As 2013 draws to a close, can we look forward to a more prosperous New Year? This time last year the talk was of an historic triple-dip recession. That did not happen and virtually all current indicators provide a more positive outlook for 2014. The easiest job at the moment must be George Osborne’s script-writer ‘..unemployment down, employment up, inflation down, confidence up, a recovery in the housing market..’ just for starters.
Looking forward, the magic number for 2014 is 2.4%, with the CBI, the OBR and OECD all expecting this level of growth, and with the IMF forecast a little more conservative at 1.9%. In other words, back to its long-term trend rate – that it, the sustainable rate at which no significant macro-economic problems will emerge. Expectations are widespread that growth with come from a continued falling savings ratio, an upturn in fixed investment and solid growth in UK exports sales (which are still below those of 2008!).
Dig a little deeper and performance over the last three years indicates a deep and wasteful output gap, with output failing to get to even half the trend rate for the UK, averaging a mere 0.18%. Productivity has hardly budged over the last three years, with output per hour worked less than at the end of 2010. Also, long term unemployment is edging ever higher. This leads one inevitably to wonder whether the Bank of England’s forward guidance policy is just a little too mean spirited when it comes to falling unemployment. Surely, setting a ‘trigger’ level of 7% is too cautious, even though the Bank is a pains to state that this is not a level which would trigger an automatic increase in interest rates. And clearly it is time for the Bank of England to factor out the buoyancy of the housing market, and give the Chancellor something to do. Raising interest rates are, surely, not the way forward in terms of tackling house price inflation, which, even at its most rampant, creates only a modest wealth effect. But it does, never-the-less, need to be tacked for other reasons – none the least being the widening wealth gap, rising inequality, and falling labour mobility. Sorting out the housing market is, without doubt, the Chancellor’s biggest test to date.