Three major features dominate our forecast. First, the collapse of the Japanese stock market has not yet had a major impact on the rest of the world, but it is expected to slow activity down in that country. Second, the continuing public sector deficits in Germany in combination with above target money supply growth have caused the Bundesbank to tighten its monetary policy, and this has been acting as a break on output growth throughout Europe. High short-term and long-term interest rates have had major consequences. They have been a major factor behind the strains that have been re-emerging in the ERM, and the possibility that a realignment has to take place cannot be ignored. Third, high nominal real interest rates in Europe also appear to be a factor behind the weakness of the dollar. The current German-US interest differential is higher now than at any time since the end of the Bretton Woods system, and the continual monetary easing in the US has been a major factor behind the fall in the dollar effective rate.