2008: Looking ahead

Tis the season for predictions again. Yesterday you'll have read my reflections on what I said this time last year - and whether it was useful or not. But now it's time to look ahead...

If you asked how I’d like 2008 to go, given where we are now, I would be looking for

• a consumer slowdown;
• offset by a rise in exports;
• driven by a falling pound.

The overall economy would slow, but only to 1.5 to 2.0 per cent growth.

There are two interesting questions about 2008, that should tell us whether that scenario is achievable.

The first is whether the seed of inflation has already been planted in the economy and is now going to grow into a significant problem. If it has, economic life will be very much more complicated than my scenario outlines.

If we have already let inflationary pressure start building, then we can’t allow a falling pound to drive up prices, so we can’t promote more exports, so any slowdown in domestic spending is unable to be offset and becomes more serious.

Or to put it another way, the authorities will need more than a mild slowdown to kill the inflation.

The second question is whether the turning point now reached in the housing market combines with banking and financial problems to form a self-reinforcing downward spiral in asset prices, confidence, spending and growth.

The key words here are “self-reinforcing”. If we get to a point where a bit of slowing sets in motion more slowing, then the authorities will struggle to keep the economy on a desirable path. You need to hang on to your hat.

With those points in mind - here are my observations and forecasts for next year.

1. On inflation, my guess is that it will rise but then fall back and it won’t turn out to be a serious problem. I say this because a mild slowdown will be sufficient to tame the inflation, and at least a mild slowdown seems very likely. I wouldn’t say I’m sure of this, but that would be my guess. Inflation seems less of a threat than it did in 1989.

2. On the slowdown, my guess is that it won’t be self-reinforcing; but that it will be very significant. I expect the UK economy will probably grow less than most forecasters currently estimate (1.9 per cent is the current consensus). This slowdown will derive from the fact that consumers will start being more cautious, increasing the savings ratio. As a result, domestic spending and demand will grow rather modestly. I wouldn’t think consumers will stop spending in a very abrupt way - shopping habits die hard.

3. On house prices, they now appear to be falling. I expect they will continue to fall, by 5 to ten per cent over the year. This is not because of the credit crunch; it is simply that once people lose the sense that house prices are rising, they don’t want to buy them anymore and the demand for houses falls. In addition, the oversupply of city-centre flats and the inevitable sale of buy-to-let properties will lead to downward price pressure. I wouldn’t rule out the falls being much bigger, but the market tends to turn quite slowly (remember the US housing market started turning in 2006, not 2007).

4. On the pound, my guess is that it will fall alongside the dollar. The UK economy has to switch its emphasis from domestic consumption to exports; that requires the pound to fall, and the authorities will let it do so. If I’m wrong about inflation, the falling pound will cause problems and may be curtailed by interest rate rises.

Incidentally, I expect China will let its currency drift up significantly further against the dollar, and this will significantly ease the path to global re-balancing.

5. On interest rates, I expect the bank rate to fall, ending the year at 4.75 per cent. If I’m wrong about inflation or the severity of the slowdown, I’ll be wrong about this too! But my view is that rates can come down to contain the slowdown to the level just necessary to deliver falling inflation.

6. The government finances will probably turn out to be worse than Alistair Darling has forecast. The current balance (borrowing in excess of investment) for the 2007/08 year should exceed the pre-budget forecast by about four billion. It will be quite a problem as the chancellor’s forecasts for future years will look more and more shaky.

Those are my forecasts and observations. But let’s face it, there is a lot to go wrong. The US could slide into recession, China could overheat, oil prices could soar or banks could collapse. I’d love to predict that these will or won’t happen, but none can be foreseen with certainty, and none can be dismissed.

Mervyn King said he wanted to make monetary policy boring. He failed in 2007, and it looks like he’ll be struggling to do so in 2008 as well. My final prediction is that Mervyn will be reappointed to make it boring again – at least by 2013.

Comments   Post your comment

  • 1.
  • At 10:25 AM on 28 Dec 2007,
  • Mike Dixon wrote:

There are two additiona problems facing the British enconomy where it is in compertition with Continental Europe.

The first is the decline in British manufacturing and subsequent lack of investment in industry. A great deal of plant and mechinery is now very old.

The second is the high and uncertain costs of jumping the Euro barrier. The solution to the this is obvious but politically very difficult at the present time.

  • 2.
  • At 10:54 AM on 28 Dec 2007,
  • Tim wrote:

I think the question we need to ask our selves is that if the structual changes in our economy since 1997 leave us with the ability to export more to offset the slow down with the consumer sector even if sterling falls.

  • 3.
  • At 11:50 AM on 28 Dec 2007,
  • John O'Brien wrote:

For those living abroad, on a UK pension, a fall in sterling is bad news indeed meaning an even higher rate of inflation in local currency terms. What a pity that Gordon Brown blocked our entry into the Eurozone. We now have a small currency that is very exposed internationally. And the ECB appears to have more independence than the BoE.

  • 4.
  • At 01:08 PM on 28 Dec 2007,
  • Matt wrote:

Business as usual then Evan!

  • 5.
  • At 01:18 PM on 28 Dec 2007,
  • Kenneth Jackson wrote:

Taking into account what you have said, it would not surprise me if you happen to be (or be close to) an ex-pat living abroad. No problem there of course. You rightly point out that a falling pound is bad news for such persons, but then enter the mammoth debate of whether Great Britain should (or should have) entered the eurozone armed with only this grievience as a reason (with the addition of two poorly thought through arguments). Might I suggest that if such persons (bearing in mind that you may well be one of them) wanted to avoid this risk, then they should have retired to somewhere in Britain like Skegness instead of Spain etc. where you no doubt have learned as much of the about the local language as you have about international economics.

  • 6.
  • At 01:18 PM on 28 Dec 2007,
  • Keith wrote:

More like a major recession is coming, I think.

The UK commercial property market is now toast. Expect to see layoffs and companies going bust in this domain, and investors in the commercial property market losing substantially.
As the private sector housing market falls, new builds will slow down causing grief in the construction and related industries. This will also hit the retail industry as people spend less on home-related items such as kitchens, bathrooms, furniture etc.

The government will have serious problems cause by the balance of payments deficit and the need to finance it. Added to that the tax income will fall too, plus the little black hole called Northern Rock and Gordon's going to wish he hadn't massively increased the public sector in his days of so called prudence.

As for a rise in exports - what on earth are we going to export? UK manufacturing industry hardly exists any more and all the income from the financial services industry is going to be hard hit by the credit crunch.

No, the 'miracle economy' of the last 10 years is going to be replaced by a nightmare economy for another 10 years.

  • 7.
  • At 01:20 PM on 28 Dec 2007,
  • stanilic wrote:

May I congratulate you on a very measured and sensible analysis.

I do feel though that the inflationary aspect has been underplayed given our dependency on imported oil and imported food. We have to use oil to get the food into the shops. Shipping and distribution costs are soaring as a consequence. Hopefully this will lead to more localised supply chains.

I anticipate a reduction in consumer spending as a consequence but as you rightly say it will take a lot to change the attitudes of shoppers.

My big concern is the possible return of `stagflation'. We had this in the Seventies and it was a truly awful period in which prices went up astronomically, there was little growth in the economy and so standards of living fell dramatically.

  • 8.
  • At 01:36 PM on 28 Dec 2007,
  • kunjani wrote:

If unemployment rises at the same time as immigration, these will be seen as cause and effect and gloom could turn into something else. What was all that crap we read about Britain being the economic model for Europe?

  • 9.
  • At 01:51 PM on 28 Dec 2007,
  • Jonathan Davies wrote:

The warning signs for the UK economy have been flashing amber for some years now (excessive personal sector borrowing, deteriorating trade defcit etc.) but now it looks like the inevitable slowdown is crystallising.

Gordon Brown has been claiming that he laid the foundation for the performance of the UK economy in recent years. Let's make sure he doesn't forget these claims in 2008 and beyond.

  • 10.
  • At 01:58 PM on 28 Dec 2007,
  • Jeff Gray wrote:

I am appalled! This will not do. The BBC could have employed any schoolboy to write these comments. Are you not supposed to be the economic editor? Where is the evidence to support your comments. You are supposed to supply insightful comments on the economic direction of this country and criticise the policy decisions of the government. What do you offer the readers guesses!!

