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My predictions for 2013

Ed Bowsher
by Lovemoney Staff Ed Bowsher on 29 December 2012  |  Comments 8 comments

Read what's going to happen in the financial world next year.

My predictions for 2013

This time last year I made some predictions about what might happen in 2012. I was right on some of them, wrong on others. I can’t claim that I did fantastically well.

But in spite of my mixed track record, I’m going to have another bash at forecasting for 2013. Even if I get some of my predictions wrong, I still think it’s a useful exercise. It can spark debate and, heck, it’s quite fun too.

Banking

Let’s start with the banks. In the autumn, new rules will come into force that should make switching current accounts much easier. Firstly, the switching process will take no longer than seven working days. And secondly, your old bank will have to redirect payments and direct debits to your new account for 13 months.

This is good news. I very much hope that it will spur more switching and greater competition in the current account market.

However, I fear there will be less switching than I’d like. Customer inertia is very strong in this area, and the potential benefits of switching aren’t sufficiently large to tempt many folk. So I think we’ll just see a modest rise in switching in 2013/14.

Peer-to-peer lending

I expect to see much more than modest growth in the peer-to-peer lending sector.

The basic idea of cutting out the banks and lending to other individuals via the web is fantastic and I get the impression that this sector is really reaching critical mass now. Zopa remains No.1 but other players are coming through and that can only be good. Read more in What is peer-to-peer lending?

I also expect to see lots more innovation with exciting new web-based financial products being launched all the time. I’ve written about some of these businesses in 2012, I’m sure we’ll see new ones in 2013 offering financial products that I haven’t even thought of.

Savings

Moving onto a more depressing subject, rates on savings accounts will remain ridiculously low next year. I’d be very surprised if the Bank of England raised its base rate in 2013, and the Government’s Funding for Lending scheme (FLS) will continue to operate.

That means that the banks can borrow cheaply to finance their mortgage loans, so they don’t need to offer decent interest rates to attract money from savers.

On the plus side at least, most mortgage borrowers will continue to benefit from very low rates.

New regulator

Speaking of mortgages, I think the new financial regulator, the Financial Conduct Authority (FCA), will want to ‘hit the ground running’ with a couple of clampdowns on something or other. One likely target is the mortgage sector and the treatment of ‘mortgage prisoners’ in particular.

These ‘prisoners’ are borrowers who are unable to remortgage or move house as they cannot meet the stricter lending criteria lenders have implemented since the credit crunch. Anything the FCA can do to help in this area will be very welcome.

The other interesting area for the regulator will be what some people call ‘RDR 2.’ Many people now manage their investments and pensions via online platforms such as those offered by Hargreaves Lansdown and Alliance Trust Savings.

These platforms make it very easy to manage your investments, but the trouble is that some of the platforms are more expensive than they first appear. So the FCA may tighten up the rules for platforms and push for lower charges.

Economy

So what about the economy?

In the UK, I reckon we’ll see more of the same. Either the economy will grow slowly or we’ll see a modest contraction. As more austerity measures kick in, it will be hard for our economy to really pick up steam.

The US, however, may perform better now that the property market is showing signs of coming back to life. That’s assuming that the ‘fiscal cliff’ issue is resolved reasonably quickly. At the time of writing, there’s a stalemate in Washington. My best guess is that Republicans and Democrats will finally sign up to some sort of deal in January – after the original deadline has expired.

If an agreement is made in January, the US will have only had to deal with higher taxes and lower government spending for a couple of weeks, so no great damage will have been done.

Bond bubble?

Another major economic issue is the state of the bond market – in particular gilts. Some commentators think gilts could crash next year, which would effectively push up long-term interest rates for borrowers in the UK. (Read more about gilts and how they affect interest rates in Why gilts matter.)

My view is that we might see some modest falls in gilt prices but a crash is unlikely. Yes, gilt prices are much higher than their historic levels, and I struggle to see how they can go much higher. I certainly have no intention of investing in gilts at current prices.

