Here is the news for the next five years...

By 2007 we will be enjoying another economic boom, but getting there will not be a lot of fun
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The Independent Online

Those of us who spend our time trying to identify big economic changes – and predict them correctly – are rarely called to account on our forecasts. Indeed we tend to forget about them. So I am grateful to a loyal Independent reader, Peter Ball in Bristol, for reminding me that five years ago I made six economic predictions for 2002 – and sending me a copy of what I wrote at the end of 1997.

Those of us who spend our time trying to identify big economic changes – and predict them correctly – are rarely called to account on our forecasts. Indeed we tend to forget about them. So I am grateful to a loyal Independent reader, Peter Ball in Bristol, for reminding me that five years ago I made six economic predictions for 2002 – and sending me a copy of what I wrote at the end of 1997.

So, how did I do? Well, see what you think. The first prediction was about global deflation: that "some of the G7 countries, probably including Britain, will experience falling prices at some stage in the next five years". That has been completely correct as far as one G7 country is concerned, Japan, and others like Germany are pretty close to it. General deflation has yet to spread here, though the price of many goods such as cars and clothing are now falling. So not exactly spot on, but broadly right.

Number two was the warning of the post-Millennial economic slump: "The end of the long American boom, the deflationary forces from East Asia, the uncertainty associated with the introduction of a single currency in Europe and the Millennium computer bug will combine to make another world recession probable before 2002." I added that Britain "may be less hard hit than most, particularly if we have remained outside the single currency". Well, the "bug" reference apart, I think that was pretty accurate, for it countered the euphoria about the US and picked up the dangers of deflation in East Asia.

It also identified the danger to the European economy from the introduction of the euro, even though that has only now become completely apparent. I'm pleased about that judgement because it took a bit of courage to predict a world recession in those heady days of 1997.

I am less pleased about number three: that the slowdown would lead to higher unemployment, "though still below Continental levels". I could see why the Continent would score badly but I did not appreciate how successful the service industries would be in creating jobs not only through the boom but through the downturn. We have a million people more in jobs than five years ago, with growth in services more than offsetting the fall in manufacturing jobs.

That prediction that employment in manufacturing would be lower in 2002 than in 1997 despite the growth in the economy was number four. That was absolutely right, down from 4.1 million to 3.7 million – but that was an easy one to predict, so I am not particularly proud of it.

Fifth was that we would "increase market share in communication and entertainment industries" and that as a result "physical trade with the EU will have become less important relative to service trade with the rest of the world".

Well, that was sort of right, but only sort of. On the face of it our creative industries would seem to have done wonderfully. Look at Bond, Lord of the Rings, Harry Potter and so on. But much of the money is made by the US-owned studios, not the UK stars. In any case the movie industry is small in relation to total trade in communications and entertainment. What is true is that our reliance on physical exports is gradually shrinking: it is now only half our foreign currency earnings, but that is more the result of higher investment income than the work of the entertainment industries. It is also true that physical exports to Europe are a decreasing proportion of our total earnings, but only marginally so.

Finally, I made a political forecast, braving the fact that I recognise I have bad political judgement: that was that Labour would get back with a majority of 45 in October 2001. Well, I could not even get the month right, let alone the number ... and getting the party was not too hard.

Still, getting the big story – the post-Millennial slump – more or less right is surely the thing that matters most and emboldened by that, here are six predictions for the end of 2007.

Start with the big economic story, the present downturn. I think, for several reasons, that there is more pain to come before recovery is secure. These include, of course, continuing tensions in the Middle East – which we will still be worrying about in 2007. They also include the underlying headwinds of adverse demography, global deflation and the serious indebtedness of consumers in the English-speaking world. My guess would be that we will have two, maybe three, more years of disappointment before the world re-establishes secure growth. So, prediction one: by 2007 we will be enjoying another boom but getting there will not be a lot of fun.

It will be less fun in Japan and Germany than in the US or UK. The core of the eurozone will continue to disappoint. While I don't think the eurozone will break up in the next five years – that is more likely in another 10 years' time – I think it will be a very difficult period for the eurozone members. This is partly because of the fundamental flaws in a one-size-fits-all interest rate, but also because of the difficulties of getting reform in the core eurozone members. So, prediction two: the US and UK will grow faster over the next five years than the three core eurozone countries, Germany, France and Italy.

Given the eurozone's increasingly evident difficulties, I find it very hard to see Britain adopting the euro in the next five years. Prediction three is we won't.

One of the other reasons why I think we won't is the growing evidence of global deflation. By 2007 the developed world will not just have achieved price stability – we are pretty well there now – but will be adjusting to the idea that prices do not rise forever and people will plan on that basis.

One area where this will have a profound impact will be the UK housing market. So, prediction four: UK house prices will overall be no higher at the end of 2007 than they were at the end of 2002.

Prediction five looks beyond the present developed world to what will continue to be the fastest-growing region: East Asia. China's GDP is already larger than that of Italy. It will officially become the world's third largest economy, after the US and Japan, around 2007.

And six? I suppose I have to make another political prediction for the UK. The next two years are going to give the Government a much tougher ride than the past six. Growth in consumption will, at best, slow sharply and voters will feel that the great experiment of increasing public spending to get better services will have failed. So people will be pretty angry. But we won't yet be ready for an alternative, and only partly because of the continued weakness of the opposition, whoever they choose to lead them. The problem will be that the outlines of an alternative political strategy will still be fuzzy.

We can see vaguely how government in all developed countries will have to be reformed but cannot quite see how to do it. We know we want a lean, efficient government that takes responsibility to see that all citizens have access to quality services, but that is essentially an enabling task rather than a providing one. Getting that right will be tough given the entrenched power everywhere of public-sector bureaucracies. So in the absence of a credible intellectual alternative I predict that Labour will indeed get back again, with a majority of 45, in June 2005. Oh yes, I predict too that the name of the leader of the party will begin with the letter B, though it may not be the first couple of Bs that spring to mind.

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