  • 11.
  • At 02:08 PM on 28 Dec 2007,
  • Paul Hammans wrote:

I agree with the comment about UK manufacturing industry. I think commentators seriously underestimate that we have less competitive edge in this area than we might like to think both in cost effectiveness and infrastructure, the result being that any expectations of manufacturing industry somehow stabilizing or compensating for the country's acknowledged shortfall in reserves is erroneous. The coming pressure to borrow beyond investment will be too great. By the end of this year I fancy people will be talking about imminent recession.

  • 12.
  • At 02:23 PM on 28 Dec 2007,
  • Ashley wrote:

The UK balance of payments current account deficit figure (20bn 2007 Q3 ONS) suggests to me that domestic demand and the pound need to fall. This should mean inflation falls back to target at 2 year, and exports should pickup. What's a little bit worrying is that in light of point 6 public spending probably also needs to slow reducing domestic demand further.

  • 13.
  • At 02:59 PM on 28 Dec 2007,
  • Edward Cockram wrote:

Why should people increase their savings level when the RPI is already 4.3% and the returns after tax on savings are already very small. If inflation is on the increase and interest rates on the decrease many people may decide to carry on spending rather than saving.

  • 14.
  • At 03:05 PM on 28 Dec 2007,
  • Ron Metcalfe wrote:

A major problem with the Uk is that too big a proportion of the economy is depedent on the financial sector. For too long too much attention has been paid to those who have argued that our manufacturing sector is of little importance. I have always believed this argument to be false and the situation we now find ouselves adds weight to that argument. The chickens are now coming home to roost.

Ron Metcalfe BA Econ.

  • 15.
  • At 03:30 PM on 28 Dec 2007,
  • Andrew Taylor wrote:

It's difficult to see what real benefit a falling pound will have in todays UK economy, which is largely built on service industries, retailing, and excessive debt. When Harold Wilson gave his famous "pound in your pocket" speech in the 1960s the UK actually manufactured stuff. Now that "stuff" is mostly imported, from the Dollar area (Far east) and Euroland. A fall in Sterling will therefore lead to higher prices for most manufactured goods.

Logically the way to stem the higher inflation that this will produce, would be to raise interest rates, which would in turn, shore up an ailing currency. It would however also make consumers feel poorer, this exacerbating a fall in growth.

All in all a holy mess! Now, what if the UK joined the Euro? It has to be an option today, since one of Mr. Browns (fairly phony) economic tests was a lower exchange rate, which he now has. The only question is, how to do it without asking a deeply Eurosceptic British public. I feel sure it could be done, with 2 years to go before an election, which Brown seems certain to lose anyway.

Interesting times - and for those of us whose living depends on selling goods purchased in Euro, very precarious times. It won't be too good either for all those anti-Euro Brits. who will realise how much less their beloved pound buys when converted to Euros on their annual trip to the costa-packet. That alone could help sway an an arguement!

  • 16.
  • At 03:35 PM on 28 Dec 2007,
  • Adam Norwood wrote:

To my mind, it is clear that Evan understands the techniques and trcks of forecasting. But why doesn't he express himself more clearly in his last sentence? I take this to mean " ... Mervyn will be re-appointed to make it boring again - if not before, by 2013 at the latest!"

The switch from consumerism to export is much easier said than done.

The 6000 jobs lost at Rover (partly lost forever, partly exported to China) will not come back. The 5500 jobs lost at Nortel Networks in Paignton (partly lost forever, partly exported to China) will not come back either. The latter was much less publicised but no less important, and there will be plenty more manufacturing jobs lost in just the same way but quietly forgotten by those not affected over the last five years or so. High quality jobs, too.

The expertise has dissipated, the equipment sold or scrapped, the buildings redeveloped into retail and housing. The wise graduates for many years have steered well clear of manufacturing and so there is not a large pool of engineers.

Now perhaps the government will see that manufacturing needs to be an important element in the country's economy, the key to regaining control of import / export balance. But it is far too late to switch attention back to manufacturing and expect any kind of rapid recovery in that sector.

As a result, it looks quite possible that any downturn will be deep, long and painful.

  • 18.
  • At 03:39 PM on 28 Dec 2007,
  • Jon wrote:

Forget CPI rates, they're not worth the paper they're written on. The Retail Prices Index hardly dipped below 4% last year, peaking at 4.8%, and is on the rise again. The recent cut in interest rates goes completely against the underlying upward trend in inflation, and far more so than the one in 2005 did.

Inflation could turn out to be an enormous problem if the BoE cuts rates again early in the new year. How high will they allow RPI to go? 5%? 6%? 7%?

  • 19.
  • At 04:16 PM on 28 Dec 2007,
  • fred wrote:

Inflation is 11.5%

M4 money is 13/14%

Evan Davis youre a comedian of the first order we all sit and laugh at your incompetence.

Hi Evan,

I always love reading your blog.

Yes, there is a general feeling that the House Price is going to fall. To be honest, it may not necessary be a bad thing in itself.

Yes, a lot of peopel who boorrowed more than they can afford to will be hit badly, but I believe that teh government will do its best to help curb the situtaion.

See, nothing major will happen before we host the Olympic game in 2012!

It is inevitable that the house price market will ahve to readjust itself, otheriwse the current going rate is unsustainable!

  • 21.
  • At 05:08 PM on 28 Dec 2007,
  • djc wrote:

A fascinating, and well written, piece as always - with Evan moving to the Today programme - I look forward to him interviewing himself about the successes of his predictions in 12 months time!

  • 22.
  • At 05:09 PM on 28 Dec 2007,
  • john thomas wrote:

Inflation, inflation, inflation.

It will rise in 2008 and therefore (if it follows it's own rules) castrate the ability of the BoE to maintain consumer confidence, prop the now clearly failing housing market or ease other recessionary pressures.

This isn't a re-run of 1989, it is a re-run of 1979 (when the oil price spiked).

  • 23.
  • At 05:12 PM on 28 Dec 2007,
  • DaveH wrote:

"I am appalled! This will not do. The BBC could have employed any schoolboy to write these comments. Are you not supposed to be the economic editor? Where is the evidence to support your comments. You are supposed to supply insightful comments on the economic direction of this country and criticise the policy decisions of the government. What do you offer the readers guesses!!"

I would not be so hard on ED - his forecasts/predictions/guesses from last year do not look too bad, but you will find many "experts", whob are way off mark. Having worked (briefly) for BNP Paribas, I was amused in Nov 06 to hear one of their economists saying int rates would fall into 2007 - so, I made a public prediction that they would go up. You will know who was right! I was amused to read the same fool being quoted by the Daily Fail this week as predicting 4 rate cuts next year - it will be two as the economy cannot go back to the 4.5% level, which fuelled the last round of debt and house price inflation (ED has gone for three cutrs!).

ED has however forgotten the level of government demand "created" by Brown, which he gambled would get us through the slowdown, which hit the US and Euroland earlier this decade. It too will be massively scaled back and will be another demand factor taken out of the economy. The BoE will be under severe pressure to cut rates then - the Treasury appoints 7 of the 9 on the MPC after all - but the inflation is already locked in and will only get worse with the UKP's decline. Stand by for another fiddle on the index - to follow the golden rule fiddle of two years ago.

Rates to stay above 5% with a consequent house price fall of about the same as house prices display "stickiness" (like wages they don't fall much as we all need to live somewhere). My neighbour (£35K on an extension and on a fixed rate ending in April) to move!

  • 24.
  • At 05:24 PM on 28 Dec 2007,
  • Steve Ellis wrote:

I think we should look at some of the less used but just as important economic indicators. Are skirts getting shorter or longer? (look it up as an economic indicator, tells you more than you'd think!!) Are cabbie's jawing more in the cafe than on the road as business dwindles? How many empty parking spaces are there at Bluewater at 2pm on a Saturday compared to last year (probably none at the moment but whats it like out of sales season), whats the trade balance between normal digestives and there posh counterpart the 'chocolate' covered digestive? The penny pinching on the basics may tell us more than we see in other parts of the usual stat mill.
Stats based on economin indicators are all well and good but they require careful use given the need for post dated adjustments when the next figure comes in. Just a thought of course.

  • 25.
  • At 05:43 PM on 28 Dec 2007,
  • Martin Hopkins wrote:

2008 will be noted in history as the year of the biggest squeeze ever!