That said, I can’t really see what is going to trigger a collapse, and anyway, the main factors that have driven up gilt prices will still apply next year:

- Inflation will stay fairly low

- Economic growth will stay low

- Pension funds will still be under pressure to invest in ‘low risk’ gilts rather that shares

- There’s a global shortage of truly safe assets

So the most likely outcomes for gilts are unchanged prices or modest falls.

Share prices may well do better in 2013. As long as the fiscal cliff doesn’t pan out disastrously in the US, companies should be able to grow profits there and that will help stock markets around the world. My only caveat to that is the situation in the Middle East. A war between Israel and Iran could put a skid under share prices – at least for the short-term.

Right, mince pies are tempting away from my computer, so it’s probably time to wrap this up. I’ll just say ‘Happy New Year’ to all Lovemoney readers.

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Comments (8)

  • r
    Love rating 98
    r said

    Ed, I agree with what you say. With predictions like:

    Either the economy will grow slowly or we’ll see a modest contraction.

    we can't be wrong! Have a nice year and I am looking forward to some more discussions.

    Also, Happy New Year to all our regular posters.

    r.

    Report on 29 December 2012  |  Love thisLove  1 love
  • Mike10613
    Love rating 626
    Mike10613 said

    The one thing, we can be sure of is that the rich will get richer and the poor will get poorer as benefits are cut for the most vulnerable in society. However, for every action there is often a equal and opposite reaction. Roll on 2015!

    Report on 29 December 2012  |  Love thisLove  0 loves
  • nickpike
    Love rating 308
    nickpike said

    You forgot Europe. Greece will need more money soon, and Spain's banks need about 15 billion Euros soon as well. Europe could cause big changes here.

    The bond bubble collapse is highly probable, and should put interest rates back where they belong.

    The governments lending scheme is a complete flop, with only 4.5 billion lent to banks, and only 0.5 billion passed on for mortgages.

    Even if the USA do agree to something less hostile than the Fiscal Cliff, things are going from bad to worse there. They have a large proportion of the population on food stamps, and whole cities and states are bankrupt. House prices are showing a slight rise, but bear in mind their prices collapsed by more than 50% so are rising from a low bottom.

    The economic situation is so fragile, it could be very dangerous taking on a mortgage at present.

    Report on 29 December 2012  |  Love thisLove  0 loves
  • Arblaster
    Love rating 43
    Arblaster said

    Happy New Year, Ed. But it might not be.

    The US, however, may perform better now that the property market is showing signs of coming back to life.

    Yes, I have heard this, too. The question one must ask is: who can afford these houses? Also there are a lot of people who have been in default on their mortgage for years, who are still living in their houses. They are getting away with not paying their mortgages because some of the banks' paperwork was so careless, that they do not have the documents to prove in court that they actually own the property, or that even a mortgage was ever taken out. I think it will just be a matter of time, before the defaulters are turfed out of their houses, though. LIke the UK.the USA have interested parties who want to kick-start the housing market, and you will continue to hear these false alarms for years to come.

    My view is that we might see some modest falls in gilt prices but a crash is unlikely. Yes, gilt prices are much higher than their historic levels, and I struggle to see how they can go much higher.

    A crash is inevitable. Bond markets do crash, and have done in the past. And it is not pretty to watch. The difference here is that the prices on the gilt markets are the highest they have been for - I am told - 300 years. What is different now, is that just about the whole world has a bond bubble. That includes the USA. If US Treasuries pop, it will take everything with it. Everything. And if you are "struggling to see how they can go much higher," you were not struggling at all, Ed, because you told us:

    Pension funds will still be under pressure to invest in ‘low risk’ gilts rather that shares

    They have to buy a certain portion of gilts whether they want to or not. It is all air into the bubble. And by quantitative easing, the Bank of England buys gilts. Then there is the 'flight to safety' whenever the Greeks do their impression of Oliver Twist.

