1984 was the third successive year of moderate growth. GDP probably went up by something like 2 per cent, following increases of 3 per cent in 1983 and 2 per cent in 1982. The changing pattern of demand over the three years, as the period of economic recovery has lengthened, is summarised in table 1. The left-hand side gives the changes in the main components of expenditure, the right-hand side the arithmetical contributions of these to the increases in total output.

1984 was a much better year for the world economy than most observers, including ourselves, were expecting twelve months ago. Increases of 4 1/2–5 per cent in OECD countries' GDP and probably over 9 per cent in the volume of trade were the largest for at least eight years and far in excess of general expectations. At the same time the developing countries probably achieved GDP growth of the order of 3 1/2 per cent—easily their highest rate since 1979 despite continued restraint of imports, through which they achieved a substantial reduction in their balance of payments deficit on current account. Moreover, inflation, though probably rather faster than in 1983 in the developing countries, did not accelerate in the OECD area. Indeed, while its consumer prices rose, as in 1983, by 5-5 1/2 per cent, inflation measured by GDP deflators appears to have declined further, probably to the slowest rate since the ‘first oil shock’. Neither wage settlements nor commodity prices reacted as strongly as might have been expected to accelerated output growth. Indeed commodity prices weakened markedly during the summer.

On the basis of interviews with management and factory floor employees at 45 matched firms in Britain and West Germany, this article examines the roles of machinery and workforce skills in explaining comparative produc tivity performance. The average age of British machinery was not very different from that found in German plants, but it was less technically advanced, was subject to more frequent breakdowns and breakdowns took longer to correct. Productivity was higher in Germany in each of our matched product groups and the importance of skills at all levels was apparent.

Unemployment in Britain has risen from around 2 per cent in the late 1950s and early 1960s to around 3 per cent today. What accounts for this astonishing increase?