Debt overburdened consumers will tighten their purse strings causing many retailers to panic. Hardship caused by much higher than usual council rate increases, high fuel costs and remortgage costs will affect everyone and push up services company costs

The subprime crisis is not over by a long chalk, it will take more than another year before this demon is contained, banks are powerless in its wake, credit can only get tighter

Baby boom consumers are now moving into retirement fast, they will want to release equity from their houses to fund retirement but they too will start to panic as they notice how difficult it is to sell their house
at the price it was once worth!

Export Income from financial services instruments will drop alarmingly and affect UKs GDP and jobs market
Many store chains will close poor
performing branches adding to the unemployment problem
Consumer goods will over saturate the market and prices will tumble
in every area except food where the prices will double or treble
I already have 40 pairs of trousers and over 50 shirts and they will last me till I die!

Unemployment will rise faster than at any time in the last 20 years
exacerbated by high immigration

Do not think think the USA or Europe will help us out, our exports will dry up and it will be every man for himself!

Martin Hopkins

  • 26.
  • At 06:04 PM on 28 Dec 2007,
  • Valdis wrote:

If the pound fall down much further in value against euro, then lot
of East europeans simply will return to their home countries or will be looking for a job in Ireland,other West european countries and this will help to reduce unemployment.

  • 27.
  • At 06:08 PM on 28 Dec 2007,
  • Bernard from Horsham wrote:

How many caveats does it take to write an article on the economy Mr Davis? Talk about hedging ones bets....

Recession is coming, its not if but when..............

  • 28.
  • At 06:09 PM on 28 Dec 2007,
  • Going For The One wrote:

I remember well attending an RBS Economist speech in Ipswich where he suggested it was OK for redeployment of employment from Manufacturing to the Services Sector such as Restaurants. My thoughts were “utter poppycock – but this bloke is supposed to be the expert, so what do I know.”

As a parent I have concerns where jobs in the UK will come from in the future as everything that can be moved is shipped off to foreign shores. That being the case there is no chance of switching back to exporting and Evan should know this. Such a comment is pure flippancy, shows an abject lack of preparation and ignorance on the part of his readers. I remember in the early 1990’s a Bank Manager’s advice to customers in trouble, “get your sales up and reduce your costs.” Blindingly obvious but maybe not practical when you are in the middle of a recession!

New Labour is not completely to blame, for they have allowed a continuation of Mrs Thatcher’s policy to close things. In the early 1990’s Sir John Harvey-Jones was telling us on BBC2 that to close something was the easy option but once done it would not come back. Good telly but no one was listening and with a continuation of this trend we now find ourselves bereft of real ideas and exposed to China and India. For many years our former Chancellor told us how well placed we were against France and Germany in his budget, but like Evan his comments were misplaced scoring us against friendly competition rather than the true opponents.

If we want to gauge the state of play look no further than the petrol pump. 95% of every item that we buy uses diesel to get to its destination and the haulage industry was been under tremendous pressure to survive when fuel costs were approaching £1 a litre at the pump. For them to continue what they are doing they need to charge their customers more and this will be passed on through the till. That’s a real worry but little press is currently made from it – or has been to date.

Many people in today’s job market have not experienced a recession and would be surprised by some of things us more seasoned campaigners experienced last time around. There is an outside chance that things could turn sour in 2008. Let us hope that this does not happen.

  • 29.
  • At 06:26 PM on 28 Dec 2007,
  • josh wrote:

i have a feeling that if anything by next year interest rates will be fairly similar to this year, to control rising inflation, which has been forecast by various economists who believe that stagflation might actually occur. And noone knows what can be expected from the mpc nowadays, as i thought the recent decease in interest rates was slightly unexpected as there had been an increase in manufacturing industry for the first time in two months and also the fact that the price of commodities has risen, leading to an increase in factory gate entrants and inflation. And with the RPI being at 4.3% i can still see rising in the near future to perhaps 5 or 6, if the mpc continue to cut interest rates. And with house prices falling i can see the mpc wanting to cut interest rates to try create more demand for housing, but again this is all theory. But i believe the Bank of England will have to set a priority. I have made a bet with a fellow colleague that infact we shall still maintain steady growth in the region of 3%, especially if the mpc decides to cut the r/i.

I'd be really intrigued to see what you guys think of my opinions and predictions. Thanks Josh

  • 30.
  • At 06:35 PM on 28 Dec 2007,
  • Jeremy wrote:

I wouldn't let the latest short-term rise in the Euro against the pound and the US dollar deter any Euro-sceptics.

The argument for the UK joining the Euro is largely driven by political interests, not economic ones.

The many economic arguments against joining the Euro express fundamental long-term concerns and still apply in my view, especially while Euro-land embraces such ever-widening and disparate member-state economies, not all of whom play by the same rules.

  • 31.
  • At 06:42 PM on 28 Dec 2007,
  • Jeremy wrote:

I wouldn't let the latest short-term rise in the Euro against the pound and the US dollar deter any Euro-sceptics.

The argument for the UK joining the Euro is largely driven by political interests, not economic ones.

The many economic arguments against joining the Euro express fundamental long-term concerns and still apply in my view, especially while Euro-land embraces such ever-widening and disparate member-state economies, not all of whom play by the same rules.

  • 32.
  • At 06:46 PM on 28 Dec 2007,
  • Philip Rawlinson wrote:

I seem to remember a similar situation an asset price bubble)arrising in Japan in the late 80's - sky high property prices, liquidity difficulties in the banking sector, over-zealous lending, equity indicies at record levels, commodity prices also at highs. Today you could add a few more gremlins - the hidden but huge costs of reducing carbon emissions, the serious implications regarding off-balance sheet financing, complex regulatory issues, massive fiscal and trading deficits (USA), ageing industrialised populations requiring subsidy from a compromised tax base, geopolitical pressures (Iraq, Iran, etc). The response of the Japanese central bank at the time was to reduce interest rates, eventually to zero. And yet the Japanese consumer prudently remained on strike for well over a decade, provoking a bear market that saw Japanese equities fall by over 60% and many companies (some substantial) go to the wall. I switched my pension funds from equities to deposits twelve months ago. I see no reason to switch back despite the prospect of rate cuts, current resilience of the stock market, concerted and coordinated action by central banks, or bullish statements from vested interests. The correction I believe we are witnessing the beginning of could be severe and prolonged both for equities and property. Also, the UK would seem to be particularly vulnerable.

  • 33.
  • At 07:02 PM on 28 Dec 2007,
  • Steve Potter wrote:

Evan states: ‘The UK economy has to switch its emphasis from domestic consumption to exports’.

Just exactly how we do this? Time after time, media & political commentators – and our politicians - trot out comments such as these.

They might just as well state: ‘We must now turn water into wine’ – for this is exactly the scale of problem we are now facing in this country.

Answer this question, Evan - How do we ‘export’ when this country now has NOTHING TO EXPORT?!

Increasingly, all we do in this country IS ‘Consume’.

We have no viable, completive manufacturing industries (and their associated supporting industries) left in this country to contribute to any increased ‘export’ strategy.

So, please do tell me Evan: ‘Just what DO we ‘make’ in this country any more?’

Honestly – what DO we have left to ‘export’ from this country anymore?

Even our much trumpeted Financial Sector no longer has true ‘UK’ boundaries - does it?

This has been more than demonstrated by the recent “Northern Rock’ Fiasco. The Financial Sector is too greatly ‘assimilated’ into the Global Financial System to be regarded as any separate ‘UK’ entity - that might be more greatly boosted to yield a greater ‘export’ yield for the UK’s direct benefit.

The UK is not even permitted to fully support and cultivate its own Agricultural Sector (on the land or at sea) anymore. Our producers are World Class ‘Manufacturers’ ALL – the quality of their produce is second to none – and yet we can not even fully avail ourselves of their existing products (quotas) – let alone invest and augment their potential for increased yield in order to ‘export’ this abroad in the future.

No answers here then.

Of cause, I am no ‘economist’ (thank God) - I am but a simple ‘Engineer’ (now supposedly a ‘rare’ commodity in the UK?)

But I can not help the UK either – for there is no answer in ‘Engineering’ within the UK, from my close perspective.

I work (based in the UK) for a ‘global’ engineering company – and it is they who dictate ‘where’ and on ‘what’ we can – and can not – work.

All my time is spent working on ‘over-seas’ projects where the economic benefit is largely reaped by some other European country (from wherever in Europe the ‘group’ accounts are registered – which is certainly NOT the ‘UK’!)

