Since we last reported, the most important economic event has of course been the re-introduction of a form of incomes policy as set out in the White Paper ‘The Attack on Inflation’. The publicity surrounding the introduction of the new policy has however served to mask the startling nature of recent developments in the ‘real’ economy—startling both in relation to past experience and, unfortunately, in relation to our May forecast. They suggest that, so long as the £6 pay limit is generally held to, the focus of concern is now likely to shift rapidly away from inflation and the balance of payments and towards unemployment.

The recession had probably reached its trough by the middle of the year. Total output in the United States hardly changed in the second quarter and the industrial component began to rise slightly in June, while in Japan industrial production has been increasing since March. On the other hand it now appears that in a number of other industrial countries, notably France and West Germany, output in the early months of the year was substantially lower than we suggested in May and the decline in OECD's aggregate GDP will probably be of the order of 2–2½ per cent for 1975 as a whole. In 1976 we now expect an increase of nearly 5 per cent.

The formidable problems of estimating stable econometric relationships explaining capital expenditure which are usable for forecasting purposes are well known. These are attested by the fact that despite the very large number of regression studies in the field no clear consensus has yet emerged among economists as to the determinants of investment behaviour. Given the difficulties of econometric model-building it is hardly surprising that in practice considerable reliance should be placed on the concrete evidence about future investment plans afforded by business surveys when making short-term forecasts of investment.

This article traces the development in the British gas industry of pressures to innovate and of the industry's response, not in any great depth but as an illustration of the complexities of the innovation process and of the variety of factors which may typically be involved in bringing it to fruition. Innovation occurs within a given system; in order to understand why it occurred and the reasons for its success or failure it is important to observe the working of the system as a whole, the connections between the industry concerned and other sectors of the economy and the factors which encouraged or delayed innovative activity.