Relative to what we expected following the collapse in the oil price, growth in the OECD economy was disappointing last year and, with activity still not registering a convincing pick‐up, we have lowered our forecast for 1987–88. Previously we argued that the sharp drop in oil prices from around 27 a barrel in 1985 to an average of 15‐16 last year represented a significant boost to real incomes in the oil‐consuming countries. Notwithstanding the corresponding real income loss to the oil producers, we expected OECD demand to rise sharply in the course of last year, with clear benefits to output becoming apparent by the end of the year. In the event this analysis, though correct in outline, has apparently underestimated the negative elements ‐ tighter fiscal policy, the failure of consumers in some countries to obtain the terms of trade gains from lower oil prices and/or currency appreciation, the offset to domestic demand from falling exports. Consequently, we now expect OECD output to rise by only 3 per cent p. a. over the next two years. The corollary of this is that inflation is also unlikely to record a marked increase and this enhances the prospect of sustained output growth in the medium term. The forecast combines steady output growth of around 3 per cent p. a. with inflation stable in the 3–4 per