HAPPY New Year, dear readers, and welcome to our first edition of 2014. As ever, we devote a sizeable chunk of this issue to trying, as best as we can, to predict some of the big economic, political, market, financial and corporate events of the year ahead.
We do so with humility: as Mark Twain put it, “prophesy is a good line of business, but it is full of risks.” Hindcasting is much safer but pretty useless; a good forecaster is merely right a little more frequently than the rest and a great one more than half of the time. The key is to beware well-remunerated charlatans who believe that they can predict the future to the decimal point: as F.A. Hayek put it many years ago, in the extraordinarily complex system that is the world economy, only broad, “pattern predictions” are possible. We can legitimately try and argue that a market faces a bubble, for example, and attempt to calculate the rough extent of the problem, but it is impossible to work out precisely when it will burst, and by exactly how much prices will fall. There are trillions of variables, interacting in a non-linear, chaotic manner.
Speaking of overvalued assets, one (of many) issues which this newspaper called right last year was that the bond bubble would start to burst. Yields on gilts have shot up; those on 10-year Treasuries rose from 1.76 per cent to 3.03 per cent during 2013. There is further to go, depending on the extent and speed of US monetary tightening; my feeling is that we will see a little more of that than the markets are currently expecting. Equities will continue to rise, albeit not as much.
Not all parts of the world economy will do well. China will be beset by its ongoing problems. France will suffer a continuing self-inflicted recession in early 2014, courtesy of Francois Hollande’s economic illiteracy. But the UK will continue to bounce back.
The Budget will be another joyous occasion for George Osborne: he will be able to boast of another round of better than expected figures. But while the budget deficit will fall further, it will remain far too large for comfort.
One event that ought to happen, but won’t, is a hike in the Bank of England’s interest rates. Monetary policy will remain unchanged in the UK, even though the economy will grow, nominal GDP will rise strongly, the current account deficit will remain vast (suggesting excessive demand), unemployment will fall, there will be no signs of consumer price deflation and mispriced money will continue to distort decisions and capital structure.
Employment will surge further, with the seven per cent unemployment threshold used as part of the Bank’s forward guidance reached far sooner than expected, possibly even before the middle of the year. That, however, won’t be enough to shift the Bank’s stance. Of crucial importance politically, real wages in the private sector will stop falling at some point during the next 12-18 months.
Slowly but surely, the construction industry will recover; housebuilding will creep up but not by anything like enough. House prices will continue to increase, driven by eye-wateringly scarce supply (especially in and around London) and increasing credit.
Net corporate borrowing growth will remain subdued; the rise in net debt will be fuelled by the consumer (primarily mortgages) and the state. The big question is what will happen to corporate investment: my prediction is that it will disappoint again, though partly because a post-industrial economy doesn’t require as much capex.
Ukip will do very well at the European elections, exacerbating Tory panic. Scotland will vote to stay in the UK. This will be a make-or break year for Boris Johnson. He is running out of time to get into parliament. If he doesn’t hurry, somebody else will take his place as the next Tory leader in waiting. My guess is that he will act this year – but like all of my predictions, only time will tell.