The chief domestic policy problems of 1971 were the same as those of the previous year: inflation and unemployment. The comfortable balance of payments surplus realised in the previous year was substantially improved, thanks partly to the sluggish condition of domestic output and demand; and the dollar crisis signalled by President Nixon's measures of 15 August, though provoking some awkward problems for monetary management in the interim before the new settlement, seems to have had little immediate impact on the domestic economy.

The basic forecast discussed in this chapter was prepared before the introduction of electricity power restrictions and associated short-time working in industry effective in the main from 14 February. The duration and the effects of this interruption of normal productive activity are as yet unknown, and it was impracticable to incorporate an allowance for them in this forecast. A speculative discussion of the possible impact, however, appears on page 30.

The industrial situation in 1971 was characterised by exceptionally slow growth in most sectors, by stagnation and decline in a few; by a drop in the high level of strike activity, though not in all sectors; by rapidly rising unemployment, particularly during the second half of the year; and by some signs, during the last few months, of a modest slowing down of the high rate of wage inflation which prevailed in 1970 and most of 1971. The small increase in production and the substantial fall in the number of people in work were accompanied by an unusually large increase in output per head (table 1).

Last February we suggested that the world economic situation presented governments with two main problems in 1971. One, the problem of world-wide inflation, was generally recognised. The other, the problem of the growing disequilibrium in the balance of payments of the United States, appeared to be inadequately appreciated. OECD, for example, had suggested two months earlier that the United States would combine a real economic growth rate of 4 per cent with a surplus of $2 billion on the current balance of payments. We ourselves predicted a growth rate of 3 per cent and a current deficit of $¾ billion, but even these figures proved over-optimistic. The rise in real GNP reached only 2 ¾ per cent and, partly because of strikes, there was probably a current deficit of the order of $3½ billion.