Bill Jamieson: Naysayers routed but Yes/No to come

Bill Jamieson. Picture: Jane Barlow
Bill Jamieson. Picture: Jane Barlow
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ONE point can be made with certainty about 2014. If it turns out half as good as consensus predictions it will be a year to savour.

This time 12 months ago the outlook did not look so encouraging. The economy looked in poor shape for recovery, business and household confidence was in the doldrums, manufacturing and construction could barely manage a pulse between them and the housing market looked comatose. Little by way of recovery was expected.

But the best thing about last year’s predictions is that few of them came true. The economy did not stagnate – it recovered far more strongly than most dared to predict. Manufacturing and construction both enjoyed a marked improvement. Unemployment in Scotland and across the UK continued to fall markedly.

Business and household confidence steadily improved. The stock market rose. In America the economy did not fall off a fiscal cliff. China avoided a growth implosion. The Eurozone held together and its currency rose. There was no bond bubble and it did not burst. Oh, and Japan, the one market most had written off as beyond hope, enjoyed a barnstorming rise of 60 per cent. For the doomsayers, 2013 was a rout.

Today, the consensus view is more optimistic – not difficult given the dire nature of the predictions of the past few years. Most of the pundits in the giant investment houses see not only a stronger global performance next year but also a more even and balanced growth outlook.

Predictions for 2014 range between 3.3 per cent and 3.7 per cent against less than three per cent for 2013. And the outlook for 2015 looks even better.

The bulk of this growth is set to come from developed economies as budget deficit constraints continue to ease and monetary policy stimulus, albeit in more tapered form, continues to work its magic for the first half of the New Year.

For the UK, the recovery news keeps on coming. Figures at the end of the week showed an upward revision to growth estimates for the second and third quarters. Including earlier adjustments, GDP growth since the third quarter of 2011 has so far been revised up from 0.5 per cent year-on-year to 0.9 per cent now. These figures are likely to trigger sizeable upward revisions to the consensus. Prior to the revisions, this was for 2.3-2.4 per cent GDP growth in 2014. Citigroup’s base case forecast before the revisions was for growth of 3.2 per cent next year – now even this may be subject to upward revision.

Here in Scotland, the intensifying politics of the independence referendum may work to obscure a continuing underlying improvement in our economic fortunes. These are still closely linked to those of the UK and there is no reason to suppose that further improvement in growth should not be enjoyed here. But should the prospect of a Yes vote strengthen, there is likely to be growing apprehension across business about the implications of a separate tax and regulatory regime and all the transitional uncertainty in between. This may well work to delay business investment decisions at least until the vote is held.

That caveat aside, what can we expect by way of outriders that could upset this applecart of sanguine serenity?

We don’t escape the legacy of chronic government and household debt that easily. In the US, the Federal Reserve signalled last week the start of QE tapering. It may have succeeded for now in divorcing “tapering” from “tightening”. Markets are not pricing in a US rate rise until the end of 2015. One reason is that big companies in the US have notably failed to boost capital investment, and this slow growth in capital expenditure is set to keep private sector domestic demand subdued. Higher corporate spending and hiring are prerequisites for sustainable expansion in the US, the key to 2014’s acceleration in global growth.

China is still wrestling with a credit boom, an overheated property market and rising bond yields. Reform will come at a cost. And in much of the EU, deflation will be a growing risk – in fact deflation may well prove a wider worry as the year proceeds. This could mean that the European Central Bank has to step up its monetary stimulus efforts, putting pressure on the euro, which needs to fall. The prospect should help underpin Eurozone stock markets through the year.

Here in the UK the strength of the recovery is likely to bring forward a rise in interest rates, from the current consensus expectation of mid-2015 to the final quarter of 2014. Management of expectations here will be critical. A minor lift from 0.5 per cent to 0.75 per cent or even 1 per cent is unlikely on its own to damage business confidence. Market rates are already much higher in any event.

The concern will be that the first increase could be quickly followed by a series of rises taking rates up to 4 per cent over a short period. Here, too, the Bank of England will need to indicate to the market the difference between a mild dampener and a full-on rush up the rate ladder. In this context, a low or falling rate of inflation will help greatly in obviating the risk of a violent change in rate policy.

And one certainty of 2014 is that there will be a marked rise in the political temperature as the independence referendum campaign reaches its climax, and also as we approach the 2015 general election.

A No vote next September, which currently seems the more likely outcome, would be a big fillip to Labour’s prospects at Westminster as Scotland’s predominantly Labour MPs retain their seats. But for the party to lift its economic credibility in the face of a Tory recovery, Ed Miliband will be under pressure to drop Ed Balls as shadow chancellor. And that in turn could well see Alistair Darling restored to the Treasury brief. What goes round comes round?

Twitter: @Bill_Jamieson