Tony Curzon Price (London, oD): 2008 will see the start of a recession that will do all the work left undone by other failures, to turn the Brown era into a sad trail of failed promises. The recession starts in the USA. The Fed will soon slash interest rates, thus saving Wall Street while massively reducing the price of all dollar goods even further than they have been. UK banks and the City will continue to look shaky -- watch the Commercial Property Loans portfolios and derivatives going awry -- and the Bank of England will be expected to slash interest rates. The pound will tumble on expectations that Mervyn King will comply. Book your UK seaside holiday destinations early this year, they will be popular.
A tanking economy as election and the judgement of history looms is not the best recipe for good economic policy. Alastair Darling will propose a budget that pushes the limits of what the government can do fiscally. There will be a lot of number-massage over the level of the deficit and the rather tarnished "Golden Rule" of balancing the budget over the cycle. Expect lots of fudge to keep expenditure increases off the books, especially Private Financing Initiatives. Big nuclear investment is quite a good example of quasi-government expenditure programs that will be tempting this year. Any other thoughts for big projects that could be accelerated by regulatory nudge? Some airports?
What will Mervyn King -- if he's still in the seat -- do? The fiscal expansion and sterling devaluation point to inflation. Will he stick to the Bank's lauded independence and target 2% inflation? If so, look to rising interest rates and a serious housing collapse. All those imagining their old-age was safe in their bricks will start to save again. So we get recession and inflation, or stagflation, by year-end. Mervyn, humiliated by the government over his handling of the Rock, will be tempted to punish the Treasury by insisting on playing by its rules.
Of course, this was just what Bank of England independence was meant to do: provide a stick with which politicians knew they would be beaten if they pursued inflationary policies. So, tentatively, my economic realism leads me to forecast that Gordon Brown will close his reign by reversing the BoE independence that started his Chancellorship in 1997. Inflation will be allowed to drift upwards -- there are economic situations when the beguiling illusion of inflation is politically much more comfortable than the alternative of falling incomes and prices. That's where we are.
In summary:
- Fiscal expansion, as much off the books as possible
- Mervyn King is not governor by year-end
- Average sterling is 15% lower against the Euro over 2008
- Inflation is 3% by year-end
- Unemployment is rising
- Domestic savings rate (excluding occupational pension fund saving) will have increased from 0% to 5% by year-end.
Gloomy times, made gloomier by the political cycle. Recession, Recrimination, Remorse and then Realignment?
Thanks Bebedora!
