Guest leader: Not many breaks in the cloud

We are going to have a recession. Many people reckon that we have one already, although my fellow economists have fancy criteria that may not yet be satisfied. It stems from higher oil and food prices, the demise of cheap borrowing and the end of the era when people could spend the increased value of their houses. We will have to get used to the shift of purchasing power from countries such as ours to those that produce food and fuel. The average Briton will be worse off either because prices rise faster than wages, or because some people protect their real incomes while others lose their jobs. Both routes bring average incomes down; the latter in a less even-handed way.

So how will all this affect universities? There is conventional wisdom that we do quite well in recessions. The story goes that more people want to come to university either because they have little alternative or because they think that it is even more important to differentiate themselves by gaining skills and qualifications.

This time might be different. Before the economic downturn of the 1990s, fewer people came into higher education; so when jobs became scarce, there were more people than there are now who were qualified for higher study and could turn to us. We have also not had a major economic problem since tuition fees and loans were introduced, and these could be a disincentive for older students already facing higher mortgage charges. Finally, as universities respond to the employer-engagement agenda, we are likely to rediscover the truth that employers wanting to cut costs look to their training budgets. So perhaps there is not much likelihood of additional undergraduates.

"Fourth-year" masters students might be a better bet if individuals want to set themselves apart from the crowd. If graduate jobs become scarcer, it is likely that more will want the enhanced CV that comes from a programme that also avoids a period of low-grade employment. But again we enter uncharted territory, because the 2009 cohort will be the first with the full load of debt from top-up fees. Will they want to spend more on postgraduate programmes? Or if they have spare cash, will they prefer to pay off their loans?

International markets should gain from the increased wealth of food and oil producers. Oil producers want to use their additional resources for the diversification that they will need when the oil runs out. That spells opportunities for us now, followed by increased competition as overseas universities develop. The exchange rate affects our competitive position, and we will have a strong pound and a competitive disadvantage if our interest rates rise to combat inflation while rates elsewhere fall to respond to recession.

Public funding will be challenged given the present signs of resistance to higher tax rates coupled with falling tax revenues as people earn and spend less. The Government is committed to maintaining the unit of resource for teaching, but only for the next two years. Even that is at the mercy of the assumed rate of inflation, which is likely to be less than universities' increases in employment and energy costs.

Funding for higher education and research has expanded during ten years of economic growth. The next few years will, I fear, be more difficult as economic conditions worsen and the demographic downturn begins. Some say higher fees will answer these problems, but the number of universities for which this will be a solution may be small if our customers are feeling poorer.

There is one compensation. For every economist writing a gloomy piece, there is one who is cheerful. Perhaps they will respond.