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Output growth in the economies of East Asia, including Japan, remained firm in the opening months of this year, in line with relatively resilient GDP growth in the US and in Europe. Hong Kong's economy continued to boom despite the cooling-off of China's economy. Real GDP grew at an annual rate of 7.2 per cent, faster than the 6.9 per cent growth in the final quarter of last year, supported by exports which have benefited from the effective devaluation that has come from the fixed link to the US dollar. Domestic demand continued to expand briskly, registering a 7.0 per cent gain on an annual basis. In South Korea, domestic demand growth decelerated somewhat to 3.6 per cent per annum in the first quarter, but strong export performance meant that the economy as a whole grew by a respectable 5.7 per cent on an annual basis. Elsewhere, strong credit growth and rampant infrastructure spending have been supporting domestic demand growth across the region in general. We continue to expect output growth to moderate somewhat but to remain healthy this year in much of East Asia and Australia. Following strong output growth of 3.6 per cent in the first quarter, Australian GDP is forecast to expand by about 3¼ per cent per annum this year, down from 3.9 per cent recorded last year. Korean growth is expected to accelerate partly in response to the recent 10 per cent fall in the effective exchange rate. We expect growth to exceed 6 per cent this year and inflation is expected to accelerate in response to high oil prices and the weak exchange rate. Chinese growth is forecast to moderate only slightly this year, as the last minute preparations for the Beijing Olympics and the event itself are expected to provide a boost to domestic demand in the second half of the year. Output growth in Taiwan is likewise expected to moderate to about 4¾ per cent on an annual basis.

Over the past fifteen months oil prices have steadily risen from around $60 a barrel to over $100, as we can see from Figure 1. The projections in our forecast are based on information from futures markets and on projections by the US Energy Information Administration, and as prices have risen there has been increasing evidence that they are considered to be overshooting a sustainable position, as can be seen from our projections for oil prices. Oil prices are expected to fall back to $90 a barrel by the end of 2009. Hence the current oil price shock can be seen as a combination of a temporary increase and a permanent increase in oil prices. The impact of increases in oil prices on growth depends in part on the reasons for the increase, with the effects of supply reduction induced increases in prices being more negative than demand induced increases in prices. A supply reduction involves a loss of revenue for producers as compared to a fixed volume demand induced rise in oil prices, and hence a supply reduction would result in lower levels of imports by oil producers.

We assess the adequacy of saving in the United Kingdom from a macroeconomic perspective. We present conditions needed for wealth to grow in line with income and discuss the circumstances in which capital gains can represent a substitute for saving. We show that reference to balance sheets can be misleading because they fail to identify the cost of future consumption. A savings gap of between £16.5 bn and £66 bn is identified before taking account of the effects of demographic change. The outcome depends on whether one regards rising house prices as a consequence of fixed supplies of land or as the outcome of failing to invest enough in housing with the upper figure arising in the latter case. Policy measures to reduce the savings gap are discussed. These include appropriate use of fiscal policy and taxation of credit.

In the January Review discussion of the US current account imbalances, we explored the links between the US current account deficit and exchange rates, and focused on the economic adjustments required to correct the US 'triple' deficits. Using NiGEM, we illustrated that a sustained adjustment in the US current account deficit cannot be achieved through a temporary nominal depreciation alone – whether risk or policy driven – but also requires a redressing of the government and household imbalances and a consequent increase in national savings.

In the past three years the US dollar has been declining whilst the US current account deficit has expanded, and these two developments are clearly linked. However, the causes of the decline in the dollar and the solution to the US deficit may not be as closely related as at first may appear. The emergence of a sustained deficit does not automatically necessitate a fall in the exchange rate, and a fall in the exchange rate may not correct such a deficit. Deficits can exist if the currency moves above its sustainable real exchange rate, and a real depreciation can remove such a deficit. Deficits caused by exchange rate movements are likely to be more temporary than those that either emerge for long-term structural reasons or result from structural imbalances in the economy. A structural deficit can be the consequence of low domestic saving or high domestic government borrowing. If domestic investment is very profitable then even high levels of domestic saving may still result in a savings shortfall, and the high returns may induce a structural capital inflow which will produce a sustainable current account deficit as a consequence. All these factors have influenced the increase in the US deficit in the past decade, and it is difficult to see how a correction to the deficit can occur without one of the domestic drivers changing in some way. Here we present a set of simulations using NiGEM to examine the impacts of alternative adjustment scenarios and their global implications. Before adding to the debate about the possible remedies, we will attempt to establish the sources of the current conjuncture, as the alternative adjustment paths for deficits and for the dollar depend on the sources of misalignment.

Output growth in 2004 was 3.1 per cent, and the preliminary estimate for growth of GDP in the first quarter of 2005 was 0.6 per cent, slightly higher than on our early estimate. Relatively robust growth over the recent past suggests to us that the output gap has now closed, as we can see from chart 2. We anticipate that growth will rise further in the second quarter.