Economists are more optimistic about the UK economy than at any time in the past two years, with a majority sensing few domestic risks to stability, a Financial Times survey reveals.
Of 49 econmists polled, the vast majority said the main risks from abroad came from either a US slowdown or a geopolitical crisis, but their level of concern was limited.
Often-heard worries about the housing market, the public finances, the competitive threat of China and India or immigration hardly featured as far as economists were concerned for 2007, and persistently high inflation was the only domestic concern listed by 15 economists as a potential risk.
Sir Alan Budd, the former chief economic adviser to the Treasury and MPC member, calculated odds of an 85 per cent chance no risks would materialize and said that even if something did go wrong with the global economy, “in recent years the economic and financial systems have coped well with shocks so the consequences may not be serious”.
In becoming more optimistic about the ability of the global and UK economy to avoid a crisis, economists have followed investors in financial markets who are also pricing-in low probabilities of any big problems in 2007.
This lack of concern itself was one of the main issues raised by 21 economists as a potential flashpoint, as many financial market crises occur just as many people are dropping their guard.
Prof Willem Buiter, the former MPC member, said that risk premia “have fallen to ridiculous lows and are begging for a correction”.
Most of the rises in the rebounding housing market are now viewed as sustainable by three-quarters of economists in a reversal of the position two years ago, when the same proportion viewed a housing crash as posing a serious threat to the economy.
While a majority still think Gordon Brown has lost his prudence with the public finances and that public expenditure should be limited further than planned, almost none said this was an urgent prioritry for government.
But economists were highly critical of the chancellor’s tendency to view China and India as a competitive challenge for the next decade, with the vast majority seeing the growth and integration of the two economies as a huge opportunity for Britain.
Prof Mike Wickens of the University of York said: “Has the loss of virtually all of the 19th century industries done any long-term harm to the UK? No.”
But there was encouragment for Mr Brown in the weight of the economists answers to the effect of high immigration on the UK. The main effects were to raise the sustainable rate of growth of the economy and reduce wage inflation, providing a boost for most consumers and workers with a limited threat for those competing directly with immigrants for jobs.
With 2007 almost certain to bring a new chancellor of the exchequer as Gordon Brown moves to Number 10, a large majority of economists thought he would hang on to his power over the Treasury and UK economic policymaking.
Prof Buiter, said “As long as Brown is in number 10, the First Lord of the Treasury will Lord it over the Chancellor of the Exchequer”.