If the good times are ending, are we going to crash into a recession?

'Nearly all economists accept there will be some sort of slow-down in the next couple of years'
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The Independent Online

Soft landing or hard landing? Those are the buzz-words to describe the alternatives ways in which our boom might end - and not just our boom, the boom that now envelopes most of the world economy. A soft-landing means that the boom ends with a gentle slide back to slower growth; a hard one that we have a recession.

Soft landing or hard landing? Those are the buzz-words to describe the alternatives ways in which our boom might end - and not just our boom, the boom that now envelopes most of the world economy. A soft-landing means that the boom ends with a gentle slide back to slower growth; a hard one that we have a recession.

Of course there are parts of the world that have failed to enjoy much of a boom. Within the developed world, Japan remains in near recession; sadly parts of sub-Saharan Africa are still moving backwards; and even in countries such as the UK that have in general have done well, there are regions that have failed to share much in the benefits of growth.

But boom, for most of us, it has been: a period of growth that has been higher than the past trend. We have in Britain plenty of experience of what follows a period of faster-than-trend growth. It is period of slower-than-trend growth, maybe so slow that there isn't any growth at all, in which case we have a recession. We are particularly sensitive to the notion that slump must follow boom because every adult has experience of at least one, the recession of early Nineties.

The thing that made the Nineties recession most searing was the associated fall in house prices and the entry into the language of the expression "negative equity". So the sign this week that the present surge in house prices may have peaked raises all sorts of twitches. Britain has actually had a better balance between inflation and growth over the last seven or eight years than any large developed economy, but we remember the earlier failures of economic policy rather than the recent successes.

Contrast that with America where the current conventional wisdom is that the "new economy" - the surge in the high technology sectors - makes the country recession-proof, and the general view on the Continent that they have had such slow growth for such a long time that there are several years of good performance ahead.

Are we right to be so worried? Well, yes in the sense that at this stage on the economic cycle there must always be some danger. Economists are at present debating whether the peak in global growth was in the first quarter of this year or whether it will happen this summer, but just about all accept that there will be some sort of general slow-down in the next couple of years. Where they differ most widely is whether the US will end its burst of growth with a recession.

For America is the key. If the US economy goes down it would be very naive of us to assume that we in Britain will escape the consequences. It is not just that it is still the world's largest economy, even if you lump the eurozone together as though it were a single country. It is also the most vibrant part of the world, pumping out the ideas and the kit that is driving economic change everywhere.

We can see some aspects of that change in the e-commerce revolution: the way, for example, that many of us are now booking flights or train seats on the internet. But, as with an iceberg, the parts we can't see are much bigger than the parts we can.

Companies, particularly in the US, are using the new technologies to streamline their whole supply production chains with the aim of making things and delivering services vastly more efficiently than in the past. There is something very big happening here that at the moment we can only glimpse. We know that this transformation of the way we produce both goods and services will carry on whether the world is in boom or slump; what we don't know is whether by making things more efficiently we can lessen the swings between boom and slump. Technology is making the world economy more efficient; it may also be making it less prone to an economic cycle. We will learn this first from the US, and we will learn it in the next two years.

Why should the new technologies help iron out booms and slumps? Because better information ought to enable companies to fine-tune supply more closely to demand. Take a personal computer. Five years ago the firm made a batch of computers, passed them to retailers, who sold then on to the rest of us. If it judged demand right that was fine. If it failed to do so, it was left with a pile of unsold stock and had to cut production and lay off workers. Now increasingly we go on to the Net, order up the computer we want from the manufacturer, who then makes it to our specification.

Result: no danger of unsold stock because the computer is made to order. Since the stock cycle was one of the reasons behind the economic cycle, in theory at least that is one uncertainty removed.

And not entirely just in theory. In practice there does seem to be some evidence that the swings of the economic cycle are becoming less marked. But the evidence is still very thin and we can't test the theory until we have been through at least one full cycle, by which stage it will be too late to do much about it.

Meanwhile, the very success of America's new economy may have blinded Americans to the dangers of letting the boom get out of hand. Anyone who visits the US regularly will have caught the "we can conquer the world" feeling in the business community. Maybe that exuberance has been slightly dented by the falls in the price of hi-tech shares over the last couple of months. But the figures for the US - negative household savings, a widening current account deficit - all point to a country living beyond even its enormous means.

If the US goes down, could better growth in Europe help? Maybe a bit, but much of the European growth has been driven by exports, including exports to the US, thanks to the weak euro. If the US slows, and the euro strengthens a bit, then the European economies become vulnerable. The fact that they have not had the heady US boom does not mean they can then expect secure growth. Look at Japan. In fact, Germany shows many of the characteristics of Japan, albeit in much less severe form.

And the UK? It is beyond our ability to know just how hard the landing will be. My guess for what it is worth is that the US may experience a mild recession in the next two years. We in the UK will avoid a recession, but we will see a very sharp fall-off in growth in a year to 18 months' time.

The trick in this new world is to be both calm and nimble. We have neither the excessive exuberance of the US, nor the locked-up monetary policy of the eurozone. The great thing about Britons is if they have money they will go and spend it. If there is a serious global slow-down we know what to do: cut interest rates, stoke up house prices a bit and rely on the Great British Consumer to pull us out.

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