It’s a joke right? The prediction says the UK will eclipse both the US and Eurozone next year and expand at a much faster rate. In fact it goes further than that. The UK is expected to grow by 3.4 per cent next year, an impressive growth rate at any time.

Now, it is very rude to laugh when people are being serious, so be serious now. The thing you need to bear in mind is that the prediction comes from a very impressive source, and before you dismiss it, the case is actually quite strong.

Okay, let’s let the cat out of the bag: the predictions come from Goldman Sachs – yuck a bank. The man who made such bullish claims was none other than Jim O’Neil, the very same man who coined the acronym BRIC, to describe Brazil, Russia, India and China.

Yesterday, the great and the good of the investment world descended on Fleet Street, London, where Goldman Sachs held its annual global strategy conference.

What made the occasion all the more wondrous is that this time last year at the same conference, the bank’s economists predicted a share rally in 2009. That prediction too, was greeted to guffaws across the land.

It remains bullish on equities. Its reasoning goes like this. The developed world will continue to grow rapidly, and apparently 70 per cent of the FTSE 100 profits are not generated from within the UK.

As for the optimistic UK forecast, Jim O’Neil reckons the British economy will expand by 3.4 per cent in 2010, compared to a growth rate of just 2.4 per cent in the US, and 1.9 per cent in the Eurozone.

The reasoning behind his prediction is not rocket science. The UK’s growth will be born of the cheap pound. Of course the dollar has fallen too, but not as steeply as the pound, which has dropped from an exchange rate of approaching $2.1 to the pound a couple of years ago, to just $1.65 last night. (Although for much of last year the pound was even cheaper against the greenback.)

So far, there has not been any noticeable pick up in UK exports as a result of the fall in sterling. But these things take time. Economists even have a theory to explain the time lags. They call it the ‘J’ curve. The idea is that following the devaluing of a currency, the trade balance may actually worsen for a short while, before picking up. The explanation is simply that exporters and importers often agree deals at prices that are fixed for months ahead, so in the short term they don’t necessarily benefit from an improvement in the terms of trade.

It is also worth bearing in mind that the UK recovered from recession quite briskly in the 1930s, after pulling out of the gold standard and devaluing the pound. The recovery occurred while much of the rest of the world were still mired in economic depression.

There are risks to the Goldman Sachs prediction. As the bank which originally forecast the rise of the BRICs, it is ultra positive about the emerging economies, and doesn’t sign up to the Chinese bubble theory. It may, of course, be wrong.

For its part, Goldman worries that the pound may bounce back. That’s quite ironic. There are many commentators out there who believe the massive UK fiscal deficit will eventually cause such problems for the UK that sterling will crash out of sight. And yet here is Goldman Sachs fretting over a possible recovery in the pound.

Of course, back in 1967, when the pound was de-valued, the result wasn’t an export boom at all, rather we suffered inflation. You may recall, reading about this in history books, or listening to your Great Grand Father tell the tale. Apparently, there used to be a British Prime Minister called Harold Wilson. He said of the ’67 devaluation “it won’t effect the pound in your pocket.” Of course he was wrong.

So the lesson of history is ambiguous. The 1931 devaluation worked, the 1967 led to inflation.

The next 12 months or so will tell which of those two experiences bears the closest resemblance to today, and whether Goldman Sachs called it right, or was guilty of absurd optimism.

© Investment & Business News 2013