Six predictions from five years past, and six for the future

The coming recession
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People in the prediction business rarely check back on their past performance - so I am grateful to a reader who has sent me a copy of an article I wrote in December 1992 giving half a dozen ideas that were deeply unfashionable then, but which seemed to be "decent odds-on bets" for 1997. The result? Several near bull-eyes, one poor shot and one catastrophe.

We had just been ejected unceremoniously from the ERM and were still in the midst of recession, so the first prediction - that Britain was entering a period of relative prosperity "when the country will gain ground in terms of economic growth against the rest of Europe" - did seem a bit extreme. Actually we have done even better, for every single year since 1992 we have grown faster than France and Germany, and in four out of the five years faster then Italy too.

The other two big macro-economic forecasts have also stood up pretty well. World inflation would head down and "by the last years of the century (maybe by 1997, but it could take a little longer) Britain will have as near zero inflation as makes no difference". Maybe we do have to wait a little longer, but the latest projection for the UK GDP deflator - the best measure of overall inflation in an economy - is 2.5 per cent, and for the G7 economies, 1.7 per cent. Not quite there, but heading in the right direction.

As for unemployment, we have done even better than the "less than 6 per cent by 1997, below the European average" that I expected. Even if the official unemployment total of 5.1 per cent overstates the fall, this is still remarkable; I don't think, on the other hand, I had fully grasped the possibility that European unemployment would rise by as much as it has.

There were two micro-economic forecasts, one of which I got right, the other wrong. The one which was right was that house prices would not soar "although they may rise a little in money terms, say by about 15 per cent over the next five years". The actual rise in the Halifax house price index from the last quarter of 1992 to November 1997 (the latest figure) I calculate at a little under 14 per cent, but would admit hitting that one so close was a bit of a fluke.

I missed the other specific projection: that Britain would have the second largest car industry in Europe after Germany, thanks to the build-up of Japanese manufacturers. Production has risen and we are ahead of Italy, but we are still far behind France, as well as Germany.

The other and worse miss was the one political prediction I made. Given the success of the economy and the divided opposition, I thought that the Tories would be safe for another term and I predicted "a Tory majority of 45 in October 1996". Hopeless. My only defence is that at the time John Smith was still leader of the Opposition and I did not appreciate that the voters might be offered Tory economic policies by a Labour leader. My colleagues unkindly suggest that I should stick to economic predictions and leave the politics to others.

That is the track record; what of the future - the year 2002 - following the same pattern of five economic predictions and one political one? It is much harder, largely because in 1992 things were so dreadful that they had to get better, whereas now the domestic economy seems OK, but there are powerful external uncertainties that are very difficult to call.

Starting from a global viewpoint, it does seem clear that we are now definitely in a period of global deflation, so prediction number one is that some of the G7 countries, probably including Britain, will experience falling price levels at some stage in the next five years.

Does that also mean global recession? Not necessarily, but I think the balance of probability is that there will indeed be another world recession in the early part of the next century. 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 - prediction number two. We may be less hard hit than most, particularly if we have remained outside the single currency, but we will still be affected.

Will the "euro" happen? I suppose that the probability is that it will, but I do not believe this is the certainty that European politicians currently think. If it happens, I am sure that it will collapse; but I don't think collapse will come immediately, because initially the political glue will be too strong. Collapse will come in 10 or 15 years' time, not five.

Prediction number three concerns unemployment. Managing the UK economy through global recession will be difficult, particularly so for an inexperienced UK government that is bound to make mistakes. It would be surprising if unemployment were not higher in 2002 than it is now, though I would expect it still to be below continental levels.

Meanwhile the shape of the economy will continue to change, with such industries as communications and entertainment continuing to grow while manufacturing continues to shrink. So prediction number four is that employment in manufacturing will be lower in 2002 than in 1997, despite general economic growth.

Number five is the positive side of that: we will have increased world market share in the communications and entertainment industries. As a result physical trade with the European Union will have become less important relative to service trade with the rest of the world. The economy will be slowly reorienting itself away from Europe, not for any political reason but because ties of language and culture are becoming more important in trade than physical proximity.

And six? This general picture is one of the UK continuing to do quite well relative to other developed countries, but having to struggle into the head-wind of the post-Millennial economic slump. The present Government will, inevitably, catch some of the blame, but I do not think the electorate will be sufficiently miserable yet to want to throw it out of office. That comes in 2005. So yes, I envisage Labour getting back with a majority of 45 in October 2001.

And if that, given my past performance, seems the kiss of death for Mr Blair and his colleagues - sorry.