Expert View: Out with the old, in with new movers and shakers

2006 will be the crunch year for the UK economy and for UK plc
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I woke up this morning and thought that the state should be smaller. David Cameron, please note. The new leader of the Tory party has had a bumpy start to the year, ruffling feathers and promising some dramatic changes. But this new year, he is just one of many key individuals taking up a new position, and offering new directions. I think the commentators who are predicting 2006 will be more of the same have got it wrong. The coming year will be very different.

It perhaps says something that the Tories have turned to a quasi-aristocratic old Etonian to give them a contemporary feel, but you have to hand it to him, he's trying. An advert and interviews in last Sunday's papers have sparked talk of the Conservatives at last having a "clause 4 moment" (recalling when the Labour Party finally abandoned nationalisation). This time, however, it would appear that you and me in the business community are the sacrificial lambs.

"A lot of people think all we're interested in is shareholder value and big profits ... [In fact] we will not just stand up for big business but stand up to big business when it's in the interests of Britain and the world [sic]."

All in all, a pretty remarkable statement coming from a Conservative leader - apparently the product of some focus-group discussion.

I have to say, I think this is a strange place for the Tories to start. Mr Cameron, does the electorate really wake up in the morning and think your party is too pro-shareholder value? Other millstones - like perceptions of Tory policy on race, Europe, health and education - come to mind, let alone memories of Black Wednesday.

Maybe this is mere electoral spinning, but it is a mistake - because 2006 will be the crunch year for the British economy and for British business. And the reason for that? The state really has got too big again - thanks to Gordon Brown's disastrous stealth taxes and wasted health spending - and is squeezing the life out of the economy. Whether Mr Brown can balance his books and avoid killing the golden goose is, in fact, the Government's weakest front. This is not the moment for Mr Cameron to retreat. He should be chasing Mr Brown across the floor of the chamber; Prudence has become the Great Tinker.

This is especially true given the difficult climate for world business. Britain has had a free ride in recent years on the back of world economic recovery led from the US. Maintaining this is in the hands of another new man at the helm, Ben Bernanke. The new chairman, from next month, of the US Federal Reserve also promises some change of emphasis, specific inflation targets being a real possibility.

Can Mr Bernanke achieve a soft landing? The American housing market is rampant, eclipsing even what we have seen on this side of the Atlantic. Can it be gently deflated? It has been estimated that housing created two fifths of jobs growth in the US last year. Too sharp a slowdown could savage the economy, in turn causing a run on the dollar and pushing some companies (General Motors?) into bank- ruptcy. Mr Bernanke must choose his shots well.

Of course, ever-optimistic broker forecasts for 2006 paint a scenario in which a soft US landing combines with strength in the emerging markets and (finally) a recovery in Europe. The latter is long overdue, and here German economic policy will be vital. Another newcomer is in charge: Angela Merkel. The past few weeks have seen analysts scouring her policy statements to find the kind of radical reform necessary to revive Europe's moribund engine. Mrs Merkel's manoeuvrability is limited, but we can expect some definite differences. A cut in the German budget deficit looks at last to be a priority, and it now seems that the replacement for Otmar Issing at the European Central Bank will be a Merkel man, Jürgen Stark.

Changes of direction will characterise this coming year - 2006 will be different. These new movers and shakers have their work cut out.