The ultimate ‘irony’ is that many ‘UK’ Market Sectors (for example, the UK Water Utilities Market) are actually serviced (by my company) from their operations in Germany and Poland – the ‘home’ UK Operation is not permitted to be involved in our ‘own’ industrial market places.
It really IS like we’ve been ‘invaded’ – and no one has even noticed!

Unfortunately, my situation is far from ‘unique’. What ‘Engineering’ there is left now in the UK is typically part of some ‘global’ company – who operate in exactly the same way (for if one does it – they all must do it – so they claim – in order to ’compete’ on the ‘global stage’).

So please don’t look to ‘Engineering’ in the UK to improve our ‘export’ capacities – like it or not, most ‘Engineering’ companies in the UK are now actually working for some other ‘competing’ economic power – anyone other than for the UK ‘home’ nation in fact (sad – but true).

For more than two decades now, this country has been ‘instructed’ by our political masters to do little other than to learn to ‘consume’.

This is what we have done – and very proficiently we have become at it too; but in order to do this, we have all had to borrow financially – and often very heavily in a lot of cases.

Now there are signs emerging (the ‘credit crunch’, for example) that this will no longer be possible and if this is indeed to be the case, there will inevitably follow a ‘severe’ contraction of the UK Economy across all areas and sectors – none will be spared.

Indeed, so far have we now gone in this ‘consume only’ direction that the UK economy will inevitably have to be almost totally ‘stripped down’ before it can be re-built back up around a different ‘model’ for the future?

Otherwise, it surely can not function in any other way than it does at present - and we now know that this present ‘model’ simply doesn’t work (and certainly will not continue to work in the future).

This ‘realignment’ of the UK economic model is going to have profound social implications for all of us.

It certainly does now look that 2008 is the year when it all ‘changes’ – and it isn’t going to be pleasant for any of us.

I would conclude by saying: ‘and my God have mercy on our souls’ – but it isn’t even fashionable - or possible – for us to ‘export’ our ‘religion’ any longer, is it?

‘Happy New Year’.

  • 34.
  • At 07:22 PM on 28 Dec 2007,
  • John Portwood wrote:

An excellent piece of Government-sponsored comments about the future - definitely looked at through rose tinted spectacles.

A more appropriate quote is available on the front of the Hitchikers guide to the galaxy.

  • 35.
  • At 07:43 PM on 28 Dec 2007,
  • Tom Printon wrote:

The Bank of England's room for manouvre is controlled by the target set for inflation. This stands at 2 per cent (as measured by the Consumer Price Index). If inflation varies by more than 1 percentage point (either side) then Mr King has to explain this in writing to the Government. My guess is that reductions in interest rates to 4.75 per cent will cause this, not the least through an over-devaluaton of Sterling. As I write Steling is down to 1.35 Euros and we have not even started 2008. I seem to remember that currency slides are difficult to control and all too easily get out of hand. I think that the authorities should be a great deal more circumspect in their comments about exchange and interest rates. Now is the time to be cautious - even boring!

  • 36.
  • At 07:59 PM on 28 Dec 2007,
  • David Gale wrote:

Whilst less sanguine about inflation (I believe it got out of the bag at least a year ago!) most of the rest accords with what seems to be going on tho' the early part of 2008 could bequite rough. A particularly interesting issue is the question of whether the euro debate starts again and how those economically, rather than purely politically, opposed to entry will react when contempory events favour entry. This could be in 2008. Certainly sterling falling against the euro alongside or even slightly faster than the dollar will bring at least one of the fairly sensible "Brown tests" for joining into line.

  • 37.
  • At 08:28 PM on 28 Dec 2007,
  • nic wrote:

Mr Davis,life being what it is,some of your assumptions/guesses will be wrong. Some may be correct.
Without getting too involved,I believe that the seeds of inflation are already sown,and most importantly,and seemingly unrecognised by many economic commentators,real inflation is now running much greater than is shown by official statistics.
This means that all decisions based on inflation,are being made on false data.
The impact of this is serious right now,and will become more serious in 2008.
All other countries admit that inflation today is a problem,and yet in the UK it is denied by the government.Surely the UK is not ring fenced against inflation!

  • 38.
  • At 09:02 PM on 28 Dec 2007,
  • J attwood wrote:

An economy based on the unlimited availabilty of personal debt, driven by unregulated financial sector greed and the sale of a large proportion of our infrastructure and major companies to overseas control doesn't seem like the best way to build a sound and sustainable future for the UK.
Exporting more of our independence and the control over our interest rates by replacing the Pound with the Euro is the last thing we need.

  • 39.
  • At 09:30 PM on 28 Dec 2007,
  • Richard wrote:

What makes this period interesting is government debt. Comparisons with 1989 are pertinent - but then the government was running a surplus (remember talk of paying off total public debt?) and this time Labour is running a huge deficit. When the economy slows, the impact on government debt levels will be profound and the political pain - especially for a Labour Party used to big spending rises - will be sever. All in all a fascinating year to observe. On the pure economy - I think a mild form of stagflation is in view - with limited growth and stubborn inflation.

  • 40.
  • At 09:37 PM on 28 Dec 2007,
  • bilbobaggins wrote:

The UK is finished, no manufacturing industry, the supposed service industry outsourced left right and centre, and financial services will be gutted in the coming depression.

3rd world economy here we come. Knowledge economy don't make me laugh, the only knowledge this government and it's supporters have is one of self delusion and how to rack up debt.

On the bright side I suppose the whole of the UK may receive EU objective one status though.

  • 41.
  • At 10:24 PM on 28 Dec 2007,
  • old man wrote:

Reading this blog, I get the impression that Evans is trying to talk the economy up. Of course there is always a strong case for assuming business as usual but there are shocks on the horizon that can knock the economy off balance. We know we are heading for a downturn and so the following can provide these shocks.
1. Taxation. Received wisdom says reduce borrowing during the good times, spend during the bad. This government most emphatically has not done this. Taxation must rise or spending fall. Both whack the economy in a downturn.
2. The financial service industry now constitutes 20% of the economy and contributes 25% of corporation tax. Of course this is fine if you subscribe to the Homer Simpson theory for running a successful economy.
3. The economy has been driven by consumer debt for years. This is an indisputable fact. People borrow on the rising value of their properties and either spends the money or give it to their children to buy houses. The former props up the economy and the latter props up the housing market. The banks have become extraordinarily predatory in their acquisition of business. This is not bad debt for the banks; it is simply that the banks have become very adept at taking people to the very limit of the capacity to repay. (This is my day job). However this edifice depends on continuity. A significant increase in unemployment or increase on other costs damages the model with its consequent effect on revenue (see 1 & 2 above plus later). Consumer debt is whacked.
4. The housing market is seen as the major determinant of economic wellbeing. We already know there is a downturn in this market but how deep will it be? Selling houses is simple. You need people who have the money to buy them. Over the last 5 years this money has come from massive personal debt, parents subsidizing children by borrowing on the increased value of their own property, buy-to-let purchasing based on questionable valuation of rental properties and optimistic profit expectations. The buy-to-let market is whacked.
Personal debt is whacked.
Daddy’s purse is whacked.
5. I was stunned by the absence evaluation of external pressures in Evan’s forecasts. Oil prices are already silly. I read books only a few years ago that suggested that claimed that oil prices of $100 a barrel would mean the end of earth as we know it. We’ve seen oil price increases of something like 80%. If this trend continues we are stuffed. It’s claimed we might be at peak production, if not in resource, in refinement capacity and we compete with massive demand from China and questionable supply from Russia.
So in a calm and sensible evaluation I can simply say that on balance we are probably whacked.

  • 42.
  • At 10:48 PM on 28 Dec 2007,
  • Jonathan Roberts wrote:


Thanks for the information. While I have your attention, can you tell me if it will rain on the afternoon of May 14th 2008? I might be going for a walk.

God bless all economists,

Happy New Year!

  • 43.
  • At 11:00 PM on 28 Dec 2007,
  • Barry Levene wrote:

My question to Ivan is: why is the UK not bankrupt? We don't produce (manufacture) anything of major significance here anymore, we are a net importer of goods and food, our exports are at a very low point (not helped by a ridiculously overvalued £), our balance of payments is billions in the red as a result, and yet everyone keeps shopping till they drop on borrowed lines of debt (called credit). Just exactly how does UK plc manage to keep going? Why have we not gone bust years ago?!

