The dominant feature of the economic environment this autumn has been the uncertainty over the future course of both the economy and government policy engendered by the enforced policy changes of mid-September and the ignominious suspension of membership of the Exchange Rate Mechanism. Although the government has set out a new inflation target as the goal of monetary policy, it appears from the Autumn Statement that growth is now the immediate priority rather than inflation.

The realignment of the ERM in September, and the subsequent withdrawal of the UK and Italy from the mechanism, have caused a degree of uncertainty in the financial markets. In our last forecast we were anticipating a realignment of the lira at the end of September (National Institute Economic Review No. 141) but we expected a more orderly adjustment of exchange rates than took place. We analysed the effects of a realignment in a note in the August 1992 Review, and we expected the consequences to stimulate activity in Europe. The uncertainties surrounding the exchange-rate outlook make our main case less sanguine than it would otherwise have been. The resulting prospects for slow growth in Europe have to be combined with a modest recovery in the US and Canada and continued below capacity growth in Japan. The success of Governor Clinton in the US elections bodes well for growth in the US, at least in the short term, and this may offset the poor performance elsewhere in the OECD. However, the distinct possibility of a trade war following on from the collapse of the GATT round cannot be ignored, and such an outbreak would make our forecast much more pessimistic.

This article presents the results of a benchmark comparison of the relative level of manufacturing productivity in the United Kingdom and the United States for 1987. It shows value added per hour worked in the UK at 58 per cent of the corresponding level in the United States. The UK appears to show relatively high productivity levels in basic goods industries, including textiles, chemicals and basic metals. The benchmark results are extrapolated backwards to 1968 and forwards to 1990, showing a narrowing of some ten percentage points of the productivity gap between the two countries. It is also shown that differences in capital intensity account for only a small part of the productivity gap.

Within the last decade a number of British workplaces have signed agreements incorporating final-offer arbitration (FOA), a well known procedure in the US but unusual in British industrial relations. This is the first thorough study of recent British experience. Data are drawn from a postal survey of 72 plants, yielding information on nearly 300 wage bargaining rounds, and from interviews with eight managers at FOA plants which had disputes under the procedure. A full picture of the style and impact of FOA procedures in British workplaces is documented.

The large increase in unemployment in the last two years and the very different patterns of regional unemployment growth as compared to the last recession have brought about renewed interest in the distribution of unemployment. In the last two years the variation in regional unemployment rates has diminished significantly such that by August of this year all regions in Great Britain had an unemployment rate somewhere between the 11.4 per cent in the North and the 7.8 per cent in East Anglia. Ignoring these two outliers, the remaining eight regions in Great Britain all had unemployment rates between 8.9 and 10.8 percent.

Producing inside the European Community offers various advantages to Japanese firms, many of them related to costs. In manufacturing, for example, it enables them to avoid paying tariffs, to avoid quantitative restrictions, to reduce shipping costs and to obtain better market access. To make the exploitation of those cost advantages worthwhile the production cost differences between a Japanese company's plant in Japan and a plant in Europe should not exceed the advantages to be reaped. It is thus reasonable to expect that while a Japanese transplant in Europe may not be able to achieve parity with cost and productivity levels in its parent it can nevertheless outperform many UK plants in the same industry if the parent was a competitive exporter. Some of the better performance will come from purely technical factors such as more advanced and higher quality products, more efficient production processes and access to higher quality components, all of which can be brought in from outside Europe. However, even after taking account of those ‘technical’ factors efficiency differences remain, largely related to the quality and utilisation of the labourforce.