This chapter contains a brief general account of recent developments in the economy and a short-term forecast to end-1984. (A medium-term assessment is given in chapter 3.) Since our last forecast, published in the May issue, we have re-estimated, and in some cases also re-specified, many sectors of our econometric model. This has inevitably changed some of its properties.

Two short notes are appended. The first discusses the company sector's current financial position and the implications of the forecast for profitability. The second describes the data on wage settlements which we compile as part of our regular assessment of trends in wages and earnings.

Our view of output prospects in the OECD countries up to the end of 1983 has changed quite radically since May, both for this year and, to a lesser extent, for next. Real GDP now seems unlikely to increase by more than 2 per cent in 1983 (2½-3 per cent in 1984) after falling marginally this year (table 1).

The short-term outlook on ‘unchanged policies’ presented in chapter I of slow output growth, rising unemployment and little further reduction in inflation is not encouraging. But in order to form a critical view of policies formulated with medium-term objectives in view, it is necessary to look beyond the short term to see whether the economic ills of the recent past and immediate future could prove to be the foundations of lasting prosperity in, let us say, the mid-1980s. In this chapter we assess the economic strategy now being followed, and how the economy is likely to respond.

The European Monetary System is a joint currency area made up of countries which have not abandoned independent fiscal and monetary policies. This article discusses how it has survived the difficulties normally expected for such an arrangement, in its first three and a half years. The EMS is in modified form a continuation of the joint exchange rate management in which various members of the EC have participated since 1970. The first section summarises the previous experience and attempts to explain why the EMS was introduced, how it was to differ from the earlier arrangements, and what its purposes were. These were a mixture of fairly precise economic targets, longer term economic objectives, and a more diffuse set of beliefs about how the EC should develop and how technical cooperation can contribute to more fundamental agreement. The second section analyses how, on the one hand, the existing characteristics of the present members' economies, and particularly of trade among them, and, on the other, their economic conditions and policies in this period have contributed to the survival of the EMS. The third section examines the performance of the member countries against the specific original goals and finds achievements in the first group of targets, the most short-term; little evidence so far of progress in the second; but perhaps some success in the third, although the nature of these objectives makes judgement difficult.

In this article we compare the determination of bank advances to UK industrial and commercial companies (ICC) in three forecasting models of the British economy: those developed at the National Institute of Economic and Social Research (NIESR), at the Treasury (HMT) and at the Bank of England (BOE). In each of these models the private sector's demand for loans is an important element in the determination of the broadly-defined money stock (£M3), the rate of growth of which has been an important intermediate target of macroeconomic policy in recent years.