Economic Report of the President

some countries, and in the United States a more formal incomespolicy has played a role. Wage moderation may also have reflectedthe higher average levels of unemployment and associated labormarket slack that prevailed in 1979. In some countries—especiallythose where the oil-price shock has been absorbed most rapidly suchas Germany and Japan—wage moderation may reflect an implicitsocial consensus under which unavoidable reductions in real incomesare accepted by wage earners in the understanding that the distributionof income will not thereby be shifted to their disadvantage.Although the adjustment to the recent runup in oil prices has proceededrelatively smoothly in most countries, it cannot be denied thatthe process is very costly. While the increased oil bill due to the pricerises of 1979-80 amounts to about 2V2 percent of the combined GNPof the OECD member countries, the cost in lost output is muchlarger. Taking into account the effects of both the oil-price rise itselfand the restrictive monetary and fiscal policies it called forth, theOECD estimates that the level of GNP in the OECD member countriesmay be some 6 percent, or about $500 billion, lower by the beginningof 1982 than it would have been in the absence of the oilpricerise. While this estimate might be somewhat on the high side, itis nevertheless clear that even smooth adjustment cannot preventmajor secondary repercussions.RISKS IN THE OUTLOOKExcluding the United States, real GNP in the major industrialcountries is projected to rise at about a 2 percent annual rate fromthe second half of 1980 to the first half of 1982—a pace unlikely tobe rapid enough to prevent some further increases in unemployment.Inflation rates in the industrial countries outside the United Statesare projected to slow—averaging about 8.5 percent by the first halfof 1982, as compared to 11 percent in the second half of 1980.The possibility of worse outcomes cannot be dismissed, however.In particular, one cannot be entirely confident that the pattern ofwage moderation will continue, inasmuch as the reasons for it are notfully understood. A continuation of relatively restrictive monetaryand fiscal policies in most countries is widely viewed as necessary tocontain this risk, but these policies may also slow recovery by morethan is now projected. More critically, the situation in the oil marketis once again precarious following the interruption of supplies fromIran and Iraq. A further large increase in oil prices in 1981 could underminethe still fragile process of consolidation and recovery. Thefollowing section addresses this issue in more detail.190