Hamish McRae: And now it's time to get out my crystal ball

Economic View

Here are two predictions for the British economy. One is that the big number for growth this year will be two: it will be around 2 per cent. The other is that un- employment will fall below 7 per cent by autumn next year.Absurdly optimistic? Well, these are both at the edges of the possible. The current spread of forecasts for growth this year as collected by Consensus Economics range from 1.5 per cent to 0.8 per cent; and the Bank of England's implicit projection seems to be that unemployment will not go below 7 per cent for another two years, maybe three. But while there are some qualifications that I will come to in a moment this sort of outcome is consistent with the current data.

This year first. Yesterday we had another set of strong figures from the Confederation of British Industry's distributive trades' survey, with the strongest positive balance for more than a year. You can see the relationship between this and retail sales volume in the top graph, plotted by Capital Economics. It is not a close fit, but if retailers are that positive about their future prospects it would be pretty odd if the present pace of growth of retail sales were to ease off much.

The other recent positive signal comes from turnover in the services industries, a little-noted indicator followed by Simon Ward at Henderson. The basic point here is that services account for some 70 per cent of the economy, so what happens there is hugely important. These turnover figures do not include government, retail or financial services output so account for about 55 per cent of services, and we only have July figures at the moment and only in value, not volume. Still, it is plausible that services output will expand by 1 per cent in the third quarter, leading to an overall expansion of a similar order. We have had reported growth of 0.3 per cent and 0.7 per cent in the first two quarters, so a 2 per cent figure for this year as a whole begins to look quite reasonable.

Besides, there are always the revisions. Last month the "double dip" was duly revised away – it never existed, as some of us have believed all through – and the first part of this year may see further upward revisions as more data becomes available.

The main qualification I would make is that this is all about the onshore economy. If North Sea output continues to be weak, then growth for 2013 could turn out to be below 2 per cent. In addition, if the modest European recovery now taking place were to falter, then that too could chip a bit off growth.

So how quickly will faster growth cut unemployment? Gosh, this is really hard to predict because there are so many variables. For a start we don't how by how much the labour force will increase, because we don't know how many people at retirement age will continue to work or how many people will be pushed towards the UK by the dreadful unemployment in much of Europe. We also don't know what will happen to self-employment and to productivity. Will employers meet additional demand by taking on more labour or will they squeeze more output (and hence productivity) out of existing staff?

At any rate, for unemployment to fall to 7 per cent in a year or so (it is currently 7.7 per cent) and given the prospective growth in the labour force, we would need growth of at least 2.5 per cent and productivity rising by not much more than 1 per cent. The former looks attainable, for the current consensus is for growth above 2 per cent and forecasts are being revised up all the time. But only the slowest growth in productivity? Intuitively I think productivity will indeed take a long time to recover but there is not much evidence either way.

Let's assume, however, that these projections are more or less right. What then? Decent growth this year and next will, I suppose, be taken as an endorsement of the Coalition's economic policies, and at one level that is a fair judgement. It is quite likely that the fiscal deficit this year will turn out a bit lower than forecast, for the latest revenue figures to end-August are quite encouraging. The big taxes are running well up on last year: income tax is up 4.4 per cent, national insurance contributions up 2.8 per cent, and VAT up 2.5 per cent. But remember that the whole process of fiscal consolidation is going much more slowly than originally planned and that our deficit is still larger than that of any other big economy in the world bar Japan, so there should be no self-congratulation by the Coalition. We are only half-way, at best, towards eliminating the structural deficit.

If, however, these growth and unemployment judgements prove right, there will be a reasonable chance next year of a rise in interest rates. That is not what the Bank of England wants us to think. The new Governor, Mark Carney, unwisely decided to give "forward guidance" about monetary policy, which apparently has been misunderstood by the markets and which several members of the Monetary Policy Committee have subsequently sought to clarify. The reality is that the Bank has slightly earlier and much more detailed information than the rest of us, but its judgements in the past have been just as flawed. So here is a third prediction: the first increase in base rates will come in the final quarter of 2014.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooksNow available in paperback
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Ashdown Group: Marketing Services Manager - (communications, testing, DM)

£32000 - £35000 per annum + benefits: Ashdown Group: Marketing Services Manage...

Guru Careers: Finance Account Manager

£Neg. (DOE) + Excellent Benefits: Guru Careers: A Finance Account Manager with...

Ashdown Group: Java Developer - Hertfordshire - £47,000 + bonus + benefits

£40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...

Day In a Page

Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Could cannabis oil reverse the effects of cancer?

Could cannabis oil reverse effects of cancer?

As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

The Interview movie review

You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
Serial mania has propelled podcasts into the cultural mainstream

How podcasts became mainstream

People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
Jesus Christ has become an unlikely pin-up for hipster marketing companies

Jesus Christ has become an unlikely pin-up

Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
Rosetta space mission voted most important scientific breakthrough of 2014

A memorable year for science – if not for mice

The most important scientific breakthroughs of 2014
Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

Christmas cocktails to make you merry

Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
5 best activity trackers

Fitness technology: 5 best activity trackers

Up the ante in your regimen and change the habits of a lifetime with this wearable tech
Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

Paul Scholes column

It's a little-known fact, but I have played one of the seven dwarves
Fifa's travelling circus once again steals limelight from real stars

Fifa's travelling circus once again steals limelight from real stars

Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
Frank Warren column: 2014 – boxing is back and winning new fans

Frank Warren: Boxing is back and winning new fans

2014 proves it's now one of sport's biggest hitters again
Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas