2011 - don't expect fireworks

By Allister Heath, January 13, 2011

IT is always tempting to try and predict the unpredictable. That is what thousands of analysts and economists do every day in the City, earning a good living delivering hopelessly detailed, decimal-point precise forecasts of everything from the stock market, to what will happen to the price of wheat years ahead.

In some cases, extremely complex formulae are used; in others, basic spreadsheets. But economies are way too complex for that sort of thing: there are too many variables and the way they interact keeps on changing. Excessive hubris just doesn't work: the best a sensible forecaster can do is to paint a broad-brush picture of where the world is going and to highlight the main forces at play.

So that is exactly what I have attempted to do in my own predictions for the year ahead.

I am pretty sure the British economy will do better than expected when it comes to economic growth, corporate profits, the stock market and job creation. The government's austerity plans will be largely successful, though the budget deficit will probably continue to overshoot and it will be harder than expected to keep a lid on public spending. Companies will be spending and hiring far more this year than they did last year - apart, of course, for those dependent on government contracts. The public sector will shrink slightly - but a more confident private sector will take up the slack.

Britain's bad performance in December, primarily caused by the snow, is likely to have been a mere blip.

But 2011 is likely to be worse when it comes to inflation and living standards, with rocketing costs and prices eroding the take-home pay of millions of people. Out of control inflation has been the great, untold story for many months now; the Bank of England's refusal to raise interest rates despite the recovery, combined with global pressures on the price of food and commodities, will inflict a heavy burden on consumers, savers and firms. Eventually, the Bank will be forced to start tightening the screws. The first rate hike won't take place until the second half of the year but will be painful for those in debt when it comes, especially given that so many people have grown complacent about the cost of borrowing. Savers will rejoice.

On balance, therefore, and barring a geopolitical catastrophe or the collapse of a major Eurozone country, the UK economy is set for a decent but unspectacular year. It won't be a year to remember, but neither will it be the catastrophe that the pessimists are predicting.

Allister Heath is Editor of City A.M.

Last updated: 10:55am, January 13 2011