  • 44.
  • At 11:35 PM on 28 Dec 2007,
  • Joe Postin wrote:

Amazes me that the BOE can reject its' only mandate, which I believe was to maintain CPI between 1 & 2 percent.
At 2.1 for two months now, this is no reason to go lowering rates.
Clearly their remit has changed slightly, demonstrating more economic management than the simple rules of engagement it was issued with when given its' independence.

Personally, I see much gloom ahead.

I hope having moved to Australia 2 years ago that the demand for their resources will shelter this country from a global downturn.

If the Chinese currency is revalued then all those manufactured goods currently imported into the U.K will become much more expensive and inflation will accelerate.

Back this will falling asset prices and I do mean gloom is ahead.

  • 45.
  • At 12:47 AM on 29 Dec 2007,
  • Stokite wrote:

Hi Evan,

Your latest article seems to be quite self-contradictory.

• A consumer slowdown;
• Offset by a rise in exports;
• Driven by a falling pound.

You may be looking for the abovementioned points, but I’m afraid, you aren't going to see any of them.

And I'll tell you why.

- You yourself said that shopping habits die hard. So we can safely discount the consumer slowdown out of equation.

- When you say rise in exports... Do you realize that you are asking 18.2% of the population (working in industry) to bail out 80.4% of the population (working in services)... and that too in 12 to 18 months time? That's a big ask. I wouldn't put my fiver on it.

- That leaves us with falling pound that can only be achieved by lowering interest rates. As you have forecast the interest rates to be at 4.75% by the year-end. I can't see interest rates and subsequently GBP falling enough to prop up exports. In any case, what does UK really export now a days anyways?

Let's face it, Evan. The economy is in doldrums and there is no magical solution in sight at the moment other than increasing industrial production.

The state of our industry in terms of its infrastructure and global competitiveness does not give me any confidence boost in this regard.

This coupled with the fact that government, due to its unparalleled current account deficit and ever-burgeoning public debt, will be unable to give the general public any relief from fiscal side, I think the Santa has to think long and hard about his trips for Xmas 2008.

  • 46.
  • At 01:06 AM on 29 Dec 2007,
  • David Thomas wrote:

I think that inflation will be far worse than expected, particularly in food. There are two problems here. First, world food stocks are at a low level and any upset to a harvest anywhere could send prices soaring. Second, we are facing a long term secular change in demand from India and China whose increasingly wealthy populations are eating more meat and dairy. Sadly, so many farmers have left those sectors, particularly dairy and the cost of entry to the dairy sector is relatively high consequently we will be facing big increases in food costs next year. I think this will impact on the poorest who will demand higher wages etc.

  • 47.
  • At 02:25 AM on 29 Dec 2007,
  • Richard O'shoea wrote:

Yes, yes, all very rational: it's a shame Economics isn't though.

  • 48.
  • At 09:50 AM on 29 Dec 2007,
  • Javed Usmani wrote:

"THE wearer know where the shoe pinches"the deficit and profit making business history.The new monetary world is not depend on economy have might pay to wait a while?its a good look and view-- related all part waiting for surgery .but fixing to time at, when economy growth become down.

  • 49.
  • At 10:08 AM on 29 Dec 2007,
  • Ian Kemmish wrote:

I wonder if there's any correlation between someone's fear of inflation and what age they were in the 70's?

Another factor here is that, with a new Labour PM who's perceived as being not exactly on top of the job, the union leaders seem to be sniffing the chance to flex their muscles again....

  • 50.
  • At 01:04 PM on 29 Dec 2007,
  • Dee wrote:

Evan one again you are "spinning for Gordon". Great to see that a few of the replies have latched on to the reality of inflation and the RPI being above 4% (what is is that the Police are being offered?). Retail Price Inflation this last year has been higher that at any time since 1992. The Chancellor benefited from low global inflation for the last 10 years. The economic policies of Gordon Brown are now going to catch up with him when Britain is going into a period of lower growth, falling house prices and rising inflation. I don't think that the Bank of England will be able to move interest rates around to minimise the fall in house prices, I think that they will have more pressing issues to deal with first.

Evan is totally wrong when he stated Peak Oil will happen in 10, 20 or 30 years time.

Peak Oil actually occurred in 2003/4 !!

He has seriously misled the listeners!

The only thing he said stated correctly was that Peak Oil is going to be a bigger issue than Global Warming. Mind you, he also forgot to mention that world Population is going to hit 12 billion by the end of this century!!

I suggest that both he and your listeners read by Blog at:

"On The Edge - Climate Change is NOT the real crisis!"

  • 52.
  • At 06:09 PM on 29 Dec 2007,
  • Maureen wrote:

In my humble opinion we are in for a very bumpy ride indeed over the next 10 years and need to buckle up. We are currently buying trinkets from the Chinese and letting them buy our crown jewels. This is happening in the U.S, Canada, Australia, and Europe. We are on the fast track to becoming service countries with no manufacturing to speak of. Salaries are on a downward spiral and jobs are being lost at an unpredented level to China and India. As there is little chance of this being reversed then we are certainly on a downward trend. As for the Chinese re-evaluating their currency, good luck to that happening any time soon. It is working too well for them to make a rush to change. I currently live in the U.S and we are being sold down the river by the U.S government in a boat with no oars and a hole in it and I have learned that what happens here, happens elsewhere a year or two afterwards. Did I hear someone call out "Iceberg ahead".....

  • 53.
  • At 06:38 PM on 29 Dec 2007,
  • Kate King wrote:

In Evan’s interesting observations for 2008, I was hoping to learn his views on the likely impact of the chancellor’s proposals for changes to the UK’s tax policies (esp. to capital gains tax and the taxation of foreign workers/residents), coming at a rather interesting time in the short-term economic outlook.

With the rising mobility of people and financial flows countries today have to look at their tax policies in a far more competitive way. Even subtle tweaks to tax policies can attract foreign capital, highly skilled workers and business investment over and above that flowing to other countries.

But the opposite is equally true: capital, investment, workers and entrepreneurial initiative can abandon a country if unfavourable fiscal policy drives it away.

So I hope you’ll let us know your thoughts Evan: Are the tax changes careful driving or a bad steer?

Brilliant predictions, I agree with almost everything. More so for being boring as Adam found. I find doomsday predictions interesting but they are so terribly wrong!

In fact, these predictions may as well be for the next decade - UK and the entire Western world will slow down, but standards of living will be maintained and rise ever so slowly.

One must not miss the woods for the trees CNBC throws at us.

  • 55.
  • At 07:04 PM on 29 Dec 2007,
  • Alex wrote:


CPI/RPI - it does not matter which ones is used since the government wants inflation to dig it out of a balance of payments hole.
It also wants inflation to help out people with their personal debt.

Despite lots of talk about fighting inflation, the government has done nothing about it.
All the items, which would show inflation increasing, have not been used to set interest rates, therefore interest rates have been too low.

It is the poor and the young who will suffer because of inflation, caused by government errors

  • 56.
  • At 07:37 PM on 29 Dec 2007,
  • Scott wrote:

Everyone speaks as though British manufacturing's decline is irreversible.

I wonder if 2008 will set the scene for a revival?

Low interest rates make business loans cheap, high unemployment keeps wage costs low, a low pound makes exporting easier...etc

I wouldn't be surprised if a few bunches of finacial sector workers laid-off in 2008 don't throw away their ties and get their hands dirty in 2009.

  • 57.
  • At 07:59 PM on 29 Dec 2007,
  • Maria Amadei Ashot wrote:

Let's say, then, that the world economy in 2008 will reside in a place like London (rather than a place like San Francisco): a place with just as much fog as SF, but cleaner, crisper air; where mildly overcast skies & magical morning mists can suddenly give way to spectacular azure skies dotted with glorious clouds; where all four seasons do appear, and the weather can even be extreme at times -- but milder temperatures have become in fact more frequent than before; where there are no fault lines to speak of -- and where there are master gardeners with an astonishing genius for carefully, tenderly, brilliantly nurturing the most remarkable roses I have ever seen on earth, along with every other form of life... Godspeed, Britannia! Let's just get through the next 400 or so days without any new wars...

  • 58.
  • At 03:46 AM on 30 Dec 2007,
  • Mark wrote:

Gosh, Evan, that's forecasting without a safety net! I didn't think that anyone would still be in the business of unqualified macroforecasting - nice to see that you are willing to give it a go!

