David Smith is running a competition to predict the economy for next year. This is my prediction...
I remain amazed that the consensus from economists is that the inflation toothpaste will conveniently squeeze itself back into the tube next year.
My prediction for the next year is that inflation will fall as the commodity bubble works its way out. It will then rise again, to 3% CPI, by the end of the year and keep on rising. This is as the delayed effect of this year's crash in sterling works it's way onto company P&L spreadsheets. This year it could be argued that most businessmen were taken by surprise by the crash. Shop's for example might have believed the economists' consensus of 2% growth and ordered stock accordingly. When they repeat the exercise early this year, they are unlikely to make the same mistake and will focus on margin rather than revenue, preferring to err on the cautious side with volumes.
GDP will, therefore, fall dramatically, by 5%.
The banks will need further bailouts stretching the government's credit to a point where investors start to question the country's ability to pay it back. This will precipitate another, more serious, run on sterling. The BoE will, therefore, be forced to raise rates back to 3%, having cut them further as inflation seemed to be under control during the middle of the year.
The current account will continue to worsen, to - £50 billion, as invisible exports (mostly from the City) collapse and manufacturing is unable to make any headway in a world recession, especially as other countries re-impose trade barriers. Despite sterling's fall imports will rise in value terms, as the country still imports food, energy and other essentials. (This problem is worsened as domestic production capacity has atrophied over the last 2 decades, as has the whole private economy of much of the north of Britain, and cannot easily or quickly be rebuilt. It will be made more difficult still due to the collapse in education standards and the poor attitude to work of most graduates and school leavers these days, as I and many other employers will testify.)
The crash in sterling will force the government into savage cuts in expenditure. Unemployment will spiral much higher than the current consensus range to a shocking 3.5 million by the end of the year.
House prices will have a 'sucker's rally' midyear, as low inflation and free money (in the form of a near zero base rate) fool many into thinking the crisis is over and we can get back to the 'normality' of ever rising prices and consumption. By the end of the year, however, they will have fallen a further 20% since the beginning of the year and still be falling.
Britons meanwhile will console themselves that it is much worse on the continent. The current illusion of stability in the Euro zone will be shattered in 2009 and the Euro will fall dramatically. Italy and Spain will join Greece with civil unrest that they struggle to control. Spreads between German and Mediterranean Euros will soar leading to the official abolition of such markets and many, more draconian actions by the European elite, including suspensions of freedoms and border controls.
Longer term, everything comes down to the number of people. Italy and other Club Med countries have already passed what demographers call 'lowest low', the ratio of children to women below which no society has every recovered (2.1 children per woman is required for a stable population. That of Greece is 0.9.) They will become increasingly Islamic as the vacuum created by atrophied birth rates creates uncontrollable immigration. 2008 will be these countries' all time highest GDPs and they will follow Japan on the road to demographic oblivion. Britain will be less far behind them than the statistics suggest.