The year of the butterfly, or the wet kipper?

Just when we are feeling most self-satisfied, God is waiting round the corner with a wet fish

This is the end-of-term time of year, at which economists are cornered like rats and forced to forecast - something they are not very good at, particularly at turning points. The canny ones stick to the old rule of giving a date or a number, but never giving both together. Mostly, we are best at explaining why what we said yesterday would happen tomorrow hasn't actually come true today.

This is the end-of-term time of year, at which economists are cornered like rats and forced to forecast - something they are not very good at, particularly at turning points. The canny ones stick to the old rule of giving a date or a number, but never giving both together. Mostly, we are best at explaining why what we said yesterday would happen tomorrow hasn't actually come true today.

This does not mean economic forecasting is useless. The models forecasters use prevent us from believing six impossible things before breakfast: they are a good consistency check on our hopes and fears. But most official forecasts boil down to telling you that the future will be more or less like the present, with touches of optimism or pessimism at the edges. At the moment, the consensus is what you might call opti-pessimistic: that is to say, it suggests that world growth will slow, but at the same time become better balanced, as the US drops back in line with the rest of the developed world.

For an end-of-term report, that's not enough. We need to scour the economic landscape for three kinds of flora and fauna: the creeper, the butterfly and the wet kipper. Creepers stand for those social or technological developments that affect our long-term economic behaviour: birth control, say, or mobile telephony. Such trends are as often over-forecast as ignored, leading via hype and disappointment to a perverse assumption that nothing is really changing. (Witness the hangover that followed the dot.com bubble or the vast prices paid for the first group of third-generation telecom licences.) Actually, bubble or bust, 2000 was undoubtedly the year in which the internet dug itself deep into British life. The question is not whether it is used, but what for.

Christmas retail sales channels may have remained (almost) as traditional as ever, given the well-known tendency of human beings to leave present-buying beyond the point at which they have confidence in the delivery of remotely ordered goodies. But business-to-business e-commerce advanced globally in 2000, while consumers depend increasingly on it for information (try finding a train time without it). In Britain even low-quality home telecoms links did not deter the spread of internet access, which (as the first chart shows) has now passed the 50 per cent mark among the under 50s.

What's more, 2001 will be the year when digital television moves from minority interest to mainstream, pushing access up another big step: and efforts to exploit interactivity via that medium will drive drastic simplification of the process of connecting to and surfing the Net.

Meanwhile, the increasing unreliability of physical transport - slow trains, crowded roads, jammed airports - must at least enhance the appetite for virtual transport of people and paper via electronic networks.

What other creepers are putting on a growth spurt? Socially, we make up a country in which, increasingly, diversity rules. Only a quarter of us now think that married people are "generally happier" (even though objective analysis of the economics of happiness suggest that couples "generally" are). International comparisons show up our high rates of divorce and teenage pregnancy; although, paradoxically, the average age of first giving birth has risen sharply. We also stand out in the extent to which we have lost religious faith, not merely in practice but even in theory: the proportion of people saying they belong to no religion has risen from 31 per cent to 44 per cent since the mid-1980s. Only the Dutch are more atheist (or agnostic). Lest we should suppose this reflects or drives our innate Euroscepticism, it is worth noting that our attitude to religion is perhaps the most marked social difference of all between Britain and the United States.

Some long-running economic trends still seem to have sap in them: both the job statistics and social surveys show that the proportion of women working outside the home is still rising, particularly among the over-50s (and only one man in five thinks they shouldn't). This helps drive the continuing swing from manufacturing to services, although the exchange rate has played a pretty brutal part here too. Even more brutal has been the combined effect of health fears, the exchange rate, global surpluses and the defects of European policy on Britain's agricultural industry, which may have little impact on urban incomes (and hence GDP) but is seriously affecting our countryside, and the balance of prosperity between north and south.

Which takes me to those other creatures, the kipper and the butterfly. Even agnostics know that just when we are feeling most self-satisfied, God is waiting round the corner with a wet fish. During the past decade, it has become dangerously easy to take economic growth for granted. The signs of slowdown in the US are at least a wake-up call. There is no reason, in terms of capacity, why other economies should not pick up the baton; as the second chart (prepared by KPMG's economists) shows, with the exception of oil, commodity prices are still remarkably weak, while unemployment is still high in Europe. Hence all those hopes of rebalancing, echoed in the foreign exchange markets.

Less encouraging than the euro's mild bounce, however, are the signs that growth in Europe is also weakening. All eyes are on Germany: will tax changes and a less embarrassing currency revive consumer confidence, or will Europe's engine room simply follow the US into lower gear? Which leads to the third chart, and the butterfly - the flap of whose fragile wing can famously have immense unforeseen effects the other side of the world. Globalisation is a much over-used word; history is rich in examples of periods when currency or even government was much more "global" than it is today. What is, however, new is the speed and scale of reaction to remote events. When the dissemination of information is virtually costless, it can move fast and wide (ask that poor girl in the London law firm whose e-mail made it on to the global testosterone circuit). This increases volatility in fashions, passions and markets. Technology has uprooted the hedgerows between our local fields of activity. Stock markets drive the same winds across them, flattening good crops with bad.

What's to be done? Well, first, to recognise that we have to live with such volatility. In the past few years we have enjoyed a remarkable combination of steady economic growth with some pretty sharp movements in asset prices, both stock prices and exchange rates. Of course, when these movements become extreme, they may affect output, inflation or both; but the past five years should have taught us that light-handed management by monetary authorities is infinitely better than clumsy attempts to suppress volatility altogether, particularly in currencies.

Second, to take the rough with the smooth. A strong US stock market and a weak dollar have stimulated a lot of entrepreneurial activity in other economies, too. No good complaining when the wind changes direction. And, thirdly, to take responsibility and a long-term view. America has, of course, a big part to play in managing its way to a soft landing. But hard or soft, nothing that will happen to the US economy this coming year can prevent, or remotely excuse, Europe from the urgent task of restructuring, reforming and reviving its growth potential.

Both of the world's largest markets have spent the past month mired in constitutional argument. For better or worse, one now has a president, the other a treaty. Time to concentrate on the economy again.