Two observations from me: you suggest the economy might slow to 1.2-2.0 growth, but that will, in effect, mean for whole areas of our economy a real and significant retrenchment. Jobs WILL be lost, destocking WILL happen, asset values WILL fall. I don't see a 1.5-2.0% growth rate as 'an adjustment', in short: it will paralyse much of our economy.

The second observations relates to what you say about the personal sector and consumer spending. I think that the credit crunch has now bitten, and will continue to bite, well into 2008. The hair shirt of modest consumer spending and credit uptake will allow interest rates to fall a little, but there is too much going on in the system to allow that to have much effect (in my view, only a bit of the sub-prime fiasco is now working itself out; there is more to come and it'll be much worse...).

All in all, I'd be with the pessimists on the outturn for 2008.

Good luck to you in your new role on the Today programme in 2008. Many of us will miss the Evanomics blog if it has to give way to the demands of a morning news show. You've proved, and continue to prove, that economics can be interesting. Full marks for that!

  • 59.
  • At 09:44 AM on 30 Dec 2007,
  • lossaversion wrote:

I called for a rate cut in UK before year end at a time when all were seeing higher rates and going forward we are due to see stagflation ie economic slowdown/contraction plus rising prices a situation that no Central Bank can deal with effectively

As always monetary policy obsesssed observers in tha main forget the powerful tol that is fiscal policy ie the Mundell Fleming model and given we live in a world of homo sapiens and not homo economicus fiscal policy would be useful to dampen the gloom that lies ahead ie use of higher personal allowances and a reduction of basic tax rates as well as lower corporation taxes.

But this govt has no room and so I'm afraid with banks reluctant to expand credit its going to be a tough couple of years when inflation will get away from us

I suggest we are facing a period not seen in economic history where a combination of negative factors have yet to play out their full impactand although behavioural ecoonmics predicts that people will be seeking to draw upoin parallels from history to overcome our feeling of discomofrt with the uncertainty that lies ahead. I have a fear that the unknown will result in even more imprudent actions by those responsible for the current credit crisis and its consequences. The system needs a good shake out but no one is brave enough to inflict the short-term pain to restore long term stability.

The Fed (election year coming up), BoE et al are powerless as are governments to resolve the situation so we are left with responses that are too little too late.

Those with cash will be able to pick up the bargains while those that are addicted to debt (consumers as well as financial engineers etc) are due
for a severe bout of cold turkey

Hapy 2008 to one and all

  • 60.
  • At 10:38 AM on 30 Dec 2007,
  • Neil Small wrote:

You don't need a degree in economics to see that there are problems ahead. High food prices in the shops (many probably deliberately so), high energy prices, ridiculously high taxation on fuel, above inflation council tax rises, below inflation pay rises. When oh when will Labour learn, you need a balance between taxataion and spending. Overtax people and they don't spend their free cash, therefore retailers and manufacturers (do we have any?) don't make profit therefore lay off more staff. These now unemployed don't purchase goods. Added to all that is the insanity of PFI. How in the world can a council have school buildings they do not own? We have them up here, and all the clubs that used schools in the evenings are now not allowed as the company that owns them refuses to rent evening space out.

The UK economy is going into a deep recession, much like the late 70s, but we have little manufacturing capacity to pull us out.

  • 61.
  • At 02:01 PM on 30 Dec 2007,
  • paul vidal wrote:

Consumer spending has been fueled by an explosion of easy credit. Government spending in a 'boom time' has been beyond the bounds of reason and caution.
This 'feel good' approach of Government has been largely unsustainable and bound to come back to bite us.
To think that we can 'export' our way out of trouble seems highly unlikely.
Added to this is the need to develop 'sustainable' economic planning for a new, greener world.
I would like to hear economists take on this challenge and present realistic policies that might address the problem, rather than just talking about a little re-jigging and alot of luck!

  • 62.
  • At 02:24 PM on 30 Dec 2007,
  • Richard Durkan wrote:

Dear Evan Davis

On Radio 4's Correspondents' Look Ahead programme on Saturday you questioned whether the large income Russia was receiving from oil sales etc was being very wisely spent. Could you elaborate on this please and direct me to any further reading?

  • 63.
  • At 07:52 PM on 30 Dec 2007,
  • A Person wrote:

I can't believe what I am hearing; we are talking ourselves into a recession yet again. Why do we have this habit? Can we not trust our leaders of politics and finance to resolve this? We have become a nation that trust none, we what to be different (from Euroland) but from whom? We must embrace the Euro €, we must believe in our heart we are Europeans, 15 countries cannot be wrong, can they? By adopting Euros we will eliminate the exchange rate of £ to € and therefore make trade easier and quicker.
Secondly we must also Schengen Visa, so one who visits the mainland (I do not wish to call it Continental, as we are an island off the mainland) might pop over to see the beauty, authenticity, and monarchy we offer unlike most of our cousins. We (try to) speak English which apparently is the most widely spoken language in the world, we can make vast amounts of money on tourism. We can live off our history as many have read our Victorian novels; works of our greatest bard and many great thinkers, their landmarks are our greatest offerings. In addition we have a thriving finance sector, a successful retail industry, an overall pretty good tertiary sector.
We have a lot to fall back on if required. But I strongly believe need not bail out, everything will turn out just fine. I am not saying there is no credit crunch, I believe many individuals who have been reckless in the past will get a reality check but we should not aid then and sabotage our existence. Many are there with comfortable saving for a rainy day and many others who want a drop in house and/or share prices to make their moves. We are reaching a point of survival of the financial fittest.

  • 64.
  • At 03:17 AM on 31 Dec 2007,
  • Campbell wrote:

I lived in England for appx. 35 years before returning to Canada. I saw the downfall then. Marks like Jaguar and others going to Germany etc, etc, etc. It appears that Umteen wars could not bring this Powerfull country to her to her knees, but the BS rules and burocracy has. I beleive that The common market was the worst thing ever to happen to that great country.

God help us.


  • 65.
  • At 04:56 AM on 31 Dec 2007,
  • Joe wrote:

I have read most of the comments all I can say is remember 1979 and which party was in power when the country was declared bankrupt

  • 66.
  • At 08:07 AM on 31 Dec 2007,
  • Andrew wrote:

I am afraid that the UK government will take its lead from the FED and inflate with them. Both the UK and US have got themselves in a real mess with over regulation cheap credit and cheap energy. This is now coming to an end. Monetary inflation can last almost forever, BUT inflation caused by credit cannot. Both government / central banks are very scared about a deflationary slump. They will probably start to print money like mad to try and keep things moving. However, a big problem they have to face is if the public believes inflation is on the way, they will refuse to hold cash and instead go out and buy anything shifting demand curves and price increases, in its worst scenario this is a crackup boom (see Ludvig von mises).

Also as I mentioned above CHEAP energy. This is all about to change, since 9/11 we have seen (read Chaney's "Project for New American Century") the US and UK government (and Spain, all three the most indebted nations on the planet) invading two countries for oil, and then giving huge contracts to its favoured companies. We have probably less than 3 - 5 years before a MAJOR increase in oil prices due to a true peak in production comes into effect.

I saw an interview the other day with one of the energy advisors to Chaney (Matthew Simmons) and he said that the public really do not understand that a huge crisis is coming which will effect our way of life and the economy. This will have a huge impact on food prices and energy costs. Dont forget with regards to high food costs we have government intervention to thank again:

1) China and India both have real wage increases and they want to eat better
2) All pesticides and fertilizers are made from either oil and natural gas, you do the maths
3) Food (cereal production) is falling due to ethanol production (with government intervention)
4) UK and the US are bankrupt!
5) There will not be increases in industry as the pound falls. There is too much red-tape, taxes and a credit crunch.
6) Next year we will be at around 200 dollar oil which with a falling pound means we cant afford it either (wait for them to invade Iran, we will just by coincidence see some more terror attacks in the UK or US soon where the public will demand military action, more laws, ID cards....etc).

High inflation or deflation is a distinct possibility next year as governments move to try and deal with the above problems.

A truely free economy (not planned by government and do-gooders) would have dealt with this problem years ago, because the price of oil would have naturally gone higher and so, people innovate, this is a slow process which cannot be crammed into 3 - 5 years before the word gets out and there is a run on tangible assets away from paper (bonds, notes, most stocks etc).

