2014 and the economy recovers - what happens then?

I hope I'm right about this, but there should be plenty of blogs in 2014 on the impact of any economic recovery on inflation, unemployment, trade and so on. At this stage, even the idea of an economic recovery might seem a bit optimistic (Paul Ormerod looks back over 2008-2013 here). After all, we're only talking about the economy getting back to where it was in 2008, in GDP terms.

In fact, the economy might be bouncing back far more strongly than was expected. How the economy behaves - and how policy makers will respond - depends crucially on the size of the economy's output gap. This is such a crucial indicator it appears as the 2nd slide in these key charts on the UK economic cycle.

The key issue to grasp is how much 'slack', or spare capacity does the UK economy have? If there's plenty, then the economy can roar back into life, without worrying too much about shortages in supply creating inflationary pressures. If - on the other hand - the economy has been badly disabled by the recession (an effect known as hysteresis) even modest growth will soon run up against bottlenecks, buffers and obstacles. You can follow the arguments here.

One problem is the huge array of unknowns. The Bank of England has indicated that it will consider tightening monetary policy when unemployment falls back below 7%. That's one measure it's using to judge how much slack the economy has. It's an imprecise measure of an unknown quantity. And the speed with which unemployment has fallen seems to have surprised the Bank.

Here's hoping for more nice surprises like that in 2014.