What's in store for 2012?

Chancellor George Osborne Mr Osborne's deficit reduction targets are not going quite to plan

They've seen the future and it's frowning. That more or less sums up the New Year's commentary on our economic prospects for 2012.

Many think it will be the weakest year for the UK economy since the recession. They are known as the optimists.

Everyone else seems to believe we are heading for a double dip, the only question being how deep.

You probably already know which category you fall into. The pessimists are certainly right that conditions at home and abroad provide plentiful room for things to go wrong.

Abroad we have the crisis in the eurozone and a troubled US recovery, not to mention a year of enormous economic and political uncertainty for China, as it prepares for a change in the guard at the top and attempts to produce a soft landing for its economy.

At home, consumers will see the squeeze in their real incomes continue, at least until the summer. The government will also continue to take demand away from the economy as part of its effort to bring down public borrowing.

Borrowing targets

If you're looking for a top gloomy fact to impress your friends, you could do worse than point out that the squeeze in the public finances in 2012-13 is due to be larger than in either of the first two years of the coalition.

The latest forecasts show the structural deficit - the part of public borrowing the government can hope to control with spending cuts and higher tax rates - falling by 1.1% of GDP between 2012-13 and 2013-14, from 5.5% to 4.4%.

For comparison, this measure of borrowing is expected to have fallen by just 0.7% of GDP between fiscal year 2010 and 2011, and by 0.9% between 2011 and 2012.

As I described in detail on 30 November, it was not supposed to be this way.

When George Osborne laid out his plans in June 2010, the first two years were supposed to be the toughest. In 2012-13, things were going to ease up. But the economy has had different plans, and so, now, does the Office for Budget Responsibility.

Volatile gas

So much for my top gloomy fact for 2012 (if you're looking for more, the latest Autumn Statement has plenty). These days your friends will surely be more impressed if you can come up with new reasons to feel upbeat.

I went through a few of these in the lead-up to Christmas, but here are a couple more.

The first is that if you strip out the volatile oil and gas sector, which is only tangentially connected to the broader economy, Britain's recovery looks stronger.

GDP in the third quarter of 2011 was only 0.6% larger than a year earlier, by far the lowest annual growth since the recovery began. But excluding oil and gas, GDP was up by a less disastrous 1%.

You might say this was convenient accounting: if we include the oil sector when it's booming, surely now we have to take the rough with the smooth?

Except... with the long-term decline in North Sea oil, Britain's energy sector stopped flattering the figures some time ago.

Including oil, the UK economy has grown by 2.4% a year since 1996. If you take the oil sector out, the average goes up to 2.6%.

There has always been a lively debate about the broader spillover effects of North Sea oil. I won't get into all that now. But if you are one of those people who has always thought the benefits to the mainland were fairly limited, you might now feel more upbeat.

Rating upgrades

Finally, it's worth reminding your gloomy friends that large parts of the world are not feeling gloomy at all, and many governments are doing very nicely indeed.

For example, it might surprise you to hear that the rating agency Fitch upgraded nearly twice as many sovereigns in 2011 than it downgraded: 11 governments saw their rating go up at least once, versus six who saw their rating go down.

That is the biggest contrast with the 1930s, which so many feel we are about to repeat.

If you define a depression as a prolonged period in which national output lies below its previous peak, the UK and many other European countries are already in one.

But it is, so far, a local phenomenon. The advanced economies are doing badly, but the world is not. Whether that can continue is one of the crucial questions for 2012.

Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 1.

    "The advanced economies are doing badly, but the world is not"

    Unfortunately, there is no such thing as society... only individuals and families so I CARE NOT A JOT what is happening in the world... only what is happening in my living room.

    Happy New Year!!! :-)

  • rate this

    Comment number 2.

    if you believe that the 2 biggest consumer driven economies are LOCAL then keep believing.

    how will these other local economies survive when the USA and europe stop buying there goods?

    lets see how much money china and india really have!
    a flat screen TV cost £ 400 , that is the average persons wage in china, india, south america, for about 3 months.
    the house of cards is falling simple.

  • rate this

    Comment number 3.

    So really we have nothing to worry about. Just keep spending folks.

  • rate this

    Comment number 4.

    We are in decline, the same as the rest of Europe. To say that there

    is some good news is to be in denial! Until society face the fact ,we

    cannot move on and adjust to the new world order.

  • rate this

    Comment number 5.

    Until the trade imbalance between developed and other nations (exports less imports) is evened out, everything else is 'fiddling whilst Rome burns'.

    There is no sign of that happening.

    On a local level, the pound strengthening above 1.2 to the Euro also means less short-term inflation, but a wiping out of our export growth medium-term.

    We need a rate of 0.8, not 1.2, to economically survive.


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