The increases in real energy and capital costs caused by the oil price shock and financial turmoil are likely to reduce the productive potential of OECD economies. The extent and the speed of these effects are very difficult to estimate and will depend on how permanent the shocks prove to be. At the same time, past and ongoing structural reforms are boosting potential output, but with long and unknown lags. The net effect has been to increase the uncertainty that surrounds measures of economic slack, such as the “output gap”, the unpredictability of which is a recurrent difficulty for macroeconomic policy setting at the best of times. At the current juncture, heightened uncertainties about supply-side developments combine with weakening activity and concerns about inflation to compound the risk of policy errors.