David Smith reflects slightly nervously on the predictions that he made 12 months ago.
The early part of the year is a time when pundits (and I have rarely heard the term used other than as one of abuse) have an unfair advantage over their critics. It is a time when they can make predictions about the coming year, knowing that it is a rare reader who will check back to see whether they were right.
As a member of the ancient order of punditry, I would not want to deprive any of my colleagues of this advantage. But I feel honour bound to reflect, a little nervously perhaps, on what I was saying some 12 months ago.
I expected the economy to recover - indeed my 2% forecast for gross domestic product growth in 1993 has, by good fortune, turned out to be remarkably close to the outturn. But the composition of that growth has turned out differently to my expectations. What I suggested was that consumer spending would be weak, perhaps growing by only 1%, but that the economy could still show a respectable rate of growth, for two reasons. One was that the holy grail of post-war British economic policy, export-led growth, was in sight, thanks to what was then a newly competitive pound.
At the same time, I was optimistic about British industry's ability to stem the rising tide of imports. Instead of inexorably rising import penetration, we could expect a decent degree of import substitution, not just because of sterling's lower level, but also because of other structural factors, including the Japanese 'transplant' motor industry output of the likes of Nissan and Toyota, and better quality British products.
As an overall story of Britain's economic performance in 1993 this was not too bad. As the chart shows, exports performed pretty well. The fact that I expected them to do a bit better was mainly because of a failure to anticipate the full extent of the recession in Continental Europe.
As for imports, the picture here turned out to be very good indeed. Against a backdrop of a reasonable rise in domestic demand, imports stagnated, and this can only be explained by the substitution of domestic goods for foreign products. That the exchange rate played an important part in this is illustrated by the fact that this was clearly not the case during 1992 (when, for the most part, sterling was far higher, touching $2 in September that year).
Consumer spending grew roughly 2% in 1993, twice what I had expected. The explanation must be that consumers finally responded to the big reduction in interest rates that occurred post-ERM (exchange rate mechanism), and also the extraordinary performance of inflation. At a practical level, this meant for many retailers that higher sales volumes could only be achieved if prices (and margins) were squeezed.
The reason for dwelling on 1993 is that it carries very important lessons for 1994. The fear, following the November Budget, is that the tax increases imposed on the economy by the chancellor, Kenneth Clarke, and by his predecessor, Norman Lamont, are so large (around £8 billion in the 1994-5 fiscal year, rising to nearer £15 billion in 1995-6), most taking effect this April and having an impact on the personal sector, that consumer spending will inevitably be squashed. The tax increases will squeeze real incomes by some 1.75% in 1994-5.
The Treasury insists that this will leave a very modest 1% rise in real income in place, but this requires some fairly heroic assumptions to be made about self-employment and investment income.
We are back, more or less, to my 1993 projections for consumer spending, one year on. With most of the effects of the post-ERM mortgage rate cuts already having worked their way through, the outlook for individuals can be simply stated - taxes, taxes and more taxes.
Consumer spending, on the face of it, will be doing well if it grows by 1% this year, unless people are prepared to run down their savings or overcome what appears to be a long-lasting aversion to borrowing. There is very little prospect of spending being buoyed by, for example, a strongly rising housing market.
One reason for being slightly more optimistic than this is that inflation should remain very low. Perhaps I should qualify this. Private-sector inflation will remain very low, but government-imposed price rises, whether they be VAT on domestic fuel and power, higher excise duties, new taxes on insurance premiums and air travel, and excise duties on tobacco and petrol, will be very hefty. Even so, I would expect a similar development to that of 1993, with more price freezes and price wars keeping spending volumes up. This may mean it is possible, again, to squeeze out a somewhat stronger spending rise than the 1% that looks justified under normal criteria.
Even if this does not occur, however, there are reasons to soft-pedal on the pessimism. This is because good growth in both exports and import-substitutes can continue. On the export side, the recovery in Europe, while doubtless destined to be sluggish, will mean that, perhaps for the first time, exporters can take full advantage of their competitiveness vis a vis European rivals.
As for imports, I do believe that there has been an important change. In the 1980s, in spite of the stories of a productivity-led economic miracle, consumers never lost their appetite for imports. Foreign cars, electronic products and a host of other things, were irresistible to the status-conscious buyers of a booming economy.
Now, however, value for money has emerged as the important factor for purchasers. Cars no longer have to be made in Bavaria or Nagasaki as long as they work well and are perceived to represent good value. Perhaps widespread unemployment (its modest fall was another surprise in 1993 but it remains at very high levels) brought about a subconscious 'Buy British' switch on the part of consumers.
If I am right, then this is good news indeed. It does not, however, signal that we can sit back and stop worrying about the size of Britain's industrial base. Far from it. As I wrote last month, it would be possible to be a lot more confident about Britain's long-term outlook if there were better reasons to expect a strong rise in investment into the recovery.
Even so, there is hope enough in some of the trends that developed in 1993 to suggest that modest growth (I am going for 2% again) is on the cards for 1994. This, incidentally, is a long-held view. The belief that the second year of recovery would automatically be stronger than the first never seemed to be particularly well-founded.
I once heard J K Galbraith, the eminent Canadian economist, say that one thing we learned in the 1980s was that modern economies could stand to have a lot more thrown at them, without undue damage, than had been thought possible in the past. If the British can withstand the Lamont-Clarke attack on Britain's budget deficit, as I think it can, his words will have proved apt.
David Smith is economics editor of the the Sunday Times.