Pessimistic forecasters flummoxed by resilience of economy

London Briefing: The last time the Bank of England sanctioned a change in interest rates was back in August, when the key repo rate was cut to 4.5 per cent.

Since then, interest rate expectations have been on something of a rollercoaster ride, along with forecasts for the economy.

Initially, the cut was thought likely to presage a series of reductions, as economic data suggested something of an ongoing slowdown and the housing market, in particular, was widely forecast to be in the early stages of a meltdown.

Things haven't quite gone to plan, at least as far as the doom merchants would have had us believe, particularly recently.

Indeed, both the wider economy and house prices have shown signs of life. Even the dear old manufacturing industry, an endangered species if there ever was one, is growing again. Talk amongst economists is that Gordon Brown's economic forecasts, widely derided at the time of the recent budget, may not be so daft after all.

The UK economy is peculiarly dependent on its housing market. The high degree of home ownership means that many forms of spending are linked to the level of property transactions. But housing is not the only driver.

Older hands will remember that the UK used to be described as an open economy, dependent in large part on what is going on in the rest of the world. And the global economy is booming.

In another affront to the dismal science, far from slowing down this year, as universally forecast only three or four months ago, the world economy is showing every sign of a marked acceleration. This, quite simply, was not supposed to happen. Here's why.

First, the main rule of forecasting: what goes up eventually comes down. Global growth has been strong for a while now and the past couple of years have been the strongest period for expansion in over 30 years. Most forecasters simply assumed that this could not last. Second, interest rates, with the notable exception of the UK, have been going up everywhere.

Monetary tightening always spells the end of cyclical upswings, so let's pencil in lower growth numbers. Third, rapidly rising oil prices have always led to global recession: why should this time be any different?

That last question dogs all forecasters. Nobody wants to be the one to argue that "it's different this time". Use those words and your sophisticated customers will laugh at you.

However, things clearly are different, but nobody is asking why. Instead, the dismal ones just mutter that it's the world that's wrong, not the analysis.

For whatever reason, the global economy looks to be in fine shape and UK industry is finally looking like it is joining the party. By happy coincidence, the property market is also picking up smartly. So, when the Bank of England delivers its inflation report today, don't be surprised if there are hints that interest rates are unlikely to be cut again. There may even be dark mutterings about the need for inflation vigilance, central bank code for the need to raise rates.

Indeed, money markets are now flirting with the prospect of a rate rise quite soon. All things considered, the bank would be well advised to leave things as they are, using that ultra-sophisticated model of monetary policy known as "if it ain't broke, don't fix it".

The buoyancy of the global economy should come as no surprise to anybody able to put current circumstances into some kind of context. Oil prices have soared because of booming demand, the first time this has ever happened in this way (one very obvious reason why things are different this time). Despite Iraq and the concerns over Iran, there are, globally, less "hot" wars at the moment than there ever have been. And capitalism has broken out everywhere, notably China and India. It's a mix that does have some precedent, but you have to go back a century to find it, but even then, the parallels are far from exact.

UK GDP growth in the first quarter came in at a respectably 2.2 per cent compared to a year ago. It looks like it has accelerated since then: the most recent survey of manufacturing industry, for example, comfortably exceeded expectations. The much larger services sector is also in good shape. Many of those pessimistic forecasters will be scrabbling around, looking for the eraser.

Chris Johns is an investment strategist with Collins Stewart. All opinions are personal.