‘It is not often that a government finds itself confronted with the possibility of a simultaneous failure to achieve all four main policy objectives—of adequate economic growth, full employment, a satisfactory balance of payments and reasonably stable prices.’

The movement of the economy since we last reported seems to have been rather weaker than we were expecting. Output seems to have fallen in the fourth quarter of last year—a development which is all the more surprising since consumers' real incomes have been much higher than we anticipated; real personal disposable income is officially estimated to have risen by nearly 4 1/2 per cent in the third quarter of last year compared with our November estimate of only half this amount. The wage and salary bill rose by 8 per cent in current prices as thresholds were paid under Stage 3 agreements, as London weighting was increased and as post-Stage 3 catch-up settlements became effective. Current grants to persons rose by 15 per cent as the large uprating of pensions came into effect. The Forces too appear to have been given a large pay rise, and threshold increases and London weighting have also raised pay in other parts of the public sector.

Industrial production fell in 1974 for the first time since the 1958 recession. The all industries index showed a decline of almost 3 per cent. This was rather more than the fall in manufacturing production of 2 per cent because the wider category includes activity in mining and quarrying and construction, which were two of the worst hit sectors in the economy. Because of the weakness of these two sectors industrial production lagged behind manufacturing production throughout the year (chart 1), even though output in gas, electricity and water was one of the few growth areas. The only other sectors which saw some growth in 1974 were drink and tobacco, chemicals, mechanical and instrument engineering, shipbuilding, other metal goods and pottery and glass. Throughout the rest of industry the picture was one of decline. In manufacturing three sectors-ferrous metals, bricks and cement, and timber and furniture-suffered falls of over 10 per cent during the year, whilst motor vehicles fell by 9 per cent. The output of the engineering and allied industries as a whole declined by 1 1/2 per cent, which was a slightly smaller fall than for total manufacturing.

1974 ended as it had begun, in an atmosphere of crisis for the world economy. But while inflation remained at or near the forefront of official preoccupations, in other respects the nature of the crisis had been changing gradually as the year progressed. Initially it had seemed that the main obstacles to a normal rate of expansion of output and trade would be shortage of energy and highly unstable conditions in the international currency markets. In practice, however, the vast funds now at the disposal of the oil-producing countries have not so far proved to be particularly volatile and except in the early part of the year the level of petroleum output that they have been prepared to allow has exceeded the importing countries' requirements. Moreover, the weakness of effective demand for oil has been due less to direct measures of energy conservation than to general economic depression throughout the year at a level of output, for the OECD area as a whole, which on average was some 1 1/2 per cent below the rate achieved by the fourth quarter of 1973. This situation seems certain to persist well into 1975 and to bring with it levels of unemployment which, by post-war standards, will be exceptionally high, as well as an initially declining volume of international trade.