The 2015 Financial Times economists' survey: my answers
Today the Financial Times published its annual survey of UK economists’ views of prospects for the year ahead. As ever, before looking at what we think might happen this year, it’s worth looking at what we said last year. The FT is quite complimentary about our record, saying we scored “many more hits than misses”, in particular on the course of the UK economy. This is what I said last January:
Poor policy and bad luck have delayed recovery, relative to our original forecasts and everyone else’s, but have not removed the UK economy’s ability to generate growth. Paradoxically, the underperformance of the recent past means that, in the short term, the potential for rapid expansion exists. Many firms still have plenty of spare capacity. Unemployment and underemployment are still high. There is no sign of wage inflation, and interest rates will not be going up any time soon. Nor would fast growth now be anything particularly remarkable, over a medium-term perspective – we could grow at an annual rate of 3 per cent for the next two years at least, and we’d still be poorer than we were in 2008. Of course, there are risks, both international and domestic, but for 2014 at least growth should finally be above trend.
Accurate enough, but, as the FT also says, arguably this was not that difficult. Anyway, here are my answers to this year's survey.
Q1: Economy. Will Britain’s economy sustain a decent pace of economic growth in 2015? Please explain your answer.
The central expectation is that it will, if by decent is meant 2-3 per cent. That would represent trend growth but little catch up from the very large fall relative to trend between 2008 and 2012. That per capita GDP is still below 2008 levels 7 years on and 2 years into “recovery” is historically unprecedented. The key upside risk is the oil price fall. The key downside risks are the euro area and, domestically, persistent weakness in productivity growth relative to the pre 20088 trend.
Q2: Living standards. To what extent will UK households see – and feel – an improvement in their household finances and standard of living next year?
As with 1 — the central expectation is some growth but relatively little catch up from the very large fall relative to trend.
Q3: Labour market. Will the UK reach full employment in 2015? What would this look like?
Full employment, in the sense of unemployment levels plateauing at the same time as the economy is at roughly trend growth, is not far off. It is however, not entirely clear what “full employment” means in a labour market open to immigration within the EU.
What is happening structurally to the labour market is perhaps more interesting. People are working longer and this is likely to continue — for the most part, this is a good thing. On the downside, the government’s appallingly incompetent handling of disability benefit “reform” has reversed the previous established trend down in numbers on incapacity benefits. This has led to both unnecessary suffering for claimants and very large taxpayer costs.
Q4: Monetary policy. Oil prices are low, inflation is set to fall below 1 per cent, but growth is strong and unemployment falling. When should the Bank of England raise interest rates? And do you think they will?
With current mandate, when the balance of risks in the inflation forecast is clearly for inflation over 2%. That seems some way off.
Q5: Fiscal policy. Do you think the next government will deviate from the current deficit reduction plans? Does it matter?
As ever, what “current plans” means is unclear. The government claims it has stuck to plans which were supposed to deliver structural current balance this year. Like most analysts I think this assertion is laughable- there was twice as much deficit reduction (on any measure) between 09-10 and 11-12 as in the 3 years since. So plans will change and should change — it is sensible to adapt to events.
Looking at the announced fiscal targets of the main parties, those of the Liberal Democrats and Labour parties (current balance achieved through a mix of tax rises and spending cuts) are clearly more credible and sensible than those of the Conservatives (absolute balance plus large unfunded tax cuts delivered by utterly implausible spending cuts).
Q6: 2015 election. How important is the result of the UK election to the country’s economic performance in 2015?
In the short term not very. Over the medium term key impacts of the election could be on
A) fiscal policy. The Conservatives plans are neither sensible nor (fortunately) credible, while the other parties lack detail (to be flattering). So considerable uncertainty will remain over the UK’s medium term fiscal policy. This need not be disastrous -there is no solvency issue and never was — but will remain an issue
B) immigration. Excessively restrictive policies — for example yet further restrictions on foreign students, which have already done considerable damage — will reduce (per capita) growth over the medium term.
C) the EU. The prospect of EU exit (presumably both preceded and followed by a protracted period of uncertainty) could potentially severely inhibit investment. This is not inevitable — it all depends on the circumstances — but the risks are high. This is very clearly the most serious domestic political risk over the next few years.
Q7: UK and Europe. If Britain was to call a referendum on its membership of the European Union, would this impact on your economic outlook?
See 6. The potential impact on investment of the resulting uncertainty is a very serious risk, although it depends on the circumstances. But this is clearly the most serious domestically generated political risk over the next few years.