Next year will be better. That, I should quickly add, does not mean that it will be wonderful. It is more a reflection on just how difficult the past 12 months have been.
Anyone who has been reading these columns may recall that I have warned again and again that 2009 would be the bad year, but as it has turned out it was at the outside limits of what I had expected. We do not have final GDP figures for this year, and won't for some months to come. But even if they keep revising them upwards, as I expect they will, the dip from peak to trough will be almost as bad as in the early 1980s, our worst post-war recession to date.
So what can we say about 2010, aside from the fact that it will be better than 2009, that won't look silly 12 months from now? Let's focus on Britain, though what we do will not be that significant from a global perspective, and our experience will be very much shaped by the solidity or otherwise of the world recovery. I have been looking at several forecasts and they are really quite encouraging. What is more, they have been getting better as the months have gone by. The new forecasts for the UK from HSBC are summarised in the big graph. As you can see, the bank now expects growth next year to reach 2.2 per cent and to rise to 2.5 per cent in 2011. That is up from previous estimates of 1.7 per cent and 2.3 per cent. There are similar upgrades for other European countries, but you might be surprised to know that HSBC is forecasting the UK to have the fastest growth among the large European countries both next year and the year after. It is not at all alone. Goldman Sachs is also positive about UK growth, while the forecasts from both the Bank of England and the Treasury see above-trend growth from 2011 onwards.
If this turns out to be right it will have some further consequences. For example, while unemployment is forecast to climb further next year, it will be coming down during 2011, as you can see in the charts. Exports are forecast to do well and one effect of that will be that the current account deficit comes back to 0.5 per cent of GDP by 2011. So when government spending is cut back, as it will be in 2011, the rest of the economy should be able to take up the baton of demand. HSBC headlines the UK section of its forecast, "Policy is working", praise that poor Alistair Darling rarely gets these days.
As growth gets back to normal, and on these forecasts it will be back to trend rate by the end of next year, other things have to get back to normal too. The budget deficit in particular will have to be tackled. So much has been written about that that I don't think there is any point adding to the comment mountain here, but what is worth observing is that interest rates will have to come back to normal too. HSBC forecasts that base rates will be 2 per cent by the end of next year and 3.5 per cent by the end of 2011.
If this is right, it will mean that the world will have experienced a downturn rather similar to that which hit it in the 1970s. Simon Ward, the economist at Henderson, has done a rather neat comparison with then, taking G7 industrial output for the first period and G7 plus the seven largest emerging economies for the present cycle. That recognises that the emerging countries are much more important to the global economy now than they were 30 years ago, and also that they have suffered much less seriously (indeed in some instances hardly at all) than we have.
As you can see, the overall loss of output is similar and the recovery so far equally sharp. This reinforces the view that the world economy as a whole can sustain decent growth from now onwards. That is another bullish point. We tend to forget that there is another world beyond ourselves, Europe and North America, and that this will be the first economic cycle ever when the principal growth stimulus has come from Asia rather than from Europe and North America.
Come back to the UK. Let's accept those macro-economic numbers are about right, or at least as close to right as it is sensible to say this far ahead. What then? We cannot, I fear, escape from the fact that politics will intrude. An emergency budget will be unveiled shortly after the election – whoever wins the election – because there will have to be. The present programme to cut the deficit is not credible.
The question then will be to what extent might fiscal consolidation (which is a polite expression for cuts in public spending and increases in taxation) hold back the economy?
It would be nice to be able to give a precise response to that, but this is simply not possible. HSBC is working on the assumption that any meaningful consolidation will not occur before 2011, but I am not sure that will be right. The economics are uncertain because though faster cuts in public spending on paper should in theory cut demand, that is counterbalanced by the rise in business confidence that occurs when companies and investors see the government is tackling the problem. If you believe that the former force is the more important, you have to wonder why our huge deficit this year has not had more impact on maintaining demand. You also have to explain why tough budgets in the late 1980s and early 1990s in places as far apart as Ireland, Sweden and India have paved the way for economic recovery.
In any case, politics matter too. It is probably easier for a newly elected government to push through tough measures and so rebuild confidence quickly, than it would be for one to dribble out measures year after year. My guess is that, a year from now, most of the bad news will be in the public domain and we will see the emergency budget as the basis for solid growth.
So, a year from now, what might we be saying? First, we will be relieved that growth has returned. But, second, we will be aware of the legacy of public debt and the need to hold down the growth of consumption. So it won't feel much fun. Third, there may well be some sort of relapse at some stage during the year, a pause in growth, following some kind of new shock. The financial markets are still fragile and confidence both among businesses and consumers equally so. The prospect of a tighter monetary policy may be more unsettling than the prospect of tighter fiscal policy – that goes for the UK but also for the entire world.
The biggest issue of all, and again this is one for all developed countries, will be how to repair indebtedness at every level – personal, company and national – so that we will be in better shape when the next recession comes. Next recession? It may seem a bit rough to be worrying about that when we are barely out of this one, but the more we are aware that there is such a creature as the economic cycle, the better we will be able to prepare ourselves when it bites.
All these attacks on our financial services industry are rather odd
The relentless attacks on Britain's financial services industry are getting out of hand. You might understand the Government attacking bankers after the bailouts; the scale of liquidity support has been enormous. There is no doubt too that the partial nationalisation of Royal Bank of Scotland and Lloyds-HBOS was essential. But there is an important distinction to be made between liquidity support and solvency support. On the former, the taxpayer looks like making a profit. On the latter, the projected losses are small and there may even be a profit there too.
But politics are politics. More surprising have been the attacks from public officials. Lord Turner is a regulator and must be independent, but to call, as he did a few weeks ago, some banking activities "socially useless" was surely inappropriate. And for Andy Haldane, a respected official at the Bank of England, to say that if regulation leads to some banks moving to other centres that might be "a price worth paying", is really odd – on three levels. First, can it be good for the world economy for banking functions to move from London to less well-regulated centres? Second, a key historical part of the Bank's role has been to foster the development of the City. It would have been unthinkable when Eddie George, Lord George, was governor for any Bank official to say something that might damage it. And, third, financial services are a massive export industry. Do we really want that industry to move to other centres?
Financial services earned the UK a balance of payments surplus of £38.6bn last year, up from £31.7bn in 2007. If you are interested, there is a graph on page 43 of the Balance of Payments "Pink Book" 2009. The UK is a massively successful exporter of financial services, bringing foreign currency into the UK. Germany, by contrast, is a massively successful exporter of motor cars. Because Germany is part of the eurozone, exports to other eurozone countries don't bring in foreign currency, but its exports outside the EU in 2007, the most recent figures, were €32bn. So, would you expect to hear a German official saying that if German car firms moved business abroad it might be "a price worth paying"? I think not.Reuse content