Not many New Year greetings for the UK economy have been accompanied by so much uncertainty as the welcome for Year 2001.
The pot of economic and financial statistics is overflowing with figures to support the varied, often conflicting contentions of economists of many persuasions.
Monetarists warn of reviving inflationary pressures born from the continuing surge in home loans and consumer credit. Classic Keynsian economists warn about falling demand caused by the new "oil shock" and stealth taxes. Industrial economists warn about the lasting damage to the manufacturing industry caused by strong sterling.
Primarily, though, economists are divided over the extent of the economic slowdown from the spanking pace set in recent years.
Until recently, the "soft landers", predicting a relatively pain-free economic deceleration, were in a substantial majority. But the US turn for the worse during the autumn has led to an increasing number of "hard landers" forecasting recession, possibly as severe as during the early 1990s. Yet there is scope for a third scenario, worse than the sanguine view of soft but nothing like as bad as the prognosis of doomsters. "Rather than a soft or a hard landing, it's possible we are looking at a soggy landing somewhere between the two," says Mr Keith Wade, chief economist at Schroders.
Certainly, recessionary influences are becoming stronger by the month. Discretionary household spending is being squeezed by higher oil prices at a time when spending power is still being pinched by the tight fiscal policies of the Chancellor, Mr Gordon Brown.
As well, the US downturn, now being partly discounted by the Wall Street bear market, will have a significant impact on export order books and the ability of euroland to take on the locomotive role in the world economy remains uncertain. Other things being equal, the boombust cycle suffered so frequently since the 1960s should now see the economy moving into a prolonged period of weak growth, if not outright recession, accompanied by rising inflation. Higher interest rates needed to rein back inflation worsen the recessionary conditions leading to factory closures, increasing unemployment and yet another hard landing for the economy. This time around, though, the future could be different.
Surprisingly, despite strong growth enjoyed in recent years, a fall in unemployment rates to record lows and unremitting expansion in credit, inflationary pressures remain few and far between.
Extraordinarily, the underlying rate of UK inflation is now the lowest in Europe and, stripping out oil, rises in excise duty and seasonal factors, inflation is virtually non-existent. For several sectors, such as cars, electronic products, household goods and clothing, falling prices are creating real difficulties for most retailers. Marks & Spencer is not alone in having to rewrite its business model. The strength of sterling is mainly cited as the key factor holding down UK prices, by cheapening commodity and raw material costs and encouraging import competition.
Also, the arrival of the Internet has led to greater transparency of product pricing at competing retailers, as well as new competition from e-tailers. With inflation running at historically low levels, most City seers believe the UK interest rate cycle is at its zenith. With the economic downswing getting under way, the Bank of England's monetary policy committee is widely expected to start the process of cutting interest rates in February.
Forecasts are for the bank's repo rate to be reduced from 6.25 per cent to 5.5 per cent, and possibly 5 per cent, by the end of 2001. This, then, could be the "soggy landing", where the potential slide into recession is alleviated by a loosening of monetary policy in a way that has not previously been possible in the UK's traditional boombust cycle. Even so, it is not difficult to see how things could go horribly wrong. The UK is more exposed than euroland to an external shock from a "hard landing" for the US economy, both directly through cutbacks in orders and indirectly through the financial markets.
If the sterling exchange rate were to fall precipitously against a resurgent euro, the scope for UK interest rate reductions would be lessened. Domestically, the main risk to the "soggy landing" scenario could well be Mr Brown's budget in March, which will be the launching pad for the government's re-election campaign at the general election, probably in April. If the fiscal stimulus to the economy from tax cuts and public spending increases is too great, the Bank of England has already warned that interest rates could be raised rather than reduced. Although the economy as a whole would benefit from fiscal stimulus, the adjustment process would feel very much like a hard landing for industry and commerce in the private sector.
