Since economists got things so wrong last year, what notice should we take of their predictions this year? Of course, economics is not just about forecasting, but that is its public face, and last year was a bit of a catastrophe. Look at the UK. We don't have final figures yet (and the figures are invariably revised) but it does look as though growth last year will turn out at or below 1 per cent, while inflation looks like being 4.7 per cent. I can't find a single mainstream forecaster that came in below 1 per cent, nor any that expected inflation at more than 4.5 per cent.
If everyone was overly optimistic last year, what about this one? Well, economists are human beings and, having been humiliated last time, they display an inevitable caution now. So most predictions for growth this year are very downbeat: for example, the Office for Budget Responsibility expects 0.7 per cent, the same as Goldman Sachs, while the OECD expects only 0.5 per cent. The most gloomy forecast is that of Standard Chartered Bank, at minus 1.3 per cent, and that sort of extreme outcome should not be dismissed.
On the other hand, the stream of data of the past few weeks has not been that dreadful, as private consumption, which accounts for half of final demand, seems to be holding up. So, too, is total employment, with the private sector just managing to offset the loss of jobs in the public sector – unemployment is rising because there is an increase in the size of the workforce. Were it not for one huge uncertainty, the outlook would be rather brighter.
That uncertainty is Europe. There has been such a welter of comment, not to mention anguish, about the future of the euro that there is not much point in adding to it here. I suppose the only new feeling I have on this is that the European high command, in the shape of Angela Merkel, is now coming to accept that there has to be a Plan B to cope with Greece leaving the eurozone. It will involve trying to put a line in the sand to stop Portugal also leaving, for if that were to happen, then Spain would be next in line and the project would be in even deeper trouble than it is now. Since the principal policy weapon for keeping the whole thing together is to heap more austerity on the fringe countries, it is hard not to see some sort of eurozone recession this year. The only issue is how deep.
For us, what matters is our ability to replace any decline in exports to Europe with exports elsewhere. Exports of goods are 12 per cent of GDP, while exports of services are another 8 per cent. Fortunately, the US remains our largest single export market, while Germany, the one European country managing quite well, is number two. But it would be naïve to expect us to escape unscathed from a severe eurozone recession. Some exporters, notably our luxury car makers, are doing wonderfully selling to the rest of the world, but physical proximity to Europe does matter.
So the outlook remains somewhere between OK-ish and pretty dreadful. What should we look for to tell us which end of the spectrum it will be? Aside from the euro, I suggest two. They are connected.
The first is how domestic consumption holds up. The Christmas shopping season was fascinating because, dire predictions notwithstanding, it seems to have been not too bad. There may now be a flop and that should worry us all. But if inflation comes down quite swiftly – the second thing to look for – then, as people get more goods and services for their pounds, real final demand will be supported. The faster inflation falls, the stronger the recovery.
China's luxurious tastes
China rides to the rescue of Italy, and not because it is buying unwanted Italian bonds. No, it is investing in something altogether more flamboyant, the world's largest maker of luxury yachts. The Shandong Heavy Industry Group-Weichai Group announced yesterday that it was buying a 75 per cent interest in the Ferretti Group for €374m: "Developing the yacht business is one of the group's strategic goals for the next five years," it stated. It has already bought a French marine engine maker and wants to target the top end of the boat business, too.
Ferretti has factories in Italy and Florida and its products range from gorgeous little Riva speedboats to the over-the-top 250ft monsters on which the very rich spend their children's inheritance when they have sold the company and retired. (The online advert for the whoppers is a masterpiece of brown-nosing of its potential customers – have a look on the website and be impressed.)
Three observations. The first is that Chinese and other "new rich" nations will snap up not just the luxury products of the West but also the companies that make them. A second is that the luxury business will shift to Asia, where there is none of the European liberal guilt at displays of wealth. A third is that Europe can still produce top-end stuff better than anyone else, in some cases even than the US. Thanks in large measure to a surge in exports to Asia, Rolls-Royce sales hit an all-time high last year.Reuse content