A year ago world output was rising much faster than we realised at the time, as stocks were rebuilt after the recession and consumers began to spend a higher proportion of their incomes, particularly on deferred purchases of cars and other durable goods. Though the pace has not been maintained, the increase in the volume of output in the OECD area still reached 5–5 1/2 per cent for the year as a whole. We expect a steady rate of expansion of some 4–4 1/2 per cent a year in both 1977 and 1978, with fixed investment accounting for a higher proportion of growth than in 1976 and stock movements for substantially less.

If 1975 is remembered as the year when inflation dominated all other issues, 1976 cannot be so simply characterised. It was the year of sterling crises, of worsening unemployment, of public expenditure cuts, of trading wage restraint for income tax relief, and of the IMF visit. The major events are listed in Table 1.

The critical assumption for this forecast is that relating to pay policy when Stage Two expires in July. At the time of writing (early February), formal negotiations have not yet begun. Preliminary positions have, however, been taken up, and it seems clear that the gap between the hopes of the Government and the aims of the trade unions is much wider than at the comparable point in the Stage Two negotiations. Both the Labour Party conference and the Trade Union Congress last autumn passed motions which called for priority to be given, when Stage Two ended, to four factors in the next stage. These were the restoration of satisfactory differentials and the correction of anomalies and inequities, an emphasis on the improvement of the position of the low-paid, the consolidation of Stage One and Two increases into basic rates for the calculation of overtime, piece-work and shift payments, and provision for productivity agreements. Almost independently of the agreed basic norm, a liberal interpretation of these demands could lead to rises in average earnings in excess of 20 per cent. On the other hand, the majority of trade unionists seem to accept the need for continued restraint, though stressing that there is an imperative need for greater flexibility in Stage Three.

In his Letter of Intent to the IMF of 15 December 1976, associated with the application for a $3.9 billion loan, the Chancellor set out the Government's medium-term economic strategy. In this chapter, we consider some of the major aspects of the management of the economy over the next few years in the light of this declared strategy.

Soon after our last forecast of industrial production it became apparent that we had overestimated the strength of the recovery. At the time of that report in August the only indications of a setback to growth were the figures available for June. These showed such a large fall from the previous month that we interpreted them as a temporary aberration. In fact they signalled a step down in the rate of growth and since then the trend has been much lower than in the first five months of the year.

In the recent atmosphere of gloom over the state of the world economy it is interesting to find that our forecast of the growth of output in OECD countries in 1977 is virtually the same as it was a year ago (at 4–4 1/2 per cent in real terms), while growth in 1976 appears to have been above our expectations (5–52 per cent compared with 4 1/2 per cent). Moreover our forecasts last February were not at the time regarded as particularly pessimistic either in terms of the prospect which they held out or in relation to the expectations of other observers. OECD, for example, had predicted only 4 per cent (on unchanged policies).