    Inflation will stay fairly low

    Where do you do your shopping, Ed?

    I have a suspicion that 2013 will be the year of the jackpot, and that everything will come tumbling down sometime during the next 12 months. About time too!

    Report on 30 December 2012  |  Love thisLove  0 loves
  • Ed Bowsher
    Love rating 80
    Ed Bowsher said

    Thanks everyone for your comments.

    I'm a bit confused by Arblaster's comments. You tell us that a bond crash is inevitable.

    Then you start telling us why bond prices may rise even higher thanks to the reasons I've outlined:

    - pension funds investing in gilts

    and

    - bank of england buying gilts thanks to QE.

    You seem to be saying that I'm wrong to say a crash is unlikely, but also wrong to say that a rise in prices seems unlikely.

    Anyway, I could well be wrong. I'll keep watching.

    Ed

    Report on 31 December 2012  |  Love thisLove  0 loves
  • Arblaster
    Love rating 43
    Arblaster said

    Hi, Ed

    Firstly, let me make it clear that I admire you for having the pluck to make your predictions for 2013.

    I'm a bit confused by Arblaster's comments. You tell us that a bond crash is inevitable.

    Then you start telling us why bond prices may rise even higher thanks to the reasons I've outlined:

    - pension funds investing in gilts

    and

    - bank of england buying gilts thanks to QE.

    There's more. If the stock market collapses, people in the past have moved out of stocks and into bonds. The stock market is tanking at the moment, because of the fiscal cliff in the USA. My reading is that this is only temporary. They will cobble some agreement together in Washington, and stockholders can relax again.

    Ed, just think of the housing crash in 2008. All these crashes have similar symptoms. People do not stop feeding air into these bubbles. Right now, bond funds are still buying government bonds in spite of the prices. Pension funds are still buying them. Central banks are still buying them. If you cast your mind back to the housing market just before it crashed. Remember how house prices kept on rising in the face of bad news just before the market tanked? It was as though the market bubble had taken on a life of its own. That is what to watch for: it is the classic sign of a market about to crash. When the market no longer reacts to bad news, it means that only 'the greater fools than I' are buying, and that a crash is imminent. Could be weeks, months...who knows? Maybe a year or more. But crash it will.

    BTW. It is also possible for both the stock market and the bond market to crash simultaneously, as people rush into gold. I do not think that will happen this time, though. When it does, it will all be over, and it is time to head for the cabin in the pines.

    Report on 01 January 2013  |  Love thisLove  0 loves
  • Ed Bowsher
    Love rating 80
    Ed Bowsher said

    Hi Arblaster,

    Thanks for the compliment!

    Still a bit confused though. Are you saying that you expect bond prices to rise in the short-term, and then we'll see a crash later on, with a corresponding rise in yields?

    Moving on, yes it's perfectly possible that the stock market and bond market could fall together. Has happened before.

    And I like your comment that bubbles happen when markets no longer react to bad news. Fair point.

    I've been thinking more about this over the break. I still don't think a crash is likely in the next year or so - just because I don't really think the conditions favour much higher yields for the reasons I outlined in the piece.

    But eventually bond prices will have to fall. Hopefully, that will happen in an orderly fashion, but yes, there could be a crash at some point. But I still very much doubt it will happen in 2013.

    Ed

    Report on 02 January 2013  |  Love thisLove  0 loves
  • DLZ
    Love rating 18
    DLZ said

    If you count the ongoing killings on both sides, then Israel and Iran are already at war, but then again, it's hardly a surprise with a nation founded on terrorism (Zionists bombing of the British Palestinian Mandate authority HQ and many other), violence and force, rather than mandate, and also has, possibly, then most clandestine institute for intelligence and "special operations".

    http://en.wikipedia.org/wiki/Zionist_political_violence

    http://en.wikipedia.org/wiki/Iran%E2%80%93Israel_relations#Military_confrontations_and_psyops

    Report on 01 March 2013  |  Love thisLove  0 loves

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