JEREMY PEAT

Not a pretty sight - that is my considered view of the economic outlook for the year ahead. Management of economic policy in the UK will be particularly messy in both the run up to, and the follow up from, the May general election. That will not help the pursuit of stability and growth, especially as we need to cope domestically with the continuing trauma of sorting the public finances, while investment sags and the balance of payments deficit balloons.

A commitment to a referendum on the UK and the EU in 2015, following a Conservative victory in May, would just exacerbate matters. And this will all take place against the backdrop of uncertainties and risks in the external environment. We all know that the countries at the core of the EU are in or heading for recession - joining some of the peripheral EU economies. Without careful but substantial intervention from the European Central Bank, recession could convert into deflation - a state from which exit takes time and involves further, severe, pain.

Within the eurozone, Greece is back in confusion, facing a snap general election and quite possibly a new left of centre government which will challenge and place at risk the international support agreement.

In addition to the continuing Greek tragedy, Russia now faces severe strife as the oil price plummets. That country too could be at risk of default on international debt, a much more significant risk than a Greek default and one which would send ripples through the already fragile international financial order. Meantime, Japan remains mired in something akin to deflation, and the Chinese economy has decelerated in 2014, a trend which looks set to continue into the new economic year.

A marked Chinese slowdown would remove one of the two foundations for momentum in the global economy. The US still appears robust, but the global economy cannot survive on US momentum alone. We must hope for positive news from China, the EU, Japan and Russia - some glad tidings from even two out of four would bring welcome relief.

My apologies if this succession of negatives is causing indigestion over your porridge or cornflakes. Economics is the dismal science - but this is not an attempt to be dismal for its own sake; more an effort to offset some of the unwarranted positive statements emerging from elsewhere.

Certainly 2014 in the UK was a better year than its predecessors. We even managed to recover to a level of Gross Domestic Output (GDP) - overall economic activity if you will - above that experienced before the financial crash of 2008.

However, we must be cautious even regarding a positive interpretation of this statement. It is indeed correct to state that total GDP is above the pre-recession level. But in my view a more important measure of economic welfare is GDP per head. Given that the UK has experienced population growth over recent years, GDP per head has increased less than GDP as a whole. According to the Office for National Statistics, in the third quarter of 2014 this [GDP per head] 'remained 1.8% below pre-economic downturn levels'; while 'Net National Disposable Income (NNDI) per head, which represents the income for UK residents, has remained broadly flat since Q1 2012 and remains 5.6% below pre-economic downturn levels.' In other words, in terms of disposable incomes UK residents remain 5.6% worse off than pre-recession and have seen no improvement over the past eleven quarters. As stated previously in the Herald I see no reason to turn cartwheels of delight!

All of these issues will pose problems for those making decisions about policies. In the eurozone there is understandable pressure from many for the European Central Bank to enter into its own form of 'quantitative easing', following in the footsteps of the USA and the UK. The suggestion is that the ECB version should be based upon investment in infrastructure, a proposition which may be more palatable to the sceptical German authorities and should also help to make the eurozone economies more productive and more competitive internationally.

In the UK there seems no reason for the Bank of England's Monetary Policy Committee to contemplate any increase in interest rates in the first half of 2015 - and probably no justification for an increase in the second half either. Inflation is below target, and with wage growth muted and the full effects of the oil price tumble yet to show in inflation, the expectation must be for inflation to stay very low for an extended period.

Fiscal policy will be more difficult to forecast. The scale of George Osborne's projected cuts in public expenditure is staggering. If we look at departmental spending excluding the 'protected' areas of health, etc., then there has been a fall of 22% in real terms over the past four years. That has really hurt. But over the next four years the equivalent figure is 42% - nearly double the percentage reduction achieved in those first four years. Achieving such a target appears, thankfully, nigh on impossible. So if the Tories win in May expect them to miss their targets. If in power Labour would plan to reduce the deficit by tax hikes as well as expenditure reductions, over a more extended period, but for whoever sits in Number 11 the task will be formidable and for the rest of us the pain will surely continue.

As I said at the outset, what a mess; I do hope that I am proved wrong.

Jeremy Peat is visiting professor at Strathclyde International Public Policy Institute