Since we last reported, in May, the economy has moved broadly in line with our expectations then. We now estimate (see notes below) that total output fell by about 2 per cent during the first half of the year and it does not appear to have returned in the recovery months to levels any greater than those achieved last year. Unemployment has however begun to turn up rather more quickly than we had anticipated, rising by an average of 19,000 per month between May and August.

We quoted in May the judgment of the Managing Director of the IMF that the world was facing ‘the most difficult combination of economic policy decisions since the reconstruction period following World War II’. At the same time we expressed doubt as to whether the governments of the major industrial countries possessed either the stability at home or the mutual cohesion on the international plane which would fit them to rise to the occasion. Subsequent developments have not been reassuring.

The most notable and best publicised achievements of the European Economic Community (EEC) have been in liberalising trade between its member countries. But apart from setting up the ‘common market’ from which it derives its popular name, the Treaty of Rome gave the Community the duty ‘to promote …. an harmonious development of economic activities, a continuous and balanced expansion, an increase in stability, an accelerated raising of the standard of living and closer relations between the Member States belonging to it’. In addition to the elimination of barriers to the passage of goods between members and the establishment of a common agricultural policy and a common basis of trade with the outside world, the Treaty provided specifically for freedom of movement for persons, services and capital, a common transport policy, a system ensuring that competition should not be distorted, procedures for coordinating economic policies and remedying balance of payments disequilibria, the approximation of laws to the extent required for proper functioning of the common market, and a European Social Fund and European Investment Bank.

The National Institute has for some time prepared and published regular forecasts for periods up to 18 months ahead of the United Kingdom's balance of payments on the invisible items in the current account as well as visible trade. The results for the invisible items have compared fairly well with those for visible trade, perhaps because the latter have until recently been the more irregular and difficult to predict. Moreover the very stability of the invisible balance during the 1960s suggests that either many of the items involved are comparatively insensitive to changes in the general economic climate or the effects of such changes were largely offsetting. In neither case could regression analysis be expected to give wholly satisfactory results, particularly in view of the poor quality of some of the data. Nevertheless it seemed worth while to see whether some of the invisible items could with advantage be predicted by formal methods rather than, as in the past, by assessing current trends and making purely ad hoc allowances for such factors as the likely course of shipping freight rates, oil prices and the level of economic activity in the United Kingdom and overseas.