With the Bank of England forecasting an economic recovery and the housing market showing signs of life, things are looking up for our neighbours, writes Chris Johns
When talking about the economic outlook it has become almost a cliché to talk about "things being unusually uncertain". These weasel words are often no more than a thinly disguised apology on behalf of a forecaster who knows that he is going to be wrong.
More charitably, they sometimes represent an acknowledgement of the simple fact that forecasting is an extremely difficult game to play. But looking at the range of prognostications currently doing the rounds, it seems that analysts might be forgiven, for once, for hedging their bets. Up, down or no change, forecasts currently come in all possible shapes and sizes.
One notoriously equivocal forecaster, the Bank of England, has actually gone the other way. The bank's colours have been pinned firmly to the mast with an unusually explicit forecast of a recovery for the economy. If anything, the message being sent by the bank is even more forthright than this: it believes we are currently at a turning point.
As all junior forecasters know, calling turns in the economy is the hardest trick of all: the best mathematical model of the economy is the one that says the trend is your friend.
Trying to pick turns in either the economy or financial markets has led to the ruin of many a reputation: it is usually a better career move to miss a turn than to call one that never happens. But the bank sees the bottom of the UK economic cycle occurring about now.
A big and brave call. Many analysts think that the bank is erring on the side of optimism, although there have been one or two hints recently that the forecasting community may be changing its collective mind; seasonal cheer has even begun to creep into the analysis of the economists.
The biggest issue facing the UK economy is the behaviour of the housing market.
The Bank of England failed to see the slowdown in consumer spending through 2005, mostly because of a faulty model that failed to draw the right connections between the state of the property market and household spending. But with the housing market showing signs of life, the hope now is that the trough in consumer spending growth is near. Much, therefore, depends, on whether or not those signs of a property recovery are likely to be sustained. The doom merchants - and there are plenty out there - believe that real estate is merely drawing breath before plunging again.
The drivers of property prices don't look too bad. Demand is likely to remain robust, not least because of immigration. Like Ireland and Sweden, Britain opened its doors to the new accession countries and is benefiting from a wave of talented and employable people from Eastern Europe.
Most importantly, any sudden weakness in the housing market could easily be countered by a judicious cut in interest rates: one of the factors that stabilised the market was a single cut in rates earlier this year.
Property prices are now super-sensitive to changing interest rates. It seems to me that a sensible forecast would be for the housing market to remain relatively robust. Export performance has been disappointing of late, something that might change with the gathering cyclical upswing in the rest of the world. The UK, like any other open economy, is heavily dependent on external developments and, with even Germany looking like it might surprise on the upside next year, there are plenty of grounds for optimism.
The UK should, therefore, grow faster in 2006 than it did in 2005. Higher consumption will come as a relief to beleaguered retailers, some of whose share prices have recently been moving in anticipation of better times ahead. But ferocious high street competition and the growing switch to internet shopping need to be kept in mind.
The big sectors of the British stock market - oils, telecommunications, banks and pharmaceuticals - will have contrasting fortunes. Among this list, only banks are sensitive to the economic outlook: like retailers, they have suffered over the past year or two and may be relieved by some semblance of stability in 2006.
Against the euro there seems little reason to expect sterling to change the trading pattern observed over the past three years.
The UK currency has been kept in a €1.40-€1.50 range for the vast majority of that time, a remarkable record of stability. Currency forecasts come attached with more health warnings than do their economic counterparts but there appear few reasons for the pound to break out of this range.
There is no chance whatsoever that debate about euro participation could resurrect itself. That question has now been decided.
Business will be asking a big political question through the year: for how much longer will Gordon Brown be chancellor of the exchequer? Is this the year that Tony Blair will finally throw in the towel?
All the signs are that the prime minister is up for a fight but the problem for him is that his backbenchers seem only too willing to give him one. The recent EU budget debacle has further damaged a prime minister who was already in danger of leaving no legacy at all, good or bad.
The EU budget deal was an introverted exercise. This was not lost on those of us pondering the fact that the Chinese economy will grow to be bigger than the UK in 2006. The challenges that this poses for this country seem to be utterly beyond the capabilities of the current prime minister, if not the current government.
We can only hope that Gordon Brown's silence is suggestive of a man spending all his free time planning how to deal with our enormous external economic threats - and opportunities.
Chris Johns is an investment strategist with Collins Stewart. All opinions are personal.
