The managing director of the International Monetary Fund said recently that the world is facing ‘the most difficult combination of economic policy decisions since the reconstruction period following World War II’. It is unfortunate that action, so far, in the face of mounting inflation and balance of payments difficulties, has been at a national level rather than on the international level which the situation requires. In particular, there is still an urgent need to make concrete arrangements for dealing with the capital flows resulting from the rise in oil prices, and to offset the deflationary impact of the latter, while, unless aid is increased substantially, the plight of some developing countries will become increasingly desperate as the real value of existing aid flows is rapidly eroded by inflation, and as their oil bills fall due for payment. Nevertheless the restoration of oil supplies combined with the delay between the raising of prices and actual payments at the new rates seems to have induced an unwarranted mood of euphoria in the consuming countries in the first few months of this year.

The February issue of the Review was affected by the energy situation as to both length and the need for special treatment of the oil situation. Much material of the kind normally included in the pre-Budget issue was therefore omitted. For this reason the current issue contains rather more material than usual on the domestic economy in the form of a review of economic events over the last 12-18 months. A general review (pages 9-14) is followed by an assessment of various forecasts of the economy in 1973 (page 14) and then some discussion of the behaviour of prices and incomes since the introduction of the counter-inflation policy in November 1972 (page 17). Balance of payments developments are discussed on page 22. An analysis of trade and other developments since the United Kingdom's entry into the EEC begins on page 24 and the normal short-term forecast appears on pages 28-45.

We remarked in our last issue : ‘It is not often that a government finds itself confronted with the possibility of a simultaneous failure to achieve all four main policy objectives—of adequate economic growth, full employment, a satisfactory balance of payments and reasonably stable prices.’ In the context this applied specifically to the United Kingdom, but the possibility is becoming increasingly real for the greater part of Western Europe, with West Germany the most obvious exception, and even for Japan it is less remote than it might quite recently have seemed.

Previous articles(1) have examined the record of the National Institute's forecasts for the United Kingdom economy. This article assesses its forecasts for the economy of the world as a whole.

Britain has traditionally been a large net importer of basic foodstuffs, raw materials and fuels, the resulting deficit being covered by net exports of manufactures and by invisible earnings. The net export position in manufactures was the result of both large exports and very small imports. Since the war, however, and more especially during the 1960s, there has been a radical change. British exports of manufactured goods have lagged behind the growth of world exports, while imports of manufactures have risen extremely rapidly. Between 1963 and 1972, almost three quarters of the rise in visible imports, measured in balance of payments terms, is attributable to manufactured goods. Thus net exports of manufactures have barely risen in absolute terms, and their size in relation to total exports of manufactured goods has diminished sharply.