to widen the government's budget deficit does of course represent a tough political challenge. But the evidence is clear that such an injection would serve to promote growth. And, with inflation now back within the Bank of England's target range, the argument that it would stoke inflation is increasingly difficult to sustain.

Karel Mertens and Morten Ravn (2012). A reconciliation of SVAR and narrative estimators of tax multipliers Cornell University Working Paper

The gap between the interest rates at which Spanish and German 10 year bonds are being offered has risen inexorably over the last couple of weeks. This is a cold shower for anyone celebrating the Greek election results.

Two new packages of support for the UK economy have been announced in a speech by the Chancellor of the Exchequer at the Mansion House speech yesterday. The Bank of England's 'funding for lending' scheme will release £80 billion worth of loans, at low rates of interest, to commercial banks which will then undertake to lend to businesses. Meanwhile, in addition, 6-month loans will be offered to the commercial banks - the intention is to loan out at least £5 billion per month in this way. The aim of these two schemes is to effect a significant injection into the economy, which is facing what Mervyn King, Governor of the Bank of England, yesterday described as 'an ugly picture'.

Faced by such a dismal economic picture, the success of these initiatives will depend on the extent to which extra liquidity will translate into extra economic activity. With gloomy prospects and low levels of confidence about the medium term outlook, businesses may not consider this to be the best time to invest. Pushing 'Plan A' - expansionary monetary policy combined with fiscal retrenchment - to the limit is all well and good. But in a liquidity trap monetary policy alone cannot deliver growth.

The government's White Paper on banking reform, published yesterday, represents a response to the report of the Independent Commission on Banking led by Sir John Vickers. The recommendations made by Vickers have in large measure been taken up. This means that retail banking will be ring-fenced, protecting depositors in the retail market from potential adverse consequences of risky activities undertaken elsewhere in the bank. Vickers (in paragraph 2.28 of the report) recommended that the leverage ratio (the ratio of equity to assets) should be set at a minimum of just over 4% for large banks - above the international norm of 3% - as a means of safeguarding the ring-fenced activity against excessive risk. The White Paper indicates that the government has not accepted this recommendation, and retains a 3% requirement. Nevertheless, the government's proposals are, in large measure, those of the Commission. 

Much remains to be done, however. A key failing of the banking system is that it is insufficiently competitive. The players in this industry are too large. Given the extent to which economies of scale prevail, it is easy to understand how this situation has come about. Nonetheless, other industries are subject to regulation to ensure competition, and banking needs to be no different. The White Paper makes reference to the forthcoming divestment of part of Lloyds Banking Group, and points out that this is an opportunity to increase competition. It is indeed such an opportunity, but I suspect that, beyond hoping that this will be so, the need for much more aggressive regulation remains acute.

Spain has become the latest country to require a support package. The EU will provide loans worth up to 100 billion to support the Spanish banking system, this being offered at terms favourable to the Spanish government. Spain's banks performed poorly last year in stress tests conducted in 2011 by the Committee of European Banking Supervisors, and have been left particularly vulnerable following the bad debts that led to the original credit crunch in 2007-08. The EU loans are intended to support these banks for a period. It may be regarded as another attempt to 'kick the can down the road' - in the hope that by buying time the threat of catastrophic failure can be averted.

The initial response of the markets has not been particularly favourable. The spread between Spanish and German interest rates on 10 year loans has once again widened to above 5 percentage points, after falling over the last 10 days. The spread for Italy, widely seen as being the next country to be affected by this contagion, has also risen - in this case passing through the 4.5 percentage point mark. The key test will be the next bond auctions in Spain, scheduled to take place next week.

The last week has seen the publication of further evidence about the state of the UK economy. First came some promising data on sales, the headline figure suggesting an increase of 1.8% in sales during March. To some extent this was aided by freak conditions - as people brought forward their consumption of fuel at the end of the month owing to fears of a strike by petrol tanker drivers. But retail sales excluding automotive fuel rose by 1.5% over the course of the month, suggesting that relatively little of the growth was due to the unusual circumstances.

Next came the GDP figures for the first quarter of this year. These indicate that the economy slipped back into recession, with negative growth being observed for the second successive quarter. The overall growth rate in the first quarter was -0.2%, but this figure tends to conceal experience that differs quite markedly across industries. The construction sector, in particular, performed badly, with a growth rate of -3.0% in the first quarter. Services (which comprise a high proportion of total output in the economy) grew, but by only 0.1%. So the news on GDP has been very disappointing (albeit not surprising to readers of this blog).

More encouraging news has come in the form of a boost to consumer confidence, with the Nationwide reporting a marked jump in its indicator.

Yet, while the first quarter of this year has been one in which there are a few (very patchy) signs of life in the economy, the wider environment remains one in which there are many uncertainties and downside risks. Spain has become a renewed source of concern - the spread between Spanish and German interest rates increased in early April and shows no sign of coming down any time soon - this spread currently stands at more than 4 percentage points. At the beginning of March it was 3, and at the end of March it was 3.5. Meanwhile, the unemployment rate in Spain has risen to more than 24%, presenting a severe challenge to government policy and raising questions about the sustainability of the country's debt - which is already approaching 80% of GDP. Parallels with Greece are starting to be drawn - but Spain's economy is much bigger than that of Greece, and its difficulties are likely therefore to have larger ramifications elsewhere.

The overall position therefore remains one that is best described as gloomy.