The United Kingdom economy remained almost stagnant in 1979 with GDP being only 0.6 per cent higher than in 1978. Not only is this a dismal end to a generally depressed period of seven years but the outlook for the beginning of the 1980s is even worse, as we discuss in chapter II on the home economy. In comparison with the United States, Japan, West Germany, France and the OECD countries as a whole the UK performance has been slow, as is clear from chart I. However if similar comparisons with the other countries had been made in 1969 or 1959 the UK performance would also have been seen to be relatively slow. This picture of a stagnant aggregate economy in 1979 covers up an underlying picture of considerable fluctuation in the components of the economy.

Our general assessment of the prospects for the economy over the next two years has not changed greatly since we reported last November. There have been further sharp increases in oil prices, which lead us to raise the forecast increases of the OPEC average oil price to 60 per cent for 1980 and 20 per cent for 1981 (as against 36 per cent and 15 per cent respectively in November). And this year there has been the steel strike. These events, and other adjustments suggest that the various objectives of economic policy, such as economic growth and the reduction of inflation and unemployment will be missed by a somewhat larger margin. Ironically the balance of payments will be improved in the short run because the effect of the strengthening of the pound reduces the deficit initially (the inverse of the J curve effect which occurs when the pound falls).

1979 was a year in which public discussion of the world economy was dominated from the early spring onwards by concern about oil—first its supply and later its price. As yet, however, the actual impact of developments in this sector on the overall growth of world output and trade appears to have been small.

Our forecast a year ago that the total volume of output in OECD countries would increase by 3½ per cent and the total volume of world trade by 5½ per cent was by no means pessimistic by the standards of the time (OECD a few months earlier had put the growth of member countries' output at 3 per cent and of their trade at 5 per cent). But our output forecast appears to have been correct and the trade forecast probably a little low. In the case of output a slight over-prediction for North America, where the oil situation clearly did have a seriously depressing effect on the fortunes of the important car industry, was balanced by under-prediction for Japan and Western Europe.

Total industrial production (excluding output of oil and gas) and manufacturing production were almost unchanged in 1979 (table 1). This is rather below what might have been expected to accompany a revival of personal income which increased consumption by 4 per cent. The pattern of output through the year was strongly influenced by the weather, which reduced output in the first quarter, and by strikes by the lorry drivers in the first quarter and by engineering and car workers in the third. The fall in output in the first quarter was offset by a high level in the summer, but after the third quarter strikes the level in the fourth quarter recovered to only about ½ per cent above the end-1978 level.

The policy debate which preceded the introduction of monetary targets by and large avoided the practical problems of controlling the money supply. Frequently, the impression was given that the money supply is an exogenous policy instrument, subject to exact measurement and precise control. In reality, the money supply is not a label for a rigorously defined single statistic, but a term describing a concept, or rather several distinct concepts, for which numerous different statistical representations have been proposed. The authorities cannot simply exogenise the money supply (on some definition or other); they can only affect it indirectly by influencing the actions of banks and depositors through, for example, the raising of Minimum Lending Rate or the imposition of the corset. In other words, the money supply is not an instrument but an intermediate target, a target which, given existing instruments and the existing institutional setting, is not at all easy to hit.

The major controversies over alternative strategies for the UK economy are surveyed and evaluated in a non-technical manner, concentrating on the positions of three groups prominent in economic forecasting and policy analysis—the National Institute, the London Business School Centre for Economic Forecasting and the Cambridge Economic Policy Group.