  • 67.
  • At 10:34 AM on 31 Dec 2007,
  • Peter Baldwin wrote:

Even with an abacus I can forecast better than you Evan! It seems to me as if you are standing at the bottom of a mountain which is having an avalanche and you still have your ear muffs on. Turn around and take a good look at what is coming your way, and then like the rest of us you will understand it is time for some very serious bunker building, and pray you are on the inside and not outside with the whole mountain falling on your head.

  • 68.
  • At 11:21 AM on 31 Dec 2007,
  • Paul Pickard wrote:

Put 3 economists in a room, ask them about the future and you will get 4 different opinions.

  • 69.
  • At 12:50 PM on 31 Dec 2007,
  • jonah wrote:

Unfortunately the economy is nowhere near as solid as people like to think. Just like termites eat away a wooden structure from the inside leaving it terminally weakened but still looking solid, so the crushing levels of debt at all levels have left an economy looking fine but really based on an unsustainable boom in debt.

When people find their finances squashed between low pay raises on one side and rising bills and taxes on the other side they struggle to pay their debts. When that starts to happen it snowballs, since people reducing their spending has a knock-on effect on retailers, who struggle to maintain margins, so lose staff, who stop spending, and so on.

Gordon Brown may have sold our gold at the bottom of the market, but he's also sold the entire country a barrowload of fools gold.

  • 70.
  • At 01:10 PM on 31 Dec 2007,
  • Doug Morgan wrote:

An excellent and informative forecast, and despite an earlier respondent's criticism that you were 'guessing,' well, lets face it, no one can predict the economy with certainty as it is somewhat random and chaotic, a bit like the weather. We wouldn't be able to tell whether it will be raining in a month's time, would we?! At least the 'guesses' are educated to say the least.

  • 71.
  • At 05:08 PM on 31 Dec 2007,
  • Mark wrote:

Listening to the talk about the UK's economy on PM's question time a few years ago, I was struck at how naive Brits and other Europeans are to think that they can affect their economies more than marginally unless they make drastic changes which are politically unacceptable. Their exchanges seems to me like they're discussing what size surf board to use to ride through the approaching tsunami. The hyperpower's economy drives the world. If it slows or goes into recession, there's not much anyone else can do about it. Ironically, Europeans have made every conceivable move possible to affect an American economic downturn from refusing to take on their fair share of the cost of fighting in Afghanistan and Iraq to joining the American sucker bankers who bought the sub prime mortgage investments, their bankers being no smarter or more diligent about knowing what they were buying than America's. Europe will pay for its stupidity in spades. The last major positive change the EU made was during Thatcher's era when Britain was the ONLY European power to understand that the economic hothouse America created during the cold war which drove European prosperity wouldn't last forever. Europe's macroeconomic outlook is grim. All Britain has to do now is to join the Euro to go down the sewer pipe with the rest of the continent. If Britain was smart, it would vacate every treaty it has which constrains its freedom to act in its own economic self interest. That would mean the end of its participation in the EU except as a trading partner. It won't happen, it learned nothing from the ERM fiasco.

China cannot allow its currency to increase in value. This would decrease the volume of its exports and they are in grave jeopardy as it is for both political reasons due to backlash over loss of jobs to it in its export market countries and likely economic downturns in them as well, the EU and the US the principal ones. The Chinese stock market is a bubble which is certain to collapse and its banks are riddled with bad loans which are equally fragile. It is not clear how much longer the Chinese economic "miracle" can survive but it doesn't seem like it will for a whole lot longer to me.

Brace yourselves, 2008 could be a rocky ride.

  • 72.
  • At 06:15 PM on 31 Dec 2007,
  • Cameron King wrote:

Wow, the comments are more insightful than the article.

I agree, CPI is junk, massive inflation is in the pipe, stagflation here we come. Lack of a significant manufacturing base and lack of investment in that infrastructure will make switching into production and export mode a little tough.

Plan for the worst hope for the best.

  • 73.
  • At 08:52 AM on 02 Jan 2008,
  • Angus wrote:

Evan, aren't you the bloke who told 5_Live listeners in around 2003 that the housing market was safe as, er, houses? Didn't you trot out all the sales banter on behalf of the real estaters and money lenders of the time?
When I saw red flags, you were talking up the bubble Evan. I never heard you reporting that house values were racing ahead of salaries, driven up by the greed of speculators.
I learned the lesson of the late 80s in the UK and the 90s in HK. You seem to have learned absolutley bloody nothing! How do you hold onto your job as economics editor for the BBC?

  • 74.
  • At 10:22 AM on 02 Jan 2008,
  • Geoff Brown wrote:

Evan as always your article was interesting, thought provoking and contained all the usual ifs. but's and maybe's that city economists like to include in any report on the future of the economy.

After reading your comments it is fairly evident that everyone in the UK is about catch a dose of something nasty and while certain groups will be hardly affected others will be seriously affected and might not survive the ordeal.

Therefore in an attempt to make sure that everyone (according to class and breeding) is fully prepared for what is about to happen I have prepared my own detailed scenario of how the changes in the economy in 2008 will impact on the different sociological groups (i.e the wealthy, the middle classes and the the poor). By carefully analizing what I have to say the different groups can hopefully better prepare themselves accordingly.

The wealthy (city types and aristocrats) might be inconvenienced but will remain unaffected by what happens.

The conservative middle classes, who can afford to get by without the need to spend all the money they earn, will also overcome any difficulties by going on cheaper holidays and buying cheaper wine or drinking less wine.

The more exuberant middle classes, who who enjoying spending all they earn by showing off, will have difficulty funding that hedonistic life style and some of them might have to become working class.

Unfortunately the poor old working class will suffer the most pain and in order to survive they will have to walk the streets and borrow even more money at at higher rates in a vain attempt to survive.

It's the same the whole world over.

It is interesting that Ron Metcalfe thinks that British manufacturing will survive in these days of the global economy when the labour cost per unit manufactured here is vastly greater than that manufactured elsewhere. Manufacturing goods that people do not want to buy is what sank most of the British industries. Example - the Rover Group !!

Or are we going to send our non-existent gunboats to demand that the "damn natives" buy those vastly over-priced products instead of their own cheaper ones ??

The services sectors, especially the financial services sector, are the only ones where the British can compete effectively and even excel in. They are what keeps Britain afloat !

  • 76.
  • At 03:28 PM on 02 Jan 2008,
  • Mark wrote:

I predict that Euroland will either go bankrupt this year or that by the end of the year, the prospect of it will loom so large it will seem inevitable. Euroland has no market niche in the world outside itself and can no longer hide behind protectionism. China has cheap manufacturing labor. Japan has technology. India has software and telephone operators. The US has agriculture, technology, financial and managerial services. The third world has cheap labor and natural resources. Europe has none of them. High labor costs, impossible restrictions on investment and labor laws, third rate technology, and no prospects of anything changing because proposing it would be political suicide. I also predict the Chinese stock market will crash and between that and the EU collapsing, China will also slide into the abyss. Besides how many cheap Chinese made shoes and clothes can Americans continue to stuff in their closets, how many cheap Chinese made electronic toys can they keep in own home at any given time. This when they are worried about the price of fuel, their jobs, their mortgages? Will Britain go down the same tube as Euroland? That remains to be seen but Britain's left is working on it.

  • 77.
  • At 09:45 PM on 02 Jan 2008,
  • Mike Jewkes wrote:

As a Manufacturing Engineer with 40+ years experience I can assure Evan that we cannot dig the country out of this mess. A mess created by the short term antics of the City of London greed merchants. It takes time to develop and market products that people want to buy. The Germans, Japanese, Scandinavians and others have banks and social economic policies that appreciate this fact. All we have is the rentier caste of city dealers who know nothing other than the rapid buying and selling of our future for their own personal gain. Suggest we all read Will Hutton's'The state we're in', ten years ago it was ahead of its time.

  • 78.
  • At 10:40 PM on 02 Jan 2008,
  • lossaversion wrote:

We are in the midst of sufferinmg from the biggest systemic failure since the last one (Enron et al) and we still have yet to learn the lessons from the time of Ivar Kreuger, the grandaddy of all financial shennigans of the 1920s and 1930s

We are set for stagflation which no central banker van deal with.

The overemphasis on monetary policy has made al but a few forget about fiscal policy and of course the Mundell Fleming model.

