Hamish McRae: Don't panic! The golden age is not over

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The Independent Online

One of the great things about Independent readers is their loyalty – they hang in there through all sorts of vicissitudes – and one of the ways they show that is to remind us of what we wrote some time earlier, be it good, bad or indifferent. Since any economic writer is to some extent in the prediction business I have tried to be orderly about this. It is only by getting things wrong that you test your own judgement. And so every five years, starting at the end of 1992, I have tried to forecast half a dozen of the big themes for the next five. A reader in Dublin has just reminded me of what I wrote at the beginning of 2003 and asked me to have a go at the period to 2013.

First, though, you might reasonably ask about the last lot. I would give myself four decent hits, one near miss and one spectacularly duff shot.

If you go back to January 2003, it was clear that an economic recovery would take place but we were still pretty shell-shocked by the falling share prices, the end of the dotcom boom and of course the aftermath of 9/11. So I predicted that by 2007 the economy would be booming but that there would be difficult years in between. I would count that as the near miss: there was indeed a boom last year but the run-up was easier than I had expected. Looking back, that was because monetary policy, particularly in the US, was much looser than I expected.

The hits? One was that the US and UK would grow faster than the big eurozone economies, Germany, France and Italy, over the five-year period, something that they actually achieved almost every year. A second was that the UK would not join the euro, something that looks obvious now but was not at all obvious in 2003.

The next hit was that China would be the world's third largest economy, after the US and Japan, around 2007. Well, we don't yet have figures for 2007 and it may be that China passes the present number three, Germany, in a few months' time, but I don't mind being six months early.

The final hit was a political one. I know I have bad political judgement but I did predict that Labour would win a third term, with a majority of 45, in June 2005. As it turned out it was May and the majority was 66, but not bad.

What was seriously bad was my prediction on inflation. I thought inflation was dead, not just goods and services inflation, but housing inflation too. So I predicted that UK house prices would be the same at the end of 2007 as at the end of 2002. That of course was completely wrong: they doubled.

Why so wrong? Mainly because I failed to foresee that central banks would push down interest rates to below the level of inflation and let rip on the money supply. We can see now they made a huge mistake and the sub-prime crash, Northern Rock and the other banking consequences are now evident. But it is a poor defence to say that I expected central banks to be more responsible. It also meant that there were sins of omission: no hint of rising oil prices.

Well, that is context for what comes next. There will, of course, between now and the beginning of 2013 be another global slowdown. It may have begun, though I remain more concerned about 2009 than this year. And by 2013 growth will be re-established. The issue is how serious the downturn will be and my judgement, prediction one, is that it will, in the UK at least, be more serious than the post-2000 dip but not as bad as the early 1990s.

Growth in the next five years will come principally from Asia. There will be some kind of bump, some form of economic disruption in China, but it will recover and the strong growth path will continue. India will prosper, racing on. So prediction two is that while China will still be a slightly smaller economy than Japan, it will be poised to pass it, while India will have passed or be about to pass the UK to become the world's fifth largest economy.

This growth will put even more pressure on natural resources, but the market will respond to high oil prices. So while oil will peak above $100 a barrel,I don't think it will reach $200. My prediction for 2013: oil at $120 a barrel. On the other hand, global oil production will be on a plateau and we will be profoundly worried about that. And we will continue to be worried about global warming, though action to combat that will be achingly slow.

Prediction four is easy: we still won't have joined the euro. The harder thing to catch is relative currency performance. My feeling is that the recent bout of sterling weakness will last two or three years, as will dollar weakness. But I cannot see the present high valuation on the euro being sustained. Currencies to bet on? It is pretty obvious but the Chinese yuan and the Indian rupee will both strengthen.

Prediction five is for house prices. Having been so wrong, you should not take this seriously but, given the over-valuation now, I reckon that UK prices will be more or less the same in money terms at the beginning of 2013 as they were at the end of 2007. Not a crash, just a long plateau.

That will depress the UK economy and it will depress the electorate. I don't think we will have as successful a run in the next five years as we have in the past five, largely because we have grown at an unsustainable rate, borrowing to do so.

If living standards rise only slowly then people will tend to blame the Government and more particularly its principal economic architect, Gordon Brown. Things will get worse for him over the next two years, not better, so this parliament will go to the wire.

So, final prediction, despite their reservations, the voters will return the Conservatives to power as a minority government under David Cameron, in early 2010. But, as I said, I have bad political judgement so don't take that too seriously.

Reading this through I am worried about something else. It is that this is all a bit too straightforward, too linear. Yes, there is an economic cycle but we all know that. But there is nothing about Africa or Latin America. There are no "black swans", those unpredictable events that are outside normal limits and that might change everything. It is easy to dream them up: some environmental catastrophe; an even more serious war in the Middle East; a global trade war that would end this burst of globalisation. But intuitively I feel that, notwithstanding the economic cycle, this successful run for the global economy still has legs.

The big point here is that we are now living through an astounding time: not just the most sustained period of rising global prosperity that the world has ever known but one that is rebalancing the world towards Asia. Nothing is forever, but this has such momentum that it is not going to stop easily. In another 20 years' time, maybe this period does come to its natural end; but it will not come to an end in the next five.

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