Closing Bell: Despite headlines, prospects for 2011 are not so bleak

The collective view is that 2011 is a wash-out. We're not even there and already we're frozen in. The consensus is for GDP growth of 1.8 per cent; some higher forecasts have recently come down and it does all look grim.

Our open economy depends on global trends; the last two years have accelerated the divide between the developed and emerging economies. Top down, the world looks OK, with GDP likely to grow at around a trend rate of 4 to 4.5 per cent but a little closer analysis reveals a globe of two halves. And unfortunately our export efforts are concentrated on the wrong half; incredibly, we export more to Ireland alone than to Brazil, Russia, India and China combined. Oh dear.

And we have those cuts to look forward to. It is very tempting to accept that gloomy consensus, put another log on the fire and try to hibernate. But that might be missing something.

The headlines coming out of what once was the world's locomotive economy, the US, are bleak. But behind them much of the emerging data is not, though admittedly it is at best mixed.

Hidden away, for some reason, is a bit of news that I see as potentially transformational: bank lending to commercial and industrial companies - often smaller or medium sized (SMEs) - is picking up after three years of catastrophic decline. If the US economy is to sustain a recovery it will be SMEs that drive it. Timing is uncertain but I think this development has the potential to give us a serious upside surprise from the US later in 2011.

Back home it isn't as bleak as it's painted either. Let's look at government, companies and, finally, us. Headlines about cuts, scare stories of 25 to 40 per cent falls in spending may be all good knockabout stuff but they signally fail to achieve the central duty of the news media - to inform.

The reality is that government spending will increase each year between now and 2016 in cash terms, albeit by only 1.5 per cent a year. Yes this is a reduction in real terms after inflation but it is turning the tap down to a dribble, not shutting it off and ripping out the plumbing to boot.

Taking tax and spending together, the tightening is akin to the early 1990s when the economy grew very nicely thank you; indeed this is what is normal - recoveries from recession are usually marked by public sector retrenchment. And jobs, all those public sector posts that are to go? Again, this is normal, most of the jobs being replaced within the private sector. That's why recessions can actually be good for you.

Companies are in good shape and have handled the recession admirably. Hanging on to labour by lowering pay has served all parties well, though at the price of sharp falls in productivity. As slightly higher sales hit squeezed cost bases profitability is rebounding and productivity is set to soar. Companies are investing again, mainly in technology to improve efficiencies rather than increase capacity; this is text book stuff and excellent news.

Households, too, are bearing up well. Demand is steady without getting carried away and as yet it does not look as though the VAT change is artificially boosting sales. Confidence is (wisely) low but improving. Crucially, pay will soon be going up (outside the public sector at least) as employees cash in on their side of the job-saving bargain. The consumer is far from dead.

I don't want to over-egg it - there are plenty of good reasons to be wary and many ways for wheels yet to fall off. But there is room for a more balanced view and I am looking forward to the day when all those pessimists wake up and smell the coffee. Don't write off 2011 just yet.

l Peter Bickley is a consultant economist.