The year ahead

I wrote this at the request of a forum, but I thought I would reproduce it here:

Britain has been enjoying the longest period of sustained growth in its modern history. The economy has grown every quarter since 1992. In the period from 1992 to 2006 the economy grew by 49 per cent in real terms. But can this impressive record be sustained? And if it isn’t, what will the implications be for the government of New Labour’s Gordon Brown who took over from Tony Blair in 2007?

Because of its strong links with the global economy the British economy is vulnerable to any downturn in the United States. It has already been seriously affected by the sub-prime crisis in the United States with the first run on a British bank since the 19th century. The British economy is particularly dependent on the housing market. Rising house prices stimulate consumer confidence which has sustained the British boom. However, house prices have steadied and in some cases begun to fall. Underlying this trend is the fact that first time buyers can no longer afford inflated prices and are withdrawing from the market. They underpin the market as a whole. Forecasts differ about what will happen to house prices in 2008, but a small fall seems the most likely outcome.

The consumer boom has been built on the ready availability of debt in the form of credit cards, mortgages and loans. Given substantial problems of personal indebtedness, there has been a tightening up on the issue of credit cards with a higher proportion of applications being rejected. However, this does not seem to have had any effect on the willingness of consumers to spend over the Christmas period. There was a last minute Christmas rush and then a considerable increase in spending at the ‘sales’, particularly on high value items, with retailers discounting heavily. Of course, this may mean that consumers will reduce their spending later in the year.

The turmoil in the key financial services sector, which has been a major driver of employment growth, is expected to lead to more redundancies in 2008. Combined with public sector job losses, there are concerns that unemployment may grow next year, perhaps reaching 1.8 million, its highest figure since New Labour came into office in 1997. Of course, this could be offset by a decrease in the number of immigrants from central and eastern Europe seeking work as the labour market tightened.

In some respects the underlying condition of the economy is less strong that a debt fuelled consumer boom might imply. Unemployment is higher than it appears because three times as many people are on incapacity as unemployment benefits. Skill levels remain a problem, particularly among those who emerge from the education system with few or no qualifications to enter an economy in which the number of unskilled jobs is declining. They often find themselves in a ‘revolving door’ of government schemes and unemployment.

The Bank of England has the capacity to reduce interest rates to offset the risk of a recession. So far the Monetary Policy Committee is judged to have done well, but it has never been tested by difficult economic conditions. If it reduces rates too fast, it may stoke inflation which is being driven by rising food, oil and utility prices. However, it seems unlikely that the British economy will experience a recession in the sense of two successive quarters of negative growth in 2008. Growth will fall, however, and this will put the squeeze on already constrained public finances, narrowing the options available to Prime Minister Gordon Brown. Some of the tensions are already evident in disputes with the unions over attempts to hold back public sector pay.

After a short honeymoon period, Gordon Brown’s credibility was undermined by appearing to encourage the possibility of a November election and then pulling back from it. In an era in which electorates make decisions more on competence than on ideology, the Government’s image has not been helped by a series of unfortunate events, in particular the loss of large amounts of confidential data held on citizens by various departments. If Gordon Brown is to restore his authority in 2008, he will have to hope that the economic downturn is not too severe