The rise of one per cent predicted from the recent low of euro interest rates by our panel over the coming year will have a considerable influence on the financial services environment, not to mention the property market in 2006.
A rise has been threatened for a long time, but with the sputtering euro zone economy at last beginning to show some life, the time has come for borrowers to grin and bear it, and for depositors to gain some recompense for their thrift over recent years.
The 100 bp rise predicted in total by our panel, will increase interest outgoings by unhedged borrowers by a quarter to a third, and although rates historically are at low levels, such an increase cannot but have a dampening effect on the property market, particularly the housing market.
The change in market conditions will present the financial services industry with an opportunity to deliver more sophisticated wealth management services to clients, including structured products and alternative investments.
Such products, which Finance makes it its business to write about every month, and which we will continue to write about in 2006, lie at the heart of success in financial services in the years ahead. The end of the year is always a good time to reflect, and review, and in this month’s issue the article by Marie O’Connor, head of the financial services practice of Price Waterhouse, provides a thought provoking overview of the big issues, and how they promise to pan out for the financial services industry over the next five years.
‘Those organisations that offer life cycle wealth management services and predict changes in consumer preferences through the cycle will be most successful, at least in developed markets’, she says (p7).
Another theme of our times is the buffetting the financial services industry has received (more pronounced in Ireland, because of the enthusiasm for the subject amongst certain sections of the media, but an international trend nevertheless). Marie O’Connor predicts that this will continue. This also in our view is to be expected, because the financial services industry will operate in increasingly sophisticated areas using derivatives and structured products for example, while at the same time, the greying of the population, and its increased affluence and wealth, will make it more dependent than ever on an increasingly professional financial services sector.
As always, integrity lies at the heart of the financial services contract, and this is nothing new. The media’s self appointed role as vigilantes for the integrity of the financial services industry at times irritates many in the industry (it clearly will irritate those whose integrity is being impugned, and which is above reproach and always has been) - but such is the price of doing business, and success, if it is to continue, will require a continued ethos of integrity in all dealings.
While higher interest rates and the level of debt will continue to be a concern for the financial services industry in Ireland, the economic outlook for 2006 and 2007, is strong, indicating that whatever about the monetary stimulus, the fiscal stimulus following the 2006 Budget will be powerful.
At least a strong fiscal backdrop might offset monetary contraction in the year ahead - but there will be continued imbalances arising from this Budget. This column has regularly voiced concerns at the continuation of double digit growth in public expenditure - even 6 per cent GNP growth, at current inflationary targets of 2 p.c by the ECB, cannot sustain such an increase. Such spending committments leave no room for taxation relief of course, and, in our view, effective marginal income tax rates of close to 50 per cent for over 30 per cent of the working population are too high.
It will be an interesting new year, and change in the finance environment is in the air. Let us hope that interesting times, as the Chinese curse has it, will not herald bad times, but rather new and better opportunities. |
