Sunday, December 27, 2015
A year in which China slowed, Greece survived and Britain soldiered on
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on, as is the forecasting league table which accompanies the piece This is an excerpt.

So that was that. A year in which plenty happened, and plenty more might have happened. A year in which Greece did not leave the euro but came close to doing so. I predicted Greece would stay in, including to some people worried about their holiday bookings, but it was touch and go for a while.

The Greek crisis quickly gave way to deep worries about China; one of the factors behind the collapse in oil and commodity prices and this yearís exceptionally low inflation. People got a bit too bearish about China, and indeed about the global economy, which has shown tentative signs of strengthening in the final weeks of the year.

Most of what we saw in respect s of China was the necessary slowdown and rebalancing of an economy that had grown for almost 10% a year for three and a half decades. The China story, including its continued emergence as a global player in the international financial system, will continue to fascinate us in 2016.

At home by now, had things gone differently, we could have had a Labour government, perhaps with the support and veto of the Scottish Nationalist Party, with both a budget and a spending review from this strange alliance. But voters decided differently, particularly cruelly in the case of Ed Balls, who went from being chancellor in waiting to ex-MP in the space of a few hours.

The Toriesí electoral position was stronger than it seemed. Indeed, David Cameron secured the support of a higher proportion of overall electorate than Tony Blair in 2001 and 2005. So the euro survived an d the Tories survived, and indeed strengthened their position, with the first Conservative outright majority in a general election since Sir John Major in 1992.

In 1992, as this year, voter doubts about Labourís economic credibility swung the result. Labourís further loss of credibility since the election makes the partyís uphill task all the steeper.

The curious economic consequence of the Tory victory was that George Osborne, rather than taking a harder line on public spending when freed from the Liberal Democrat yoke, instead adopted a gentler approach.

The deepest spending cuts offered by the chancellor came in his March budget, when the coalition was still in place. Progressively, in his summer budget and his November autumn statements and spending review, things then got milder. Both of his big post-election set pieces also featured tax increases, significantly in the case of the apprenticeship levy and a tax clampdown on buy-to-let landlords. You would have looked in vain for much hint of these in the run-up to the May election.

Not only that, but Osborne introduced the national living wage, to take effect at £7.20 an hour next April. Some businesses, in care, retailing and catering, will find this difficult, though most in business swallowed their doubts and welcomed the move. As I wrote at the time, the response might have been different had this been introduced by Balls and Ed Miliband in a Labour government.

What was the story of the economy in 2015? One continued theme has been the very slow progress towards normalization. In the case of monetary policy, things are very abnormal indeed or, if this is the new normal, it is a strange one. As I wrote a couple of weeks ago, I expected a token rise in interest rates late in the year. Many forecasters expected more. But we are still stuck with the emergency settings of 0.5% Bank rate (since March 2009) and £375bn of asset purchases under quantitative easing sitting on the Bankís books.

The other bit of slow progress is on the budget deficit. There were two surprises in the autumn statement from the Office for Budget Responsibility. One was that it found a very useful £27bn down the back of the sofa which was very useful for a chancellor needing to dig himself out of a hole on tax credits. The other was that it took an optimistic view on the public finances for this year, when most economists were looking for a £10bn overshoot.

It remains optimistic, despite last weekís official figures showing that the chancellor has already borrowed £66.9bn in the first eight months of the fiscal year, close to the OBRís full-year forecast. But I would not dismiss the chances of meeting the forecast. The OBRís recent record on the deficit has been pretty good.

The other late-breaking pre-Christmas story was the Office for National Statistics (ONS), and its downward revisions of recent growth numbers. How worried should we be by this? Not remotely. I do not know why the ONS does this, save to complicate my annual forecasting league table.

This time last year, when the economy had been on course for 3% growth, the ONS gave us similar revisions which pushed the implied expansion down to 2.5%. Since then, it has spent its time revising the numbers back up, so we now have almost 3% for 2014 again.

This time, an economy that seemed set for roughly 2.5% growth has been pushed down to 2.2% or 2.3%. I have chosen 2.25% for the purposes of the league table, but those who predicted something stronger have every reason to feel miffed. I have no doubt that in the fullness of time growth in 2015 will have been shown to have been at least 2.5%.

The other pre-Christmas ONS highlight was the release of figures showing a current account deficit of £17.5bn, 3.7% of gross domestic product, in the third quarter. The good news is that the deficit has stabilised and is below last yearís peak. The bad news is that at just under £80bn this year (on present trends) it is still very large.

That is a worry, to be examined further next year, Britainís exceptionally strong labour market and non-existent inflation add up to the very good news of 2015.
Who did best at predicting this? All my top forecasters expected low inflation but none got quite as low as we got. The nearest was the EY Item Club, with just 0.2% inflation in the final quarter. Those who predict ted little or no change in interest rates benefited. Overwhelmingly, forecasters were too optimistic on growth though, as I say, the numbers there are a movable feast.

In the end, it was a very close fought contest between Ross Walker of RBS and Peter Dixon of Commerzbank, both long-time followers of the British economy. Both scored a very creditable nine out of 10, with Walker shading it by the tiniest of margins on the forecasting equivalent of goal difference. But both deserve hearty congratulations.

How did I do, I hear you say? Well, 2.5% growth, 1% inflation, 0.7m claimant unemployment and a £70bn current account deficit was enough for a fluky eight out of 10. It could have been nine if I had not expected that tiny quarter-point rate rise, but that would have been even luckier. I wish all the forecasters success with their predictions for 2016, some of which have already landed.