In previous Reviews, we had suggested that the economy would be likely to encounter a phase of particularly sluggish growth in demand and output. The performance since the beginning of this year suggests that this view, so far from being too pessimistic, was actually an overstatement of the prospect for expansion. The national accounts figures for the first quarter, just published, indicate a drop in activity between the fourth quarter of last year and the first of this : but while all three measures of gross domestic product (income, output, and expenditure) agree in this movement, as they do also in showing a fairly sharp rise in the fourth quarter of 1969, it seems probable that they are giving an exaggerated picture of the movement of the economy in these two quarters. This is particularly true of the expenditure measure, which incorporates big changes in stockbuilding between the two quarters. These are probably associated with timing discrepancies in the recording of other elements of expenditure. But even assuming that this is so (which would imply that the first quarter fall indicated by the unadjusted ‘compromise’ figure of GDP in table 1 is overstated), the evidence of the industrial production index gives no reason for thinking that the subsequent recovery of GDP likely to be recorded for the second quarter will be very much more than a ‘statistical’ one, correcting for the previous aberration. The average value of the industrial production index for April and May was rather below that of the first quarter and although some recovery can be expected for June (especially as the May figure was affected by strikes), the underlying trend of the economy during the first six months of the year must appear, at best, to have been no more than slightly upward. The steep rise in unemployment recorded in June—following six months of little change—is consistent with a lagged response to this trend in output.

The last twelve months have been a period of economic stagnation in the United States and exceptionally rapid expansion in continental Western Europe. In the second quarter industrial production was 2 per cent lower in the United States and about 6 per cent higher in continental Western Europe than it had been a year earlier.

The importance of the engineering industry to the United Kingdom economy is attested both by its absolute size (excluding vehicles, its weight in the industrial production index is currently 232 in 1,000) and by its contribution to visible exports (nearly 27 per cent by value in 1969). When it is also considered that engineering products make up a large part of manufacturers' investment in plant and machinery, and that the industry produces to order, it is apparent that an examination of this industry might yield some useful information for the Institute's forecasting work. In particular, the published figures of engineering orders on hand and net new orders and deliveries for both the home and export markets contain information relevant to forecasts for investment and exports. The difficulties of obtaining usable and reliable behavioural relationships for these two variables are well known—in the first case because of the importance of unquantifiabll ‘confidence’ considerations and in the latter because of the need to forecast economic factors and conditions in a large number of overseas markets.

The theoretical work presented in this Appendix is not novel; aspects of it have been comprehensively covered elsewhere in various places. The account given in this Appendix is designed to clarify for the interested reader, and to present in a convenient and readily accessible form, the basis for the methods of estimation employed in the article.

This article arises out of an investigation into the process of the diffusion of new technologies and methods through industry, on which the National Institute has been engaged, with research institutes in six countries overseas, since 1967.