In UK's case fiscal policy will be difficult to use although to help the innocent and not bail out those who created the mess, Brown should raise personal thresholds and reduce tax rates- Evamn I'm sure you recall the Laffer curve (personal basic and corporate) but given that SMEs will be paying higher rates he has painted Darking into another corner.

We are facing a scenario not seen before althogh one that has the features of the various fallouts of the past - we ain't been here before

Returning to the use of fiscal policy rational economists would scorn this but it has helped the US via Bush and the Democrats too are making unusually encouraging fiscally based noises

Since we exist in a world of Homo Sapiens and not Homo Economicus - fiscal policy is the only tool left while monetary policy will continue to perpetuate moral hazard and encourage inflation.

Time for a change but it will not come as the silver bullet of monetary policy cannot hit several targets simultaneously. Time for a behavioural approach

  • 79.
  • At 01:21 PM on 03 Jan 2008,
  • Mark wrote:

The UK has made its biggest economic mistake out of mere pride, and an economical suicide when it decided not only not to join the Euro, but also to untie from SME that recstricted currency exchange fluctuations to 5% within the Eurozone.

This led to an artifical strenghtening of the pound that among other factors strangled the UK manufacturing forcing the closure of several businesses.
Foreign business also diverged to other countries to set their base in the Eurozone: see the example of Holland and Ireland who have seen a steep economic growth.

The UK is no longer an attractive base for US and Eastern companies to set their base into Europe, simply because it does not trade in Euros.

There is only one sensible solution: join the Euro now because:

1) even with a weak pound re-building the manufacturing industry is a long term solution tampered by the competition from countries who already have the Euro and lower labour costs than the UK (Poland, just to mention one)
2) in the the short term it will benefit the UK financial sector by attracting more service based business
3) it will stop business closures led by migration to a Euro based country
4) it will make the UK attractive again for those companies outside the Eurozone who require a base in Europe.

  • 80.
  • At 05:09 PM on 03 Jan 2008,
  • DaveH wrote:

I am sure, Evan, that you are not ignoring my poists - so I will try agaoin and hope the BBC server will actually work!

You have ignored one key factor - namely, the level of government demand. Brown took one huge punt in 99-2000, betting that an expansion in public expenditure would maintain the overall level of demand while the world wobbled, so that the economy would continue to expand and then create enough wealth to pay back the debt (plus the Enronomics off-balance sheet debt). Trouble is that this most socialist of policies did not work - there has been no economic miracle and now the bills are due.

Consequently, the Govt spending round is to be curtailed, which will reduce overall demand in conjunction with private consumption. So, things are going to get rocky as the BoE will be under political pressure to cut rates and will bow to it to some extent, but inflation is already built in and will only worsen with a falling pound, which may well drop to something like 1.30 to the euro and 1.85 to the USD. Add in the pressures of extra government borrowing and int rates will not get below 5%.

  • 81.
  • At 02:45 PM on 04 Jan 2008,
  • lossaversion wrote:

Outlook for 2008 will be stagflation which Central Bankers and all those who see monetary policy as a panacea will be left scratching their heads as to what to do as the econmy slides into recession and inflation remains above target.

There is a way to ease the pain to come although this requires the use of fiscal policy ie policy co-ordination a la Mundell Fleming.

Through higher persoanl allowances and lower basic tax rates as well as lower corproate tax rates for small and medium size businesses there may be the potentiualo for stimulus akin to that prescribed by Laffer and his Laffer curve.

Economists may argue that fiscal policy is impotent because we are rational althogh I counter as a Behaviouralist that we ae Homo Sapiens and also the tax cuts in US have also helped its economy. I would not be surprised if the Democrats also sart making similar comforting fiscal noises.

However Brown's last budget has provided another rod for Darling's back (inaddition to the tripartite system of bank regulation) as the fiscal outlook both stucturally and on a headline basis looks tioght.

Sadly the UK outlook will be more severe than Evcan make out especially as the full extent of the bursting of the credit bubble as yet to be played out.

The amount of dissonance being dispalyed by those responsible for the bubble and also by regulatiors exposes the limitations of our economic system.

The excesses of the debt bubble highlight the fact we have learned nothing from previous excesses even though we have sen them hapen so often in the past (please check out the story of Ivar Kreugar of Sweden Match of the 1920s and 30s - the grandaddy of financial shenanigans)

We are in the midst of something that has no parallel with history although its causes are familiar.

Following Enron etc trust and confidence have again been compromised although unless a different approach is devised to ensure future crises are minimised there will be more fo the same next time around.

  • 82.
  • At 04:25 PM on 04 Jan 2008,
  • Paul Wilson wrote:

I'm not sure why Evan expects the savings ratio to increase when the average consumer is saddled with so much unsecured debt. If anything I would expect a greater proportion of consumers disposable income to go towards debt servicing (capital repayment).

The main danger is underlying inflationary pressure which I expect will be passed onto consumers by industry as has started in the US. My parents who live in the US have noticed a significant increase in their average weekly shopping basket as a result of retailers passing on the additional costs of fuel and commodities to consumers. I do not consider that aggressive cuts in interest rates by the central banks is the answer, as although this provides short-term relief to the highly leveraged, in the long-term it will be more painful. The high indebtedness of consumers & firms needs to addressed now and lending criteria of financial institutions needs tighter regulation.

  • 83.
  • At 05:44 AM on 06 Jan 2008,
  • Richard wrote:

it never fails to amaze me how people interested in economics discuss inflation as if its some mysterious cosmic force.

its true that inflation in small closed markets can be caused by too few products, so prices rise ( supply side ), or too much demand ( demand side ), and this can be difficult to gauge... however we are not suffering from this.

inflation today is caused by central banks pumping fiat currency into the system at a rate of knots, to cover the cost of wars, government over spending, cronyism and general corruption, and just plain poor fiscal management.

the FED and the RBE and EU BANK are guilt of massive inflation... almost all the inflation is caused by the central banks watering down the currencies at a rate of 10-15% per year.

the so called credit squeeze is only a symptom of this rampant inflation by central banks, pumping false money into the system on low interest, so people can buy things they dont need with money they dont have to impress people they dont like......

its madness and it ends in huge depression.

every paper money in histroy has gone down the toilet like this and Gordon Brown flushed it back when he sold off most of the countries gold.

  • 84.
  • At 02:32 PM on 07 Jan 2008,
  • Thom wrote:

Jeff Gray - "What do you offer the readers guesses!!"

I think Evan Davis would be doing us a disservice if he pretended that these weren't anything other than reasonable, educated guesses. All economic forecasts are guesses (and many expert forecasts turn out to be worse than chance). As recently as 1999 economists were forecasting $5 to $10 dollar a barrel oil for this decade.

I also don't think it is his job to offer specialist technical analysis of economic directions or development. Rather, he should be explaining economic news to typical BBC license fee payers in clear, easy to understand, but not patronizing terms. Generally this is what Evan is very good at.

If Evan could predict the 'black swan' economic and geopolitical developments that will actually determine what happens in 2008 he'd be a billionaire by now.

  • 85.
  • At 10:15 PM on 07 Jan 2008,
  • Ken Virta wrote:

Regarding the weather in 2008, are we to assume that it is raining?

  • 86.
  • At 02:35 PM on 09 Jan 2008,
  • David wrote:

I have a simple rule-of-thumb for determining when the UK economy is entering recession. I live in Islington, and two sorts of "shops" dominate Upper Street: the restaurant and the estate agent. When the economy is on the up, the restaurants predominate. When its on the way down, the estate agents appear.
Right now, the estate agents are sprouting up like there's no tomorrow - in one section, ten of the twenty shops are estate agents.
I think we're screwed.

  • 87.
  • At 12:29 AM on 11 Jan 2008,
  • Anonymous wrote:

your'all very funny and have given me a good laugh. A prediction in my understanding is a claim of certainty that some events will occur; not a forecast. Now Evan has forecasted and is uncertain about the occurence. what do we call that?

  • 88.
  • At 11:11 AM on 12 Jan 2008,
  • David wrote:

Wake up, Britain. The pound is already dropping like a stone which will lead to massive inflation as most of the goods we buy are imported, and we do not have an export focussed manufacturing base anymore to offset the inexorable decline of our much trumpeted service industies. I hate to say this, but the only possible way out of our current problem is to join the Euro now.

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