Even in a flat year the mood ebbs and flow, often quite dramatically.
This time last year the eurozone appeared to be teetering on the edge of the abyss, threatened by its own internal economic contradictions as well as by the politics. I know some very prominent people who thought it was only a matter of time before Europe dragged us back into extreme crisis.
Maybe it was only disaster postponed but it has to be said that this both underestimated the readiness of the European Central Bank, under Mario Draghi, to do “whatever it takes” to keep the euro show on the road, and the determination of European politicians not to let the single currency fall apart.
So the euro survived, and hedge funds and others made money out of betting that it would. There were some tricky moments, notably between the first and second Greek elections, but the eurozone, battered and weak though it is, struggles on.
There was a time when, as far as Britain was concerned, the dreaded double-dip looked like being avoided. In January and February surveys suggested some surprising spring in the economy’s step, despite the eurozone’s woes.
One bit of the economy, however, had only concrete in its boots. The construction industry, down very sharply in the first quarter, weakened further in the second and third. Without teh fall in construction there would have been no drop in gross domestic product in the first quarter and a smaller fall in the jubilee-affected second.
As it is, we will have to wait for a few more data revisions to see whether the double-dip, and in particular the small 0.2% quarterly fall at the start of the year, survives long enough to make it into the economic history books.
Nobody expected much growth in 2012. We await fourth quarter GDP figures, which will be published on January 25, but for the moment there is no reason to doubt the assessment of the Office for Budget Responsibility, and the consensus, which is that the economy contracted by a modest 0.1% last year.
Unusually, there were some growth forecasts that were too gloomy. Standard Chartered’s bold prediction that the economy would contract by 1.3% proved to be a little too bold. On the other hand, the hope of some forecasters, that this would be when the economy finally got into its stride was also too optimistic.
Most forecasters, it should be said, did OK by aiming low on growth, but not too low. However, most were also taken by surprise by the continued strength of the labour market.
The lowest forecast for the unemployment claimant count at the start of the year was 1.6m and the average was a shade under 1.8m. The outturn was 1.58m. I will say it again: there is something odd about an economy that apparently does not grow but generates something like half a million net new jobs.
Long ago, economists used to swear by the Phillips curve, the inverse relationship between unemployment and (wage) inflation. The good news on employment and unemployment has indeed been balanced by disappointment on inflation, though not wage inflation, which has remained subdued at sub-2% rates of increase.
The Bank of England gets kicked for always predicting that inflation will return to the official 2% target. To be fair to the Bank’s beleaguered forecasters, however, that was the consensus view at the start of the year, with an average prediction of 2.1%.
Some thought weak growth would drag inflation below target but it was not to be, even if we came close to target in September. The latest inflation reading, for November, was 2.7%, closer to 3% than 2%.
The other disappointment has been on the twin deficits – the budget deficit and the current account. 2012 was the year when deficit reduction ran into serious headwinds after a couple of successful years.
This had less to do with the government’s austerity programme being self-defeating than two other factors: the sharp and unexpected weakness of corporate tax revenues, particularly North Sea revenues, and the fact thaat the low hanging fruit of deficit reduction has already been picked.
We are on the brink of the most important month of the year as far as the deficit is concerned. The Office for Budget Responsibility (OBR) is looking to healthy January self-assessment receipts to put the public finances on track. But it is touch and go whether the deficit falls this fiscal year and there will be egg on face for the chancellor and OBR if it does not. I imagine Ed Balls, the shadow chancellor, is looking forward to that one.
As for the current account deficit, official figures just before Christmas showed that it narrowed to £12.8bn in the third quarter, from £17.4bn in the second. But that still meant a deficit of 3.3% of GDP, and red ink for the first three quarters of the year of £42bn. I have not reason to doubt the consensus view the full-year deficit will be around £54bn.
Exporters have been hit by the eurozone’s weakness but this is still hugely disappointing. The current account deficit narrowed from £37.4bn in 2010 to £20.4bn in 2011, suggesting the economy was undergoing some kind of rebalancing. Now that process has gone backwards.
The economy could do better but which forecasters did best. The clear winner this time is the Economist Intelligence Unit, and congratulations to them. They have been pushing upwards in my forecasting league table for the past couple of years, from 11th in 2010 to 3rd last year. Now they are unchallenged for the top spot.
The EIU got most of the big numbers spot on, only slipping up slightly on unemployment. But nine out of 10 is a great performance in what remains an unpredictable era.
Congratulations too to Deutche Bank, oln its own in second place. Its forecast was closer on growth than the EIU but a little further away on the other variables. Along with most others, they expected the current acoount to do better than it did.
The OBR, like the Bank, gets a lot of flak for its forecasts but its 2012 effort was not bad, and was in the top half of the table. Some of those in the relegation zone at the bottom suffered, like Standard Chartered, from being too bold. Others appear in the Treasury’s monthly compilation of forecasts but handicap themselves by not predicting all the variables.
We will see whether things reverse themselves next year.
This piece is cross-posted from David Smith’s EconomicsUK with permission.