The most striking feature of the Bremen proposals for a new European Monetary System (EMS) was the scepticism, and in many cases hostility, with which they were received by professional economists. The main positions on macro-economic questions—orthodox, monetarist and international monetarist—were all represented among the economists who submitted written evidence to the House of Commons Expenditure Committee, when it examined the EMS proposals last November. All doubted whether the proposals, so far as they were then known, could work, and some predicted an early breakdown. Some took the view that, even if the scheme could work, it would not be to Britain's advantage to join. Such convergence of opinion among professional economists, with monetarists and Keynesians appearing to be in the same camp, is sufficiently unusual to deserve notice. Nor is this just an example of the British giving voice to the prevalent anti-European feeling. German economists, represented for example by the five Institutes, have been similarly sceptical.

The overall pattern of changes in real expenditure and output was markedly different in 1978 from that of 1977 (see chart 1). In 1977, largely because of the undertakings given in the Letter of Intent to the IMF of December 1976, fiscal policy was deliberately restrictive. The stance of fiscal policy was made harsher still by the public expenditure shortfall produced by the operation of the relatively unfamiliar cash limits. There was a fairly small fall in public authorities' current spending and much larger falls in capital expenditures. Private consumption, too, fell as stages II and III of the pay policy operated. Trade to 6 per cent of the labour force. Retail price inflation did, however, fall fractionally from 16.5 per cent in 1976 to 15.9 per cent in 1977 (and to 13 per cent through the year).

We would draw readers' attention to two particular aspects of this forecast. First, we have not made any adjustment for the effects of the current industrial disturbances. Past experience suggests that, provided the disruption is not protracted, losses ofproduction and exports tend to be made up rapidly when normality returns. Since our main purpose is to forecast the underlying trends in the economy, we therefore decided that at this stage we would make no special allowance for the events of January and early February.

Secondly, we have not attempted to allow for the possible but as yet unquantifiable effects of the upheaval in Iran. This may seriously affect both energy supplies, with implications for both the world and the British economies, and UK exports to Iran. But again there is at this point no way of making specific numerical adjustments.

In both cases, any lasting effects that there may be can only worsen the economic outlook presented here. We can do no more than urge readers to bear that in mind in interpreting the forecasts set out below.

1978 was on the whole a year of convergence in rates of economic growth and inflation both between North America and Western Europe and within Western Europe itself. European growth rates in particular came unusually close together, but European rates of inflation still differed quite widely, with particularly high rates recorded in some of the peripheral countries.

Our commodity price indices have been published for twenty years, since the first issue of the Economic Review. They differed from the other indicators of price movements in free international markets available at that time in that their weighting system was geared to the exports of primary producing countries. This pioneering statistical exercise proved worthwhile, since these index numbers are now fairly widely used and their value, as an analytical and forecasting tool, was quickly recognised in estimating, amongst other things, the import potential of primary producing countries.