Will economic life be as smooth in 2005 as 2004?

Economic pundits have been making their forecasts for 2005, and very few expect more than a continuation of the same. That 2004 was an exceptional year for a number of well known reasons does not seem to be something that most of them care to remember.

However, the more astute note a change of direction in mid-year. Then the oil price started to surge upwards, and the dollar resumed its long-term decline against major world currencies and precious metals.

The problem for 2005 surely is that we will start to feel the actual impact of these two new trends, rather then just note their appearance.

Ironically in the Oil States the inflationary impact of high oil prices and the falling dollar is already being felt. Higher petrol prices at the pumps and higher food costs in the supermarket have been accompanied by a 20-25% high in accommodation rental costs in Dubai, for example.

These effects will also become more apparent in the Western economies during 2005, and cause interest rates to shift higher than many forecasters predict.

It is just that there is a six-month or so time lag between cause and effect in the West - quite convenient for the US Presidential election and a reason to expect a sudden UK election in February.

The UK is a case in point. Here higher interest rates have brought the housing market to a standstill, depressing selling prices and forcing rents to rise for the first time in years as very few people want to buy anymore. Rising oil and interest rate costs will also now have to be passed on by UK manufacturers unable to absorb any further rises.

Does this mean that the inflation genie is out of the bag again? Certainly judging by what we are seeing locally in the Middle East, this is the inescapable conclusion, and any idea of deflation looks well and truly dead. Even China is experiencing inflation these days.

My personal five eggs for 2005 - for what it is worth - is that we are back to the 1970s again. Then high oil prices shattered a global housing bubble that sent economies into stagflation - that is a combination of high inflation and low growth. Stock markets also went through their worst period in a generation.

To my mind this is a natural adjustment to the excessive personal and government borrowing of recent years, and an overblown financial sector. The problem always with the good times is that you have to pay for them later.

However, many readers will have the comfort of living and working in the Middle East which was the only region to boom in the mid to late 1970s, aside from Japan.

If history repeats itself then the Middle East is very much the place to be at least until the end of the decade, and recent government spending plans suggest no shortage of major infrastructure projects to keep the region's economies booming.