With Christmas only a week and a bit away, most people are now focused on making sure they’ve got their food and travel arrangements lined up, buying enough presents, and wondering how they’ll cope with difficult relatives. Economists, meanwhile, are busy beavering away at their forecasts for 2014. Given the inherent flaws in economic forecasts, focusing on point estimates is a bit of a mug’s game. So, instead, I thought I’d offer my broad themes for next year.
First, economic growth in the UK will be robust but not particularly spectacular. The Office for Budget Responsibility thinks that the economy will grow by 2.4% next year. Personally, I think we might get a bit closer to 3%, although given the uncertainties here that difference is not large. Growth of 3% would represent a pretty good year by recent standards; but in the context of past recoveries from recession, it would still be relatively weak. So although the economy might finally get back to around its pre-crisis position next year, it is still likely that most of the ground that has been lost in the intervening six years will never be made up. Real wage growth, in particular, is likely to be weak.
Second, the much-hoped for rebalancing of the economy will again fail to materialise. Since 2010, both the Government and the Bank of England have been expecting the UK’s engine of growth to shift away from consumer spending and towards investment and exports. They have been profoundly disappointed, with business investment still well down on its pre-recession peak, and any slight improvements in the trade deficit swiftly reversing. The recent growth figures – they are not really strong enough to deserve the label of a ‘spurt’ – have been driven more by consumer spending and a decline in the saving ratio. 2014 will not be the year that the UK suddenly becomes an export- and investment-led economy.
Third, UK policy rates will be on hold. Lots of people get over-excited about the potential for the Bank to raise interest rates next year. But this typically presumes that all, rather than just some, of the recent productivity weakness is permanent. And even if unemployment gets below 7%, that is merely a threshold, not a trigger. My best guess is that Bank Rate will be at 0.5% this time next year.
Fourth, not much will happen in Europe while everyone waits for the ECB’s verdict on the banking system. In truth, paralysis will be welcome for some, particularly the German government. With the ECB’s exercise likely to expose holes in some large banks’ balance sheets – particularly if it is going to be perceived as credible – the big question that remains is about how these holes will be filled. Germany dragging its heels on any agreement will increase the chance that any official sector support is government-led, potentially with the strings of a bailout programme attached if external money is needed. However, this will also weigh on hiring and spending, meaning that growth will very definitely struggle to re-ignite. Given that periphery countries already face grinding painful adjustments, the risk of policymakers getting it really wrong (again) is quite high.
Fifth, growth in the rest of the world may be a bit softer than people generally expect. The US should see a decent pace of expansion now that the two parties have reached a deal on the budget, which has removed some of the previous damaging uncertainty. And China looks as if it has managed to bring about the soft landing that many feared was impossible, at least for now. Elsewhere, however, economic prospects have softened. Japan may struggle to see sustainable growth without Prime Minister Abe’s structural reforms having much impact. And major economies such as India and Brazil are more worried about policy credibility and inflation than growth, having already tightened monetary conditions this year. Russia’s struggles to diversify will continue, especially given renewed political interference; and it is hard to see any other country really stepping up its game.
In other words, 2014 looks set to be a lot like this year – another twelve months of subdued recovery from the biggest recession many advanced economies have ever seen. In the absence of big shocks, however, we should still end up one year closer to ‘normal’ economic conditions. But it’s hardly the good news story that I think most people will be hoping for.