Chapter I. The Home Economy

The recovery in UK output is now clearly under way, against the background of a world recovery more rapid than we previously anticipated. Inflation has come down from 25 per cent to just below 15 per cent (both on a year earlier and on a quarterly basis). The current account deficit, after a low first quarter, appears to have worsened somewhat and is running at an annual rate of over £2 billion per annum. Looking over the next eighteen months, we can see a continuation of the current output recovery but, because of the drop in the exchange rate, inflation on a year earlier seems unlikely to fall below 10 per cent, in spite of our assumption that the next wages policy is not formally broken. The current account deficit should start to fall from early 1977; this improvement could be sufficient, on the assumption that monetary growth is held down by higher interest rates, to stabilise the exchange rate in the second half of 1977, if at a somewhat lower level than today's. Private investment should recover quite sharply in 1977, but unemployment may fall only slowly from a peak in early 1977 of about 1.3 million. This highlights the fact that this projected recovery, largely based on exports and stockbuilding, occurs in manufacturing and not also, as in 1972–3, in public and private services, which are relatively labour-intensive.