ECONOMIC

GENERAL DEMAND TRENDSEconomic developments in the individual countries clearly show a considerabledivergence among underlying conditions and therefore amongpolicy concerns. In those countries where marked progress had been madein turning around inflationary expectations—Germany, Japan, and theUnited States, for example—concerns centered on the sufficiency of thepolicy stimuli effected earlier. In a number of other countries inflation rateshad diminished only little or were accelerating once more, partly becauseauthorities in these countries had generally not moved to contain inflationarypressures during 1974-75 to the extent that other countries had done.The authorities in these countries, notably Britain, Italy, France, and Canada,were thus forced, partly by external pressures, to institute measuresaimed at cooling the inflationary climate during 1976. Despite the growingdivergence of policy aims among major countries, however, the shapeof the recovery revealed a number of striking similarities.The slowdown in the growth of output over the summer months of 1976,aside from the expected diminution of the stimulus derived from earlierexpansionary policy measures and inventory changes, generally reflectedone major shift in the demand outlook: private investment demand failedto revive to the extent that might have been anticipated on the basis ofsurveys of investment intentions and general economic developments. Thissluggishness occurred in many countries, despite the fact that replacementneeds have been cumulating for some years and a general recognition thata return to sustained full-employment levels in most countries presupposesa shift of resources toward investment.In Germany and Japan, for example, past recoveries have usually showna considerable rise in investment demand following an export-led upturn.In the current cycle this pattern has not been repeated, despite the fact thatthe early stages of the recovery were clearly export led. Further, in a numberof other countries as well, investment is turning out to be less strong than pasthistorical relationships would indicate. Econometric evidence based onmodels for a number of countries participating in Project LINK supportsthis view.The financial position of the business sector in many countries does notappear to be a factor restraining investment decisions at this time. The considerableimprovement in the liquidity positions, and in the structure ofbalance sheets of nonflnancial corporations, that had been evident in 1975apparently continued at least into the first half of 1976. The cyclical risein corporate profits and the improved climate in bond and equity marketsallowed corporations to bring their internal financing and debt-to-equityratios into better balance. Flow of funds data for the United States, Japan,Germany, France, and the United Kingdom collected by the OECD show224-250 O - 77 - 8109