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Is the Economy Overheating?
Author(s) -
DICKS GEOFFREY,
BUDD ALAN
Publication year - 1987
Publication title -
economic outlook
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.1
H-Index - 8
eISSN - 1468-0319
pISSN - 0140-489X
DOI - 10.1111/j.1468-0319.1987.tb00365.x
Subject(s) - overheating (electricity) , economics , current account , unemployment , volatility (finance) , potential output , demand shock , aggregate demand , macroeconomics , monetary economics , monetary policy , exchange rate , econometrics , physics , quantum mechanics
In the last year total output has risen 4 per cent and manufacturing is up 6 per cent. Unemployment has fallen by 400,000. The current account, which was in surplus in the first half of the year, has moved back into deficit. Does this mean that the economy is “over‐ heating”? In the context of our forecast we examine this issue; we consider how rapidly supply can increase and how fast demand is increasing. We conclude that the growth of output in the last year was initially driven by supply and that, more recently, domestic demand has been growing very rapidly. The emergence of a current account deficit is evidence of excess domestic demand but from now on we expect demand to grow less rapidly. With non‐oil supply expanding at a rate in excess of 3 per cent, we forecast steady output growth and little change in either inflation or the current account. In our judgement, the economy, though hot, is not overheating.