Ed Bowsher looks into his crystal ball and makes his financial predictions for 2011.
Looking back, 2010 has been a year of aftershocks following the financial earthquake of 2008. We’ll almost certainly see more follow-up shocks in 2011, and you can’t completely rule out another earthquake as big as 2008’s.
Let’s look at what might happen in different areas of finance, starting with my most positive prediction:
Current accounts
I reckon competition is going to hot up in the current account market in 2011. Tesco will finally launch its current account next year (along with mortgages too) and it’s bound to offer a pretty competitive product. Virgin is also planning to launch a current account while new entrant Metro Bank has said it will speed up its branch opening programme.
What’s more, there’s a chance that Santander may finally sort out the integration of the three UK banks it has bought: Abbey, Alliance & Leicester and Bradford & Bingley. If that happens, customer service may improve and more customers could be tempted by some of the excellent products that Santander offers.
Sure, some banks may introduce fees on some accounts, but I think increased competition means there’ll still be plenty of accounts offering free banking come January 2012. (For the opposite view on this issue, read Why free banking is bad for you.)
Mortgages
I don’t think we’ll see much improvement in the mortgage market. Most of the big banks still have too much debt and they’re not going to lend more aggressively until their balance sheets are stronger.
UK economy – interest rates and inflation
The UK economy grew surprisingly strongly in the second half of 2010. The momentum from that growth will probably keep the UK out recession this year, but I do expect growth to slow, largely thanks to the impact of government spending cuts.
I also suspect that inflation will stay stubbornly above 3% for the whole year. That’s because expectations of higher inflation are beginning to take hold. Whenever that happens it becomes much harder to get inflation down.
The Bank of England will be under pressure to increase the base rate to combat inflation but it won’t want to raise the rate too aggressively while economic growth remains sluggish. It’ll be a tough balancing act for the Bank – the obvious compromise would be a base rate rise to 0.75% or 1% in the latter half of this year. That looks the most likely outcome.
I’m going to add a caveat to these economic predictions. There’s a chance that we could return to recession if things go dramatically wrong in other parts of the world.
House prices
After a massive financial crisis, you might have expected large house price falls. Instead we’ve only seen modest declines. I think that’s been down to mega-low interest rates. In 2011, I expect those gentle price falls to continue – public sector job losses will reduce demand while modest base rate rises will force some struggling homeowners to sell their home.
Europe
Making accurate predictions gets harder when you move beyond the UK. There are so many different factors to consider but one thing I can say with certainty is that I’m worried.
In Europe, there’s a good chance that Spain and Portugal will continue to struggle with their debts and further bailout packages will have to be assembled. That will increase the pressure on UK banks as they may have to write off some of their loans to those countries and their banks.
There’s also the risk of countries withdrawing from the euro or even a total collapse of the single currency project. My hunch is that the Germans would feel obliged to keep the euro afloat if things got really bad, but you can’t be 100% certain.
China
The situation in China is really interesting right now. The Chinese economy is still booming but inflation is picking up. Prices are rising because the supply of fresh, cheap labour is beginning to dry up, and because the Chinese government has kept interest rates low in order to keep the boom going.
Chinese inflation isn’t necessarily a bad thing for the West as higher prices will make Chinese exports less competitive. On other hand, inflation might spread from China to Europe and then interest rates would have to rise more quickly choking off economic growth. That’s a factor that could push the UK back into recession.
What’s more, inflation would be bad news for the Chinese people as it would make their government more nervous and less willing to tolerate change. Chinese leaders will remember that high inflation was one of the causes of the Tiananmen revolt in 1989.
What really worries me is that a full scale trade war might break out between China and the US. The US is cross that China hasn’t allowed its renminbi currency to rise in value, and might impose trade tariffs in retaliation. These tariffs would make Chinese goods more expensive in the US.
No doubt China would retaliate with its own tariffs and the ensuing decline in trade could hurt economies worldwide. Tariffs and protectionism would make it all the harder for the global economy to recover.
When you remember that many banks remain pretty weak and are struggling to pay down debt, you can’t completely rule out another financial crisis in 2011. If that happens, all my talk of gentle falls in house prices and modest rises in the base rate would be out of the window.
Happy New Year!