A BLIZZARD of New Year predictions is blowing our way. But predictions are rather like old photographs – often embarrassing in their confirmation of one's appalling fashion taste and also how the passing of years has eroded both one's confidence and one's hairline.
Predictions are also often confounded by actuality. Some of the more startling developments over the past 20 or so years would have defied prediction, from the destruction of the Berlin wall and the collapse of communism to the election of a black ma
n as the next president of the US and, perhaps, the near total collapse of the western banking system.
Forecasts are based on assumptions, which are subject to change. Today, for example, cash as an asset class appears to have limited appeal, which explains the switching out of bank deposits into alternative propositions, bonds, corporate debt paper and, indeed, even high yielding equities. However, this is not a state of affairs that is going to last indefinitely.
The reservoir of funds building up behind the dams being used to ring-fence the banking industry will breach at some point and the subsequent acceleration in the velocity of money supply will see inflation surging again.
That outcome is probably not an immediate prospect. The first quarter of 2009 is likely to be particularly difficult, with the banks apparently reluctant to lend, especially to small and medium-sized enterprises that are now being starved of commercial working capital. I fear, therefore, we are going to see a spate of smaller company crises, which the recent budget measures for SMEs will do little to alleviate.
The Prime Minister and the Chancellor had an opportunity six weeks ago to be rather more inventive, by setting up a state-sponsored bank, perhaps, with a fixed time horizon designed to provide funding at, say, two percentage points above Libor for smaller concerns facing a short-term liquidity crisis.
One prediction I will make: Gordon Brown will be watching the political runes closely and he must realise that the flocks of financial pigeons that he has launched during his decade as Chancellor are going to come home to roost soon. I see a spring election on the horizon.
I also see a developing recovery in international stock markets. This will not occur immediately and may be even less likely into the first quarter of next year as we move nervously towards the spring results season. However, provided we can navigate this period without major disasters, and the effects of a more accommodating monetary regime begin to prompt some pick-up in capital investment and consumer demand, the gloom merchants may lift their eyes from their recession-filled navels and see the promise of improvement in 2010. I also predict a marked increase in merger and acquisition activity. Many of today's quoted valuations look an outstanding opportunity for the ambitions of Middle East and Far East investors, whose initial stakes in the likes of Barclays and Sainsbury's will not be the last.
Much is expected from the young former Senator from Illinois, Barack Obama. Indeed, the burden of hope is almost terrifying. In truth, though, for Obama and the other political leaders, events will dictate policy rather than the other way round. In the UK, it is apparent the majority of the electorate has little faith in any politician – with the exception, perhaps, of Vincent Cable – to lead us to the economic promised land. Moses Brown has already led us into the desert with little prospect of an early arrival at an oasis. Unfortunately, the Conservatives appear to offer little credible alternative, probably because they are aware that the only real approach is an aggressive reduction in public expenditure, which would be political dynamite in the contemporary environment. However, dynamite is probably what we need to blow a hole in the lending dams. I make no political point but New Labour's economic strategy has been jettisoned, replaced by the policies of the 1960s and 1970s. I predict that 2009 will find them as wanting again.
• Bryan Johnston is director of Bell Lawrie in Edinburgh
The full article contains 692 words and appears in The Scotsman newspaper.
