What's to come in the world of personal finance over the next twelve months? One Fool writer looks back before looking ahead.
Before I begin, I should point out that I'm no expert commentator when it comes to forecasting financial trends. Then again, history shows that precious few financial and economic projections can be relied upon!
For example, Gordon Brown has made some spectacularly poor predictions about trends in the government's budget. Indeed, in order to meet his Golden Rule (which states that the government may only borrow to invest over the course of an economic cycle), the chancellor has changed the length of said cycle on three separate occasions. Also, six years ago, Mr Brown said that the government would borrow £28 billion between 2001 and 2006. In fact, the actual figure was over £100 billion higher, which is some overshoot!
Hence, if the chancellor (who has thousands of civil servants and advisers working under him at the Treasury) is unable to make reasonable predictions about the UK economy, then it's unlikely that many other individuals or organisations can do much better.
Nevertheless, in the interests of making myself look totally foolish (note the small f), I'm going to look at the financial trends of 2006 and suggest what may happen to them this year. Here they come in alphabetical order -- pass me my crystal ball!
1. Bankruptcies and insolvencies: going up!
In Britain's Going Bust!, I predicted that 110,000 adults would become bankrupt or insolvent last year. The figures for the final quarter of 2006 have not yet been released by the Insolvency Service, but early indications are that I was spot on, which is nice. My prediction for this year is that people will continue to go bust like never before, chalking up a total of 130,000 bankruptcies and insolvencies combined. Crikey!
2. House prices: who can say?
There are 25 million domestic properties in England, Wales, Scotland and Northern Ireland, so the UK property market is hugely diverse. Predicting property prices is a mug's game, even for the experts. For example, last year, Nationwide BS predicted that prices would rise by 3% on average. Its final figure came in at 10.5%, so its forecast was well short of the mark.
Furthermore, in 2001, HBOS group (the UK's biggest mortgage lender by far) predicted that house prices would rise by 5% in 2002. The actual figure was 25%, so Halifax was out by a factor of five. Nul points!
Anyway, I'll cut to the chase. Although I've been spectacularly wrong in predicting house prices in the past (I thought they looked toppy in 2004, 2005 and 2006!), I can't imagine that house prices will continue to outpace wage increases forever. Hence, although most so-called experts predict rises of between 5% and 15% in 2007, I'm going to predict that house prices will climb by less than 4% this year, in line with expected wage rises. Watch me be proved wrong yet again!
3. Inflation: staying high?
Inflation is the tendency for the price of goods and services to rise over time. In November, one official measure of inflation known as the Retail Prices Index (RPI) reached 3.9%, its highest level for almost a decade. When I look at how the costs of childcare, energy, transport and so on continue to soar, I can't see inflation taking a dive for the foreseeable future, unless the Bank of England's Monetary Policy Committee hikes its base rate several times.
4. Interest rates: on the up?
At present, the Bank of England's base rate is 5% a year, having been raised twice last year, both times by a quarter of a percentage point. However, most pundits reckon that at least one more rate rise is on the cards, possibly as early as February. Here's one concrete forecast that I'm happy to make: regardless of what happens to the base rate, banks will increase the cost of borrowing in order to maintain their record profits in the face of bad debts and other setbacks!
5. Pensions: a shambles!
The UK's retirement plans are in a terrible state. By taking away tax credits on the income received by pension funds, the chancellor undermined the entire pensions industry. This -- combined with the stock-market collapse of 2000-03 and falling investment returns -- has led to mass closure of attractive final-salary schemes and their replacement with inferior money-purchase plans. Is it any wonder that three in seven workers aren't saving enough (or anything) in pensions?
Furthermore, the government has failed to tackle the problem of funding public-sector pensions for around seven million workers who aren't employed in the private sector. Estimates put the unfunded cost of providing secure pensions to public-sector workers at between £750 billion and £1 trillion, or £30,000 to £40,000 per household. Hence, we can expect income tax and Council Tax to rise over time in order to fill this black hole at the heart of the government's budget!
6. Personal debt: scary stuff!
In the twelve months to the end of November 2006, our personal debt (including mortgages) had risen 9.5% to £1,278 billion. Although most of this dramatic increase in our debt burden is down to larger mortgages and higher house prices, we still continue to borrow without a care in the world.
My prediction is that our total personal debt will be close to £1.4 trillion by the end of this year, which is terrifying stuff. As someone who has been crushed by massive debts in the past, I don't do debt anymore, so you're welcome to this colossal mountain of mortgages, loans, credit cards and overdrafts!
7. Stock markets: steady as she goes?
Various economic, political and social shocks cause the stock market to wobble and even dive from time to time. However, in the long run, the UK stock market has climbed by an average of 11% a year (with income reinvested), which has far exceeded the returns on cash, property and other mainstream investments.
By one measure, known as the price-earnings ratio, the FTSE 100 index (which measures the value of the UK's one hundred largest listed firms) looks quite cheap in historical terms. Indeed, thanks to soaring company profits, with a P/E of around thirteen, the Footsie currently appears to be as cheap as it has been at any point over the past fifteen years.
Hence, I'm predicting another positive year for the UK stock market, with the FTSE 100 rising by as much as 15%, barring any nasty surprises!
Finally, as I said, predicting the future is mostly guesswork and luck, so take all of my prophecies with a large pinch of salt. At the end of the day, what matters is that you get to grips with your personal finances and master your money in 2007!
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