A good mix of growth, low pay settlements, 'prudent' government policy - three of the five minor miracles David Smith forecast for 1995 have happened. This year he sticks his neck out once again.
My grandmother used to tell me not to talk about people unless I had something nice to say about them. I have not, I confess, always applied grandmother's dictum when talking about the British economy. But at this time of year, when we can draw a line under the past and look forward to the future, I would always hope to find a few kind words.
I cannot draw a line under 1995, however, without looking back to what I wrote in this slot a year ago; the equivalent, for the economic forecaster, of revisiting the scene of one's crimes. Last year I described five minor miracles for the British economy that were possible, even probable, for 1995. They were: a healthy mix of economic growth, with exports and investment carrying the burden of the recovery; a surplus on the current account of the balance of payments; a fall in unemployment which did not lead to a burst of higher pay settlements; 'prudent' economic policy; and a continued revival of manufacturing industry.
Not bad - could do better
I suppose five out of five was too much to ask. The mix of growth was pretty good. Consumer spending rose by a little over 2%, total investment by about 4% and exports by 5%. I would have liked investment to be stronger, though manufacturing investment looks to have achieved a double-figure gain. Exports also tailed off as the year progressed. This, together with a revival of imports, and a disappointing performance on invisibles, scuppered my hope of a current account surplus. The labour market exhibited miracle-like tendencies, with pay settlements coming in below even my optimistic expectations. Government policy was broadly prudent, even if that meant, during the summer, the Chancellor resisting pressure for a hike in base rates. As for manufacturing industry, I quoted a London Business School forecast of 4.5% annual average growth for the 1994-98 period. With a marked levelling off as the year went on, the 1995 outturn looks to have been only half that. Of my five miracles, therefore, I can count only three as having been achieved. Not bad. Could do better.
So what's in store for 1996? It is tempting to say 'more of the same', because usually it is. Economies may move in mysterious ways but they certainly do not obey the calendar. It would be staggering if Britain's condition in early 1996 was much different to that of the latter part of 1995. I know, however, that you won't let me get away with that.
The first feature of 1996 will be that some of the pressure on individuals, brought about in the main by higher taxation, will clearly be seen to have come to an end. Apart from taxes themselves, the personal sector will be the beneficiary of largesse from other quarters, including the £50-a-household windfall from the privatisation of the National Grid, and those resulting from building society mergers and the conversion from mutual to plc status. Overall, I would be looking for a rise in consumer spending of around 2.5%. Perhaps more importantly, the tone will be stronger, encouraging, for example, bigger outlays on cars and household durables.
Slow start to housing recovery
This will be linked, I think, to another phenomenon: the beginning of the end of the housing slump. With the pressure on real incomes eased, other factors will come into play - most notably the fact that, even in relation to slow-growing earnings, house prices are depressed. In the past, when the housing market has turned, it has done so dramatically, with periods of price weakness being quickly replaced by near-boom conditions. Such are the current drags on the market - not just the one million or so households in negative equity, but also the collective memory of the slump - that this is unlikely this time. A rise of 10-20% in housing transactions is perfectly possible, but it could happen alongside house-price inflation of just 5%.
For this to happen, my third minor miracle - the interest rate miracle - will need to occur. It will not have escaped anyone's attention that this cycle has been highly unusual. It started with bank base rates at 15%, from where they fell - rather sedately - to 5.25% in early 1994. So far, however, the upward slope has been amazingly gentle. If the peak in base rates can be held within 1.5 or two percentage points of the trough, then something important has happened: the breaking of the inflationary psychology of the last 25 years.
The dog that has yet to bark
This links to my fourth favourable point. The dog that has yet to bark in this recovery is a decisive break-out in pay settlements. This year, I believe, the muzzle will stay on. We can all think of negative reasons why wage rises are muted, most notably job insecurity and intense competitive pressure on company pricing. But there is a positive side as well. Workers are not pushing for big rises because they believe that low inflation is here to stay. Low inflation, which in turn breeds modest pay rises, and allows interest rates to stay low, creates a virtuous circle in which, hopefully, we can remain. The big question is whether the current benign labour-market environment can survive a change of government (which I have assumed will not occur in 1996).
Finally, is it too much to ask that this will be the year when investment records a decisive rise? As described above, manufacturing investment has been reasonably strong but other business investment has been subdued. There is an argument that some investment is being under-recorded, because it is in the form of company expenditure on computer software, which is not counted as capital spending. The corporate sector is flush with cash - hence the fact that 1995 was a record year for takeovers and mergers - and I would expect that, once it becomes clear that the end-1995 slowdown did not represent the onset of a new recession, investment will show a healthy rise.
As last year, all five minor miracles are attainable. Sticking my neck out - difficult when grandmother is looking over my shoulder - I think they will be achieved.