Modest prosperity is on the horizon

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The Independent Online
Of all the misleading economic forecasts last year - of which there were many - perhaps the most dramatically wrong were those predicting the trend in unemployment. All the big forecasters expected it to rise. Yet it fell. True, in this early stage of expansion, the fall in unemployment has been accompanied by only small rises in employment, but at least it is starting to climb. The British economy, evidently, does seem able to create jobs as it expands - even when that expansion is proceeding at a modest pace.

But what of the future? Most forecasters would expect relatively high levels of unemployment to persist for the foreseeable future. And given the still-high absolute level of unemployment, that is surely right. But the ability of the economy to generate jobs in the longer term may be underestimated. There is a serious problem now, but this many look more manageable in two or three years' time.

Cambridge Econometrics today publishes some brave forecasts for the whole British economy. These are brave because they look forward as far as the year 2005. Naturally, such a long-range forecast needs to be taken with the proverbial pinch of salt. But the outlook it provides should counter the dreary predictions of the gloom- mongers, for it suggests that a sustained period of modest prosperity is within the UK's grasp.

These forecasts are drawn from a large econometric model of the British economy. The model breaks down the economy into detailed industrial segments and, in its latest version, pays particular attention to the fast- expanding service industries.

It is the growth of these which, according to the Cambridge group, will be the main source of new jobs during the next two to three years.

This is encouraging. The group estimates that private-sector services will create 206,000 jobs by the end of 1995. Job growth will be in four main areas: hotels and catering; professional services, such as law and accounting; 'other business services', which includes estate agents, recruitment agencies, security, packaging and secretarial jobs; and miscellaneous services, a catch-all which covers everything else from media and sport to dry-cleaning and funerals.

By contrast, over the same period, jobs in manufacturing will fall by a further 68,000 and a squeeze in public spending will cut jobs in defence and public administration by 52,000.

The structural unemployment problem will persist as many full- time jobs will be lost, while many of the jobs to be created will be only part-time. Nevertheless, there is a net overall gain in employment and a fall in unemployment, which by the end of 1995 is estimated to be down to 2.7 million and falling slowly but steadily.

Looking further ahead, Cambridge Econometrics sees growth running at between 2 and 2.5 per cent through to 2005, which is about the generally accepted level for the natural growth rate of the economy.

Naturally, any such long-range forecast should be treated with caution, but the interesting thing about these forecasts is that even with this fairly modest growth rate, on present trends a lot of things that now seem wrong with the economy begin to come right.

Thus in 2005, according to the model, the current account is in surplus at 1.3 per cent of gross domestic product; the Government's fiscal position is in surplus to the tune of nearly 4 per cent of GDP (some tax cuts coming in the early part of the next century?); the pound has climbed slightly; and unemployment by 2005 is down to 2.2 million.

It will not happen quite like that. Policies will change; there will be shocks to the economy from abroad; there will be spurts of growth and there will be recessions, for all the evidence of the past is that the economic cycle is one of the most persistent features of the market system. On past form we should therefore expect the next recession about the turn of the century.

What the model tells us is a different and more important message. This is that a service-oriented economy such as the UK's can be quite successful at creating jobs, at running a balance of payments current account surplus, and at making people richer.

There is nothing magic about this conclusion. All the model is doing is projecting what is actually happening now: it picks up the structural changes that are taking place and then predicts what would happen if these trends continue.

This provides some answer to the great debate about the economic changes that Britian made during the 1980s: in particular, did we make the mistake of running down industry too fast, or did we merely do early what other countries such as Germany and Japan are now having to do in a less favourable global environment? The implicit answer is that we made the right decision and will now benefit from our ability to build up private-sector services.

For the next two or three years, Britain will look quite successful by comparison with its Continental partners. Unemployment is already below the European average; it will be well below in 18 months' time. The gap in GDP levels will also have narrowed for purely cyclical reasons, for we will have had a couple of years of good growth while the main Continental economies will be only just emerging from recession. But the important thing is not where we are in the cycle; it is whether these structural changes have made the economy genuinely stronger.

This particular report suggests, sotto voce, that they have. Quite aside from being more favourably positioned in the economic cycle, the UK may now be favourably positioned from a structural point of view. Of course the Government could damage the recovery by making mistakes in its macro- economic policies, as it did in the late 1980s. But if the underlying structure of the economy is more appropriate than that of most other European nations, our relative position should gradually improve through the 1990s - even allowing for further mistakes.