General Election 2015: Whoever wins, these are my predictions for the next five years

The state of the global economy has a greater impact than the actions of any individual government

The state of the global economy has a greater impact than the actions of any individual government (Corbis)

So what will the next five years be like? What will be the economic backcloth against which our politicians will have to perform? Our next government’s fate will be shaped by its own actions but will be affected, perhaps more, by the events thrown at it. Any reasonably competent government will appear a success if there is a benign global economy, but if things go pear-shaped the government of the day will suffer too. Of course no one can know what will happen, but here are five propositions for what might happen that people can use as a template for their own ideas.

1. There will be at least three years of decent global growth, maybe more. The expansion phase of the world economy typically lasts six to nine years. We are now five years into the recovery which makes it appear quite mature. But because we started from such a long way back and there is so much spare capacity, it is plausible that this expansion will be unusually long. The latest data from the US suggests strains are starting to show: nothing to worry about yet for there is still plenty of spare capacity, but it is a reminder that growth does not continue for ever. In Britain there is spare capacity, for as growth continues we should see productivity increases coming through. In much of Europe there is a vast amount of spare capacity, so no problem there.

Still, if growth were to continue through the life of this parliament, that would be an unusually long expansion for the developed world. It may happen, but I suggest we can count on three years’ growth rather than five.

2. Interest rates will rise. That must be the easiest proposition of all, though many of us have been wrong in expecting the first increase in official rates to have come through by now. The question here is not so much when rates will rise, because US rates will almost certainly go up later this year and we will not be that far behind. Rather it is how quickly they will do so.

The prevailing view in the Federal Reserve and the Bank of England is that the rise in rates will be more gradual than in previous cycles. Because both our economies are so indebted that we need only a relatively small increase in rates to have a large effect. Or to put the point another way, we cannot afford much of an increase.

That is probably right, but only probably. One danger for the next government is that rates will go up more swiftly, thereby increasing the cost of funding the national debt.

3. There will be financial instability in Europe. That is unavoidable – we all know that. What we don’t know is how long the political will to carry on with the eurozone experiment will last.

The economic costs are huge, but it has been fascinating to see how much distress European citizens have been prepared to accept in order to keep the bloc intact. Even now, having lost a quarter of their GDP, the Greeks want to stay in the eurozone.

I can’t say whether that political will prevail for another five years. However, in economics, things often take longer than you would expect and then when they do move, they happen more suddenly. As the underlying imbalances within the eurozone have not been tackled the tensions remain. If they remain for another five years the European economy will continue to underperform, maybe seriously so. Whatever Britain’s future political relationship with Europe, its economic ties will remain, so this matters for us too.

4. Government spending as a percentage of GDP will be smaller at the end of this parliament than it was at the beginning. Spending this year is expected to be around 40 per cent of GDP, while revenues are around 36 per cent. Maybe the next government will crank up revenue a bit, but you do not need to believe the plans set out in the last budget that spending will come down to 36 per cent of GDP to realise it has to come down a bit further. Call this austerity if you like, though it is roughly the same level as in the early Blair years; whatever you call it, it continues.

5. There will be disruption in financial markets. US share prices and house prices in the UK both feel vulnerable to some sort of shock. That does not mean they are likely to collapse, though they may correct. We are not yet in bubble territory. What it does mean is that if some shock comes along, there might be an unusually violent reaction in the markets, which in turn would destabilise the world economy further.

So there is the list. This is not a bad prospect for our next government, a much better one than in 2010. But it is not the benign, calm outlook of the Blair years – and to judge by the debate in the run-up to the election, this tricky outlook is not something our leaders want to talk too much about either.