The crisis in the Middle East could damage the prospects for world growth and price stability. The possibility obviously cannot be ruled out, given the similarities which exist between the pattern of events now unfolding and the circumstances of the ‘oil shocks’ in 1973 and 1979. In preparing our forecasts, (in the first week of August) however, we have assumed that the effect of oil prices is relatively minor, and relatively short-lived. The possibility of a larger and more sustained rise is discussed in an annex to the chapter on the world economy.

We start our forecast this time with an exchange rate 9½ per cent higher in the third quarter of this year than we anticipated in May. The main reason for the appreciation of sterling was probably a reassessment by the market of the likely course of UK monetary policy over the next year or two. The likelihood of an early and significant fall in interest rates has receded, as forecasts of the underlying rate of inflation have been revised up. At the same time the commitment to join the exchange-rate mechanism has become firmer, and the Chancellor has been interpreted as wishing to ‘talk the rate up’.

Uncertainties over the prospects for the oil price mean that the short-term forecast is subject to a wider margin of error than usual. The Iraqi invasion of Kuwait could lead to a reduction of world oil production by at least eight per cent immediately and has already produced a significant rise in oil prices. Our central forecast assumes that in the short term oil prices will stay firmer, but that in the longer run there will be no major change in oil market conditions. We have assumed that oil prices (or more precisely the arithmetic average of Brent and Dubai spot prices) will be around $25 per barrel in the second half of 1990, but that they will fall thereafter. This should leave crude oil prices in the range $20–22 per barrel by the end of 1991. Annex I to the chapter investigates the effects of an oil price rise on the world economy, and looks in particular at the distribution of the effects across the major economies. The conclusion of the Annex is that a 25 per cent rise in oil prices is likely to raise inflation in the major seven economies by only a quarter to a half a per cent in the short run, and to lower output by up to a half per cent.

It is now widely recognised in advanced industrialised countries that ability to exploit technological innovation competitively is dependent upon the levels of skill available in the working population. In the early 1960s, both France and Britain took steps to remedy the problem of levels of craft and technician-level skills which were inferior to those of Germany. In the intervening twenty years, these intermediate skill levels have become increasingly important, in particular for manufacturing efficiency as micro-electronic control equipment and the efficient logistical organisation of production demand a new and wider range of technical services to maximise machinery utilisation and to combine it with the satisfaction of more sophisticated consumer requirements.

International comparisons of levels of labour productivity are rare in the field of productivity analysis. In the case of Anglo-French comparisons, for example, it has already been widely established that the French economy was more slowly transformed from an agricultural economy into an industrial society than the United Kingdom; and that since the last world war manufacturing output has increased much faster in France than in Britain. The aim of the present study is to complement previous comparisons of growth rates of manufacturing productivity in Britain and France with estimates of the current differences in the levels of output per person-hour worked in a dozen branches which constitute the manufacturing sector.

The completion of Mrs Thatcher's first ten years as Prime Minister stimulated many surveys of the economic policy of the government during that time in office (for instance Layard and Nickell 1989; Bean and Symons 1989). Authors writing at that time were concerned particularly to make comparisons with the performance of the predominantly Labour governments that had been in power during the previous economic cycle, running from 1973 to 1979.

The nature of the association between inflation and the level of unemployment has been a persistent issue of controversy over the last three decades. Initially, attention focussed on the statistical relationship between nominal wage inflation and unemployment— the Phillips curve—which could be seen equally as a relationship between price inflation and unemployment, if prices are a constant mark-up on wages. This was quickly adopted as a menu for policy choice, describing the trade-off between increases in unemployment and reductions in inflation. By the 1970s, however, the question was whether a long-run trade-off existed at all, the OECD economies having experienced rising unemployment and, simultaneously, rising inflation. The subsequent re-examination of labour market behaviour introduced the concept of an equilibrium rate (the natural rate) of unemployment which, in the monetarist view, was not amenable to demand management policies. More recent developments reflect a growing concern with the supply side of the economy, including the question of what determines the non accelerating inflation rate of unemployment (NAIRU).