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Economic Trends

Economic Outlook

1997 was an exceptional year with the privatisation of many mutual building societies injecting billions of pounds into the economy. Whilst that will not be repeated on the same scale during 1998, businesses remain fairly confident. Consumers though remain cautious with many of them still wary of possible redundancies whether caused through a continuing rationalisation in many industries, a plain turn-down in the economy, the stock market bubble suddenly bursting, or Government measures to reduce demand to avoid the economy over-heating.

The performance of the Financial Services industry closely correlates to house buying and other major purchases by consumer (e.g. cars, new kitchens). As indicated in the Social and Cultural trends, house purchases will remain strong due to changing demographics, though probably not suffering excesses due to trading up simply to increase equity. Purchase of consumer goods will continue to benefit through the strong pound and an increasing need to replace goods that have come to the end of the natural life (rather than simply buying the latest fashion).

With a polarisation of society those households with multiple working professionals will have spare financial assets to invest and to spend on leisure activities. Even those whose incomes are more erratic will, when times are good, afford themselves some leisure as a respite as well as saving to top-up liquid assets.
 

	Possible Government dampening of excess demand may cause a mini slump as companies and consumers "batten down the hatches". Any reaction is increasingly likely to be swift. Certain market segments will fair more than others, but such segments are less defined than previously.
	Some market segments will have excess assets that will benefit long term investments. Other market segments will have excess assets that are only available for short term investments. Insurances linked to consumer spending look positive. These include warranties on white-goods, holiday linked insurances, increase in car ownership).

Internationalisation & EMU

In July 1994 the European Community issued the 3rd Life Directive which removed national restrictions on selling and buying life insurance within the community. The UK is unique in that Life companies are taxed on any investment income but the proceeds to the life policy holders are tax free. Elsewhere in Europe it is the reverse; the premiums can be 25% less and tax is deferred and in many cases saved.

On a world wide basis, there was the recent World Trade Organisation (WTO) agreement to liberalise financial service markets, though in reality barriers remain in many countries. These changes are at first more likely to impact investment banking and commercial insurance rather than retail. On a retail front, major insurers are likely to step-up their investments abroad, usually through acquisition so that they can capitalise on the acquired brand.

Whilst in theory EMU will make costs and charges more transparent, but cultural and language barriers, as well as caution, are likely to inhibit most consumers buying internationally. After all, insurance is about reducing risk. Nether-the-less, some US insurance for instance is substantially lower than the UK (see box below).
 

	Foreign players will buy into the UK market though acquisition. International companies will gain more economies of scale as they handle more support functions (e.g. investments, IT) on a pan-European or worldwide basis. Third parties (e.g. brokers) may well act as intermediaries to lower cost international companies gaining increased profits for themselves and lower costs for their customers.
	To consolidate support functions on an international basis.

Increase in Domestic Competition

The predicted growth within the financial services sector is attracting new players. Besides the foreign players highlighted above, many well established UK brand leaders are entering the market. They include high street retailers such as Virgin Direct, Marks and Spencer, Sainsburys, Tesco, and Safeway. Many have used telephone banking as their business delivery model supplemented with financial services desks in their supermarkets.

Likewise, established financial services players have broaden their offerings to consumers: Halifax (an ex building society (thrift) into banking, Standard Life (a mutual insurer) also into banking, and of course all the established High Street banks and building societies offer a range of insurance products, usually as tied agents.
 

Retailer's trusted brands will continue to take market share from established players. This is particularly true for commodity type products: retail banking, term assurance, savings plans, mortgages. Margins will continue to erode on these types of product. Customer, employee and union pressures will delay rationalisation of existing high street branch networks. The shear cost of closing the existing high street branch networks and opening new delivery channels at the same time. Rationalisation of the existing high street branch networks may act as an impetus for the customers of those branches to switch to one of the new competitors.

Relationship marketing will provide an edge but only for those companies that fully understand it, change their marketing behaviour, execute it well, and take a long term view.

Shortage of Skills

Competition, new delivery methods, legislative requirements, and more demanding consumers, are some factors that are fueling the demand for high trained staff with the appropriate personal qualities (e.g. telephone rapport). A general UK reluctance to train workers has attracted companies to particular geographic areas (e.g. Leeds for telesales) but this has now resulted in skills shortages in those areas. At the managerial and professional levels, many such senior staff were made redundant in the recession. This is now impacting companies as they seek to grow new services and delivery channels.

Much expansion relies on information technology, but the year 2000 problem and the impending EMU has soaked up many technical staff.
 

Loss of competitive edge due to: spiralling wage bills delays in launching new products and services.

Implement broader recruitment policies that capitalise on unused pools of skills (e.g. avoid the various "-isms"). Provide fast track re-familiarisation induction to former employees. Develop a holistic Human Resources policy that creates genuine employee loyalty and invests in appropriate training. Use telecommunications to: access home workers and satellite offices (e.g. tele-cottages) switch calls to English speaking countries abroad (e.g. Jamaica) tap into overseas technical resources (e.g. India). Use flexible software packages that reduce costs and risk yet allow unique products and services.

End of a Mass Production Era

The post war period was a time of economic growth when customers would clamour for whatever goods were available and whatever the quality. To-day, mass production has in many cases produced an over supply of very similar goods and, in particular, services. And whilst product quality has in many instances become more consistent, products are in many cases built to a price. Moreover, in a global information based society, ideas can easily be replicated by competitors and assimilated by consumers. Consumers have become remarkably streetwise, especially with consumer goods. In many cases they have been backed-up by consumer legislation.
 

	Consumers become more knowledgeable about financial services. As a result they are more searching in their acquisition and more demanding in their wants. Price wars become common and deadly, with only the biggest surviving within the mass market.
	To genuinely produce products and services that meet actual and personal needs and wants. To differentiate on more than price, for example on services, flexible and adaptable products. To enter niche markets. To use Mass Personalisation and Mass Customisation techniques.

Next is Political, Legal and Regulatory Factors

JS

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