Tell us, gentlemen, are we in for an 'L' of a gloomy year?

FILL a room with 20 economists and you are sure to end up with a minimum of 20 conflicting opinions.

The corollary is that when 20 economists all agree they are almost certain to be wrong

With this healthy scepticism to the fore, I have cherry picked themes and risks for 2008 from six independent economists. There is little agreement among them, other than that 2008 is going to be a 'down' year. However, there is one who begs to differ, and I have saved Ed Yardeni's upbeat assessment for the last.

The big debate for 2008 will be as much about the length of the current downturn as its extent. Both America and Britain have become accustomed to short downturns and quick recoveries – conforming to a 'V' or 'U' shape. But a notable feature of this downturn is how little room there is for policy flexibility. Central banks will be constrained by inflation concerns in the speed and extent of interest rate reductions, while the ballooning budget deficit in the UK argues against tax reductions as a means of cushioning the downturn. So this would suggest we may be heading for an 'L' shaped economic performance: a sharp downturn followed by no real recovery until 2009 and beyond.

Downward spiral in US
HAN DE JONG
Chief economist ABN AMRO
I see a 75% chance to a recession in the US some time before the end of 2008. For now we are calling for a relatively mild US recession, provided that economic policy, in particular monetary policy, is eased significantly. However, the downside risks to this mild recession scenario are at least as large as the upside ones. A self reinforcing vicious spiral between the real economy and the financial markets is developing – and unlikely to be stopped, or reversed, any time soon.

Homeland insecurity
DAVID ROSENBERG
North American economist, Merrill Lynch
Both the near term and longer term outlook for the US housing market remains clouded in what is a severe downturn. Builders are now frantically cutting production. But with the sales backdrop still softening, they may have to slice their construction plans by another 30% before we hit bottom on a cyclical basis. That bottom could be as long as a year away. Beyond that, weak demographic fundamentals point to years of sluggish real estate activity, particularly in terms of the price. In fact, real estate pricing in general can be expected to be in the doldrums through to 2012.

UK growth under threat
STEPHEN LEWIS
Economist, Insinger de Beaufort
2007 has been a good year for UK economic growth. Despite slowing towards the end of the year, the annual rate of expansion in real GDP is likely to be above 3%, a rate exceeded in this decade only in the recovery year of 2004. In almost every other respect, however, the past 12 months revealed deterioration in the UK's economic performance. Inflation rose well above target and the balance of payments current account and budget deficits widened. Sterling ended the year on a decidedly weak note. The turmoil in global financial markets was not to blame for these negative trends which had set in long before the US sub-prime crisis. The threat now is that households' rising anxiety over the value of their homes, combined with a dip in spending on housing-related goods, will derail the expansion. The MPC is likely to be more cautious than the markets are currently assuming in cutting Bank Rate. The forecast is that consumer spending will slow from an annualised 3.3% of growth in 2007H2 to 2.5% in 2008H1 and to just 1.8% in 2008H2. GDP growth with slow from 3.1% in 2007H2 to 2% in 2008H1 and 1.4% in 2008H2.

Bedevilled by deficits
MICHAEL SAUNDERS
UK economist, Citigroup
The Q3 current account deficit soared to £20bn (5.7% of GDP) from £13.7bn in Q2. This is a record deficit in cash terms and, as a share of GDP, matches the record peak of the late 1980s. The current account deficit has not been bigger as a share of GDP in the last 50 years.

The fiscal deficit was £11.2bn in November, above our £10bn forecast and up from £9.1bn a year ago. Indeed, this is the highest November deficit on record. The fiscal deficit in the first eight months of the fiscal year reached £32.6bn, up from £26bn in the same period of last year and a record for the first eight months of the year.

So all this looks pretty ugly: rising twin deficits and a credit crunch. The UK has probably been the fastest growing country in the G7 this year, but is likely to have the sharpest slowdown in 2008. We continue to expect the MPC to cut rates further, but there is a risk that the falling pound could become a constraint on the pace and scale of easing.

Consumer crunch
LAURENT SOURON
Centre for Economics and Business Research
We expect that consumers will start to feel the strain of the recent credit crunch in 2008. As a result, retail sales volumes growth should decrease after the Christmas rush. A decelerating housing market will also affect both consumers' confidence and their spending habits. Nevertheless, we expect the fall in retail sales to be at a subdued pace as cuts in interest rates and price reductions support sales in the beginning of 2008.

Reasons to be cheerful
ED YARDENI
US economist
While 2007 was a very bad year for the credit markets, it was a very good year for the US economy. All the following rose to new record highs: (1) Real GDP and all of its final sales components with the obvious exception of residential investment; (2) Industrial production; (3) Merchandise exports; (4) Non-residential construction; (5) Non-farm business productivity; (6) Inflation-adjusted earned income per worker; and (7) Payroll employment. Consumers continued to spend all during the year despite rising fuel and food prices, falling home prices and weakening consumer confidence. There was no recession in 2007 despite the turmoil in the credit markets. As of October, the Index of Coincident Indicators rose to a record high, marking the 71st month of economic expansion since the previous economic trough during November 2001. Indeed, real GDP was up 2.9% year on year during the third quarter. Excluding residential investment, it was roughly a percentage point higher at 3.8%, the strongest since the start of the decade!

Will 2008 mark the end of our long economic expansion? I don't think so, though many of the same forces that were expected to depress the US economy in 2007 will still be in play.