City View: My predictions for 2009

published 9 January 2009

Lehman Brothers Holdings Inc. went bust. The UK government nationalised half its banking system. Iceland's economy blew up. Such was the scale of events in the financial world last year that forecasts for the next 12 months risk looking tame. Unless Bernard Madoff is appointed US Treasury secretary, or the dollar merges with the yen, nothing will quite compare. Even so, it is worth thinking about the trends that will shape 2009 bearing in mind that any forecasts made here are about as reliable as an Icelandic krona/Zimbabwean dollar swap trade. In that spirit, here are eight things that might happen.

Britain calls in the International Monetary Fund

In the last few months, the UK has been a lesson in how to turn a crisis into a catastrophe. Everyone knew its debt-fuelled, financial-services-dependent economy would need a painful overhaul to develop new industries. Instead, the prime minister, Gordon Brown, has embarked on one last borrowing splurge. With the pound already in freefall, the UK will run out of money and have to beg the IMF for a bail-out.

The two richest leagues in Europe, both pushing transfer fees and players' wages through the roof, are the Spanish and the British. Both are being hammered in the global slump. Easy money from pay-TV services will end as cash-strapped consumers save on their monthly budgets. With oil prices slashed, Russian and Middle Eastern investors won't burn money on sport anymore. Forget those eight-figure deals for big-name players. Next year, you'll be able to hire star footballers on minimum wage, and they'll even clean their own boots.

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At more than $140 a barrel, oil may have been absurdly overpriced, but few people predicted it would crash to less than $40 at one point. The losses will wreak havoc on national budgets and economies in all the oil-producing states. But none will be harder hit than Russia. The country is about to discover that it doesn't really have a modern economy it has lots of commodities and people spending money from that wealth. Russia needs to get the price back up to $70 or more. How is it going to do that? Joining the Organisation of Petroleum Exporting Countries (Opec) would be one place to start. There's not much Opec can do about demand, but it can get supply under control.

Most print-based news organisations have struggled in the past few years. And that was during a boom. As the economy weakens, technological change is combining with shrinking advertising spending to make the economics of many newspapers unviable. But there is still an escape route. By switching to web-only publishing, costs would be cut dramatically. It takes only one newspaper, possibly The Guardian, to make the plunge and plenty more will follow.

After the bling culture, we will need to get used to the bust culture. Television channels will clear all the real-estate shows from their schedules, replacing them with guides to growing your own vegetables. We will take pride in making our cars cover that second 100,000 miles. A new breed of frugality gurus will emerge out of the recession, dispensing tips on how to make the pennies go further. The best ones will make a fortune.

Right now, the world is following the ideas of economist John Maynard Keynes, running up huge government deficits to kick-start their economies. By the middle of the year, we will wonder if Friedman, who cured us of our addiction to Keynesian demand management first time around, wasn't right all along. You can't spend your way out of recessions: all you do is postpone the eventual recovery by saddling yourself with huge debts.

As investment bankers lose their jobs mid-career, few of them will have enough money to retire on. Nor will they find it easy to find a job. Repackaging loans into funny-sounding bonds that no one quite understands isn't an easily transferable skill. Bankers are, however, mostly clever and hard-working, and those are always formidable qualities. They will do what people always do when other doors are closed to them start their own businesses. We are about to see a wave of entrepreneurship, laying the foundations for an eventual economic recovery.

A bull market is a bit like falling in love: you don't know it has happened until long after the fact. Stocks have plummeted and priced in everything short of the greatest depression of all time. Over the course of 2009 and 2010, markets will gradually climb again. Most experts will dismiss that at first as a dead-cat bounce, and then as a bear-market rally. Around 2011, a few will start describing it as a bull market, and pretty soon the whole show will be on again. Who knows, there might even be a few vacancies in investment banking.

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.