It’s not for nothing that economics is sometimes called the dismal science. Yet it isn’t always true that economists are gloomy. Indeed, they aren’t gloomy at the moment. Compared with this time last year, when equity markets were in free fall, and everyone was concerned about a China meltdown and a US recession, the current environment looks almost panglossian.
At the same time, it would be churlish not to highlight the so-called “tail risks.” These are low probability or hard-to-measure events that have far-reaching outcomes if they occur. Think food poisoning or serious sports injuries—mostly, they don’t happen, but we know they happen often enough to fear very unpleasant consequences. In the world of political economy, think the financial crisis, Brexit referendum result and the election of Donald Trump.
In the “good news stakes,” the UK wouldn’t be the most obvious choice, but wouldn’t be the worst either. The Markit/CIPS manufacturing Purchasing Managers’ Index survey for December posted 56.1, putting the index at its highest level since 2013-14. This follows upbeat news at the end of 2015 for car production and sales, along with housing starts. Self-evidently, the predictions of economic meltdown after the referendum proved wide of the mark. The fall in Sterling, and the incremental easing in both monetary and fiscal policies have all helped, and Brexit, of course, hasn’t happened yet. Most forecasters now expect UK inflation to rise to 2.5-3 per cent this year, eating away at stable nominal income growth, and lowering GDP growth to about 1-1.5 per cent.