When we carried out our forecasting exercise in February, we were awaiting a decision about another incomes policy beyond August and, on the exchange rate assumption we made then, which corresponded to the authorities‘ stated aim of 'maintaining competitiveness', we could foresee no improvement in the current external balance within the forecast period. The Budget was yet to come but it seemed clear to us that the Chancellor had little room for tax cuts, given the external position. We advocated an incomes policy with a low norm, combined with a modest amount of devaluation designed to start improving the current balance; a small tax cut of £½ billion could, we thought, be incorporated to assist acceptance of the incomes policy without preventing this improvement.

Output in the OECD area both last year and in the early part of 1976 now appears to have been higher than we previously supposed. It now looks as though it should increase in the aggregate by about 5 per cent both this year and next after falling by only 1½ per cent in 1975. For industrial production alone, which last year declined by 8 per cent, we expect a rise of 9–10 per cent in 1976. Business investment is still at a low ebb, but rebuilding of stocks will make an important contribution this year and demand from the personal sector has strengthened markedly both for housing and for consumer goods and services.

Prospects for supplies and prices are the subject of this article. No major supply shortages are foreseen for the next ten years. Dependence on OPEC oil will be reduced by production from the North Sea and elsewhere. Other commodity cartels are unlikely to have lasting success. Oil prices are forecast in two alternatives for 1985, representing the two extreme values of the possible wide range. Prices of food and industrial materials are projected on the basis of the lower oil price scenario and on assumptions concerning world economic growth, trade and inflation. They are expected to rise in the coming ten years faster than prices of manufactured goods.