Since we last reported in February, oil prices have fallen further and there has been a mildly expansionary Budget. The chapter begins with some discussion of how prospects have been changed by these two developments, and also how our assessment of the current position may have been changed by the latest figures. The forecast is then presented, first in summary and then in more detail.

The outstanding development in the world economy in the early months of this year was the fall in oil prices. But while the broad scale of that fall is clear, it is by no means easy to see in detail what has been happening, as ‘netback’ prices are not generally known and yields of various barter deals are similarly undisclosed. By the middle of April spot prices of Brent and Dubai crude, which can probably be taken as representative for non-OPEC and Persian Gulf oils respectively, were down to around $10-11, rather more than 60 per cent below the level at which they had stood in December before OPEC effectively abandoned its restrictions on prices and production in order to increase its market share. But the fall in the average price at which oil is traded has probably lagged behind the fall in the spot price. There were reports of a substantial volume of business at an effective price of $15-16 per barrel at a time when spot prices were already much lower, and Brent was up again to about $12.50 by the end of the month.

Last year, the unexpectedly slow growth of output in the world economy, and of trade relative to it, reinforced doubts as to whether developing countries would recover from their depression and financing crisis. Since then, the fall in oil prices has altered substantially the outlook for industrial countries. The process of re-examining the prospects for developing countries has scarcely begun.

This note describes developments in their trade and financing over the past five years, since the second oil price rise, as background to the judgement that the trends expected previously would have been economically and politically impossible to sustain. It then assesses the prospect now—after the fall in oil prices.

Although there is some uncertainty about the prices at which trading takes place on the oil market, there is no doubt that the falls in oil prices since the early part of this year amount to one of the most significant economic events of the 1980s. If falls of such magnitude are maintained, investment plans in the oil sector, and depletion policy, could be affected. Furthermore, other supply-side changes may be set in train, due to the relative price (of oil to other fuels) change, and switches in profitability from the oil sector to other sectors of the economy. There are other, more immediate and quantifiable effects of oil price changes however: on demand, on the exchange rate and on prices. In this note we will offer estimates of the second set of effects, abstracting from effects on North Sea oil investment, and from any effects that improved profitability of the non-oil sectors of the economy may exert on investment apart from those associated with the increase in macroeconomic activity. A ‘no change’ assumption for oil investment is made for convenience, and to ease comparison with other simulations reported subsequently in Section 3. As for investment in the non-oil sector, our econometric work has failed to detect an influence for company profits once full allowance is made for expected future sales by this sector.

The emphasis placed in Germany on vocational training and education was explored in previous studies by the Institute. These drew attention to: the greater numbers with vocational qualifications there than in Britain; the generally broader scope of German training, leading to greater adaptability in the face of technological progress; more extensive preparation at school for subsequent training; and the consequences for productivity (see National Institute Economic Review, August 1983 and February and May 1985). This article presents the first of a series of similar comparisons for France and Britain, with particular attention to French full-time vocational secondary schools for 14-17 year olds.