It is that time of the year again when the pundits give their predictions for 2013. Their forecasts have, unsurprisingly, been less than stellar in their accuracy both for what might happen to various economies and especially what will happen on the financial markets. But the exercise is a useful one, at least as far as the economics are concerned, for they help clarify our ideas about general trends that seem likely to persist and throw up some “what ifs?” that might derail things.
Rather than trudge through them, it might be helpful to identify the big themes. Of these, the main one is of a gradually improving world economy, marred by a number of specific threats. The good news is general, the bad particular.
You can find this in a number of official forecasts, including those of the OECD and our own Office for Budget Responsibility. Both recently downgraded their outlook from earlier this year, but both still expect things to be picking up as we move through 2013. This is echoed in private-sector forecasts, such as those from Goldman Sachs, JP Morgan, and ING Bank, all of which envisage growth across the developed world gathering pace in the second half of 2013 and then increasing further in 2014.
There are, however, two barriers to growth. One is the US fiscal cliff (a matter for Congress, pictured above), the other internal tensions in the eurozone. On the first, the good news is that we will soon know the likely outcome. Even if there is no deal before the end of the year when the fiscal tightening is to begin, there is likely to be some accommodation soon afterwards. Put it this way: by Easter, we will know where we are, the issue being how swiftly the US might tighten policy, not whether or not it will do so.
The eurozone issues are much less likely to be resolved. The past few weeks have demonstrated the scale of the tensions. Thanks to the skilful way in which Mario Draghi has played his hand at the European Central Bank, the rate of interest on Spanish and Italian bonds dropped sharply. The ECB only had to say it was prepared to buy government bonds for the required effect. But the advantage gained was fragile. All it needed was the prospect of Silvio Berlusconi’s return as prime minister and the markets plunged.
Realistically, the eurozone will be a drag on global growth next year. The OECD thinks it will contract by 0.1 per cent, while the mid-point of the ECB staff projections is a contraction of 0.3 per cent. But while the eurozone is about 18 per cent of the world economy, it is only 18 per cent. Recession in Europe does not condemn the rest of the world to recession, too.
If the forecasters are right and the second half of 2013 is better than the first, the task of the financial markets will be to look beyond the current valley. That prospect – if not of sunlit uplands, at least not more gloomy valley – has been sustaining share prices. It depends which market and which measure you take, but the UK all-share index is now within 10 per cent of its peak in October 2007. JP Morgan Asset Management ponders whether 2013 will be the first “post-crisis year” for markets and that seems a rather good way of looking at it. Crises by definition cannot go on for long, but the recovery from the last one does seem utterly interminable.
If this is right and 2013 becomes the first year when equity markets are more or less back to normal, there will be one most abnormal issue to be resolved. That is the relationship between bonds and equities. At present, bond yields are the lowest they have ever been, yes ever. No one believes this can last, nor will it.
Why everyone wants to come to Britain
The surge of UK inward migration in the past decade, as shown in the new census, is astounding: the largest the country has ever experienced in absolute numbers, but also proportionate to population – greater even than the Huguenot arrival after the revocation of the Edict of Nantes in 1685. The surge has been driven principally by economics, but why?
We have to wait for economists to crunch the data, but intuitively I think there are three separate forces at work. The first is globalisation. Any enterprise seeking to take advantage of the rebalancing of the world economy needs an overseas hub, and London and South-east England are a good place to start. So a US company wanting access to the European time zone could choose anywhere in the eurozone, but the UK is more familiar.
The second is EU expansion, with the UK giving new EU citizens access to an English-speaking job market, the strongest job market in Europe. That leads to the third, the combination of language and culture. Within the old developed world the Anglosphere is becoming relatively more important. Countries where English is the mother tongue or widely spoken have been growing faster than those where it is not. The UK is an easy entry point.