JOHN Kenneth Galbraith wrote: “The only function of economic forecasting is to make astrology look respectable.” That is harsh, and not only because were there no market for forecasts, we would not have them.
Economic forecasts are an essential part of financial planning. A car company does not know how many it will sell in the coming year but it has to plan. If it has a reasonable expectation that economy A will boom and economy B will flatline then it can set targets for its dealers.
If it can assume nothing, the targets become meaningless. You have to start somewhere. That “somewhere” this year – to judge by the run of forecasts for 2015 over the past few days – goes like this: for the UK there will be another year of decent growth, maybe not the 3 percent canter of 2014 but something not far short of it.
This will support further growth in employment and the first increase in interest rates from the revamped monetary policy committee at some stage during the year. The US will show similar growth, probably around 3 percent, and that too will lead to a rates rise.
However, elsewhere the economy will struggle: the euro zone will grow by 1 percent at most and may experience a few months of falling prices. The European Central Bank will seek to boost demand and inflation, probably by some form of quantitative easing.
Japan will also struggle to generate much growth. But the emerging world – rather those parts not dependent on energy and mineral exports – will do well. China and India are big beneficiaries from the plunge in the oil price. For Russia it is a catastrophe.
That plunge was unpredicted. I cannot find a forecast a year ago that put Brent below $63 (R732) a barrel. A year ago it was steady at around $110 a barrel and most assumed it would stick around there. The most important single influence on the world economy this year went unpredicted.
Three big predictions
This failure to spot the plunge in the oil price should make us cautious about predictions for 2015. Here are three big themes.
The first is that there are still several years of expansion ahead. Somewhere there will be another global recession, and these seem to come at roughly 10-year intervals.
The next peak is likely to be somewhere in the high teens – 2017, 2018 or 2019. It is unlikely to be 2015.
The second is that differential growth within the developed world is embedded and will be very hard to shift. For reasons that I don’t think anyone fully understands, English-speaking developed economies at the moment seem able to grow faster than non-English speaking ones.
This won’t last forever, certainly if you take gross domestic product (GDP) growth per head as the benchmark rather than overall GDP. (Countries where English is widely spoken tend to have higher birth rates, the main exception being France.)
But for the time being that seems set, and another three years where the UK and US grow faster than the euro zone and Japan will change perceptions of the effectiveness of different approaches to economic policy.
The third is that the shift of economic mass towards the emerging world and away from the developed world is set to continue for many years to come.
The past months have seen a substantial reassessment of this shift. The Brics (Brazil, Russia, India, China and South Africa) are no longer high fashion. Russia has fallen flat on its face. Brazil has squeaked out of recession. Growth in China has slowed, albeit to around 7 percent.
Only India is seen to be picking up pace and it is too early to judge whether this is a politically-driven response to its new prime minister, Narendra Modi, rather that anything of substance.
Many investors who bought the Brics boom story have had a miserable time. (By contrast, most of those that bought the American boom story have had a great year.)
But you have to put this in context. I have not seen a forecast that suggests that, over the next five years, growth in the developed world will be higher than in the emerging world. The shift of economic might will continue, just at a slower pace.
If all this seems a bit bland, try this other quote from Galbraith. “Politics is not the art of the possible. It consists in choosing between the disastrous and the unpalatable.” – The Independent on Sunday