After rapid growth in 1987 the pace of expansion in the UK economy is likely to slow down considerably during next year. Year on year we expect 4 per cent growth in 1987 to be followed by about 2½ per cent in 1988; through the year (fourth quarter on a year earlier) the deceleration is more marked, and 3½ per cent this year is followed by only 1½ per cent. We were already expecting a slowdown of this kind before the October fall in stock market prices, partly because of the appreciation in the sterling exchange rate earlier in the year and again in the past few months.

Most of the indicators of the British economy published in the past few months have pointed to faster growth of output and demand. 1987, it now appears, may show the largest increase in GDP since the early 1970s. This acceleration is remarkable, considering that the recovery from the 1979–81 recession is now in its sixth year. The course of output since 1979 is the subject of chapter III of this Review.

To a large extent the seeds of the global stock market crash in October lie in the Louvre accord established at the beginning of this year. As we argue below, this agreement was fatally flawed in attempting to fix the dollar at too high a level. This error was initially both masked and aggravated by the extensive use of official intervention as the means of supporting the dollar. By the end of the summer it is estimated that up to two thirds of the US current account deficit was ‘covered’ by official intervention.

Five years has been the average, and indeed the typical, duration of a full cycle in the British economy since the war. For that reason it has been taken as a convenient time span when considering medium-term developments such as the trend rate of growth of output or productive potential. If we now look back five years from 1987 the annual growth rate averages about 3½ per cent, suggesting a marked improvement in trend since the 1970s. This may be the correct conclusion to draw, but it cannot be accepted uncritically since the pattern of five-year cycles seems to have changed.

It is a trivial truth that manufacturing matters while at current relative prices there are plenty of willing purchasers of manufactured goods. The question addressed in this article is whether it is important how much of that demand for manufactures is met from UK sources. There seem to be three general lines of argument which have been pursued. The first is that if manufacturing is low in relative importance then, since the UK is an open economy, it is relatively difficult for other sectors to generate the foreign exchange necessary to pay for the desired net imports of manufactures. In these circumstances the balance of payments acts as a brake on economic growth. The second line of argument is that because of its inherently faster rate of growth of productivity, particularly at the high technology end of the spectrum, an emphasis on manufacturing allows the economy to grow faster. The third argument is largely distributional; namely, that a decline in manufacturing would have wide knock-on effects on other firms and on employment.

Industrial policy as a whole would be a very wide subject, which could only be covered superficially; it makes sense therefore to discuss a fairly small part of it. For present purposes industrial support policies are defined as policies which offer financial incentives in order to encourage private sector businesses to achieve objectives which are judged to be in the general interest as well as—very often—in their own interest. There is, of course, room for argument about precisely what should be included. Both the purposes and the operational practice of such policies have changed rapidly over recent years and I am concerned with their development in the Department of Trade and industry (DTI) during the period of Conservative government since 1979. While this article pas prepared for a conference on manufacturing industry, there is no presumption that the policies are particularly relevant to manufacturing rather than to many other sectors of the economy.

In this election year of 1987 the state of Britain's technology has remained high on the political agenda. Following the critical report from the House of Lords on civil research and development (1986), the government recently announced changes in its machinery and priorities and expressed concern about British industry's (lack of) funding of R and D compared to the main sources of foreign competition (see HM Government, 1987).

The overall aim of the National Institute's research programme in this field is to examine the relative contribution of physical and human capital to productivity with the help of site visits to samples of matched plants in Britain and Germany. A first study, carried out in 1983-4, was based on metalworking plants in Britain and Germany; it pointed to the overriding importance of skills at supervisory and shop floor levels in contributing to the better choice and utilisation of machinery and to a substantial German productivity advantage. The present study was carried out three years later, in 1986-7, and compares part of the wood furniture industry: the production of fitted kitchens. This branch is more standardised in its products—and hence easier to compare—than the more traditional branches of the furniture industry. It now accounts for over a quarter of the value of all furniture sales in both countries.