David Smith sees signs that the current downwave could give way to a lasting upswing.
Long-term economic forecasting is usually thought of as being in broadly the same category as long-term weather forecasting. Just as the latter is likely to be of very little practical use in telling one whether to pack an umbrella or a sun-hat at some given date in the future, so the former is prone to becoming badly unstuck on the question of whether the economy will be booming or in a slump in a few years' time.
I cannot speak for weather forecasting, but perhaps long-term economic forecasting has been unfairly maligned. The long-term forecaster has two useful weapons at his disposal - the trend and the cycle. Thus, I can say with reasonable confidence that, on the basis of trend growth for the UK economy of about 2.25% a year, Britain's real gross domestic product in the year 2000 will be some 13% to 15% above its level at the beginning of 1994. I would also venture to suggest that between now and the millennium, the business cycle will have produced another peak in economic activity, probably around 1996, and another trough, perhaps in 1998 or 1999. So, safe in the knowledge that no one is likely to ring me up and complain in six years' time, I would predict that the economy will be enjoying a short-term cyclical upswing in the year 2000.
There are other, even safer, predictions. I would be surprised if, by that time, concern over the size of Britain's manufacturing base, and with it the underlying budget deficit, had been eliminated. And, as discussed elsewhere in this issue (see p30), I would not anticipate a return to full employment, on the post-war definition of 3% unemployment or less.
So much for 'safe' long-term forecasts. What intrigues me, however, is whether there are very long-run economic cycles at work, lasting 20-25 years in both the upswing and downswing phases, in both Britain and elsewhere. The idea of long cycles in economic activity, usually associated with the Russian economist Kondratief, has fascinated economists. Some have attributed such cycles to climatic events, although this analysis was perhaps more relevant when world production was predominantly agricultural.
Cycles have been identified which are linked to phases of monetary expansion, themselves driven by, for example, discoveries of gold and other precious metals, or by wars. The Austrian economist, Joseph Schumpeter, cited waves of technological innovation as the basis of long cycles in economic activity.
The appeal of long-wave analysis is that, superficially at least, it fits the facts. In Britain, for example, the Victorian great depression of 1873 to 1896 gave way to a late Victorian and early Edwardian expansion that was interrupted by the Great War, but which appeared to be still in place, albeit briefly, after 1918. The inter-war years saw the more familiar 'great depression', followed by the post-war 'golden era' of economic expansion, which lasted from 1950 to 1973. Since then, if it has not exactly been downhill all the way, conditions have been generally difficult. The question is whether, sometime between now and the year 2000, this downwave will give way to a new and lasting upswing.
The answer I would dearly love to give to this question is an unequivocal yes. Unfortunately, as one might expect, things are by no means cut and dried. If we take the Schumpeterian view that upswings are associated with a bunching of innovations, one would have to argue that, in this respect, the past 10 or 15 years have been pretty good.
We have had the microprocessor revolution and its embodiment, not only in the personal computer but also in the full range of industrial and commercial processes. And yet this has not been associated with strong economic growth.
Again, recent history does not fit the theoreticians' view of the world when it comes to the behaviour of prices. Kondratief saw downwaves in economic activity as accompanied by falling prices. But this was plainly not the case in the 1970s and '80s, even if it may be true now.
Here, though, I am not too worried. The 1930s was a period of falling prices and yet Britain's departure from the gold standard in 1931 was followed, eventually, by several years of strong economic growth. The 1930s is associated with depression in coal, steel and shipbuilding. It is often forgotten that this was also the period of the building boom and the period when the motor industry and other mass production consumer industries developed. Is it too fanciful to suggest that departure from the European exchange rate mechanism in 1992 has parallels with the leaving of the gold standard 60 years earlier? If there is a single factor that would persuade me that Britain will enjoy a new and lasting upswing in activity, it is the behaviour of investment. The UK's investment as a share of gross domestic product is low compared with other countries, and this was the case for most of the 1980s. A sharp pick-up in investment's share of the economy, unlikely in the short-term because of the extent of spare capacity, might convince me that, by 2000, the economy will have embarked on a long-lasting upswing.
David Smith is economics editor of the Sunday Times.