World markets face turbulence as decade-long boom peters out

<i>The year ahead </i>Slowing growth, oil price volatility and uncertainty in the US will be the big issues in 2001

The Economy The world economy starts 2001, like many of us, bloated from recent excesses and facing the prospect of a painful crash diet. That, at least, is the fear in many minds looking at recent economic statistics from across the Atlantic.

The Economy The world economy starts 2001, like many of us, bloated from recent excesses and facing the prospect of a painful crash diet. That, at least, is the fear in many minds looking at recent economic statistics from across the Atlantic.

The US, whose 10-year-long expansion has been the engine for the whole world, is certainly slowing down from the breathless New Economy pace of 5-6 per cent a year growth. The question for the year ahead is how fast it is slowing, and whether, in fact, it is already in a sickening dive towards recession. For, as Sir Edward George, Governor of the Bank of England, reminded us all last week, if that happens the rest of the world economy will suffer too.

So far, the signs have pointed to a soft landing rather than a crash landing. Consumer confidence fell to its lowest level for two years, but remains high by longer-term standards. Industrial production, meanwhile, has ground to a standstill.

In themselves, these signs offer no cause for alarm. The president-elect, George Bush, has been talking down the economy but that is explained in good part by his desire to justify the big tax cuts he campaigned on.

However, there are two reasons to prepare for worse to come.

One is the impact of high oil prices. Although crude prices have dropped substantially from last year's peak near $35 a barrel, they remain much higher than at any time during the long Nineties boom and could possibly climb again.

The other influence is the dismal performance of US and world stock markets. The real economic impact of sharp falls in asset prices is difficult to predict, but it seems likely a good deal of turbulence lies ahead in equity, bond and currency markets. Hangover time is here. Diane Coyle, Economics Editor

Telecommunications After a roller-coaster ride in 2000, telecoms stocks are likely to begin 2001 still suffering from the sector's investment-led boom. This could see the biggest and fittest such as Vodafone Group continue to expand, while others, such as British Telecom, retrench further to reduce high debt levels.

The market's anaemic appetite for new telecoms issues will be tested within weeks. France Telecom is committed to bringing an enlarged Orange to market via an estimated £10bn initial public offer, valuing Europe's number two mobile group at some £30bn-£50bn.

A smaller but still important float will be Yell, the Yellow Pages and directories arm of British Telecom. That, however, will be a mere appetiser to the estimated £30bn main course of a BT Wireless flotation.

For the alternative telecoms operators that soared early in 2000 and then crashed, 2001 will be about survival. Even the biggest of the alternative operators, including Energis and Colt, could end up be absorbed if the shakeout intensifies. Bill McIntosh

The Banks There is a sense of déjà vu about the situation the UK banking sector finds itself in as 2001 begins.

A year ago, the City was bracing itself for the final chapter in the battle for National Westminster Bank. This time, the loser in last year's three-way bid battle, the Bank of Scotland, finds itself in a remarkably similar situation. The object of its affections is Abbey National. The dog in the manger is Lloyds TSB. The consensus is that Lloyds will get Abbey because it is bigger, can secure more savings and can therefore pay more. But Ian Harley, Abbey's chief executive, hates Lloyds with a vengeance and has, so far, succeeded in staring down Sir Brian Pitman, the Lloyds chairman.

In any case, banks may have more serious things to worry about in 2001 than takeover tactics. Competition in the retail market has been getting fierce and is bound to get fiercer. Added to that, the dreaded r-word is now starting to be heard on bankers' lips for the first time in years. The dangers of recession may be more apparent than real. But tougher times are definitely ahead. Andrew Garfield, Financial Editor

Transport Two big themes are likely to dominate transport in 2001 - the future of the rail industry and airports policy. In rail there will be further re-letting of passenger franchises which could result in a smaller number of operators running our trains. Quite possibly, more of them will be foreign too, with the Dutch, the Swiss and the French all keen to expand their UK presence. As for Railtrack, its new chief executive Steven Marshall has promised to get the network back to normal by Easter. That, however, may not end the uncertainty over the infrastructure operator or calm investors' fears over the growing political interference in the running of the railways.

On the corporate front, it will be worth watching out for a bid by Brian Souter to take Stagecoach private if the share price climbs above the level of November 1999's 154p rights issue. The City will also have had time to pass judgement on whether Rod Eddington is the answer to British Airways' woes. Michael Harrison, Business Editor

Leisure The brewing sector will hog the limelight at the top of the year, with Stephen Byers, the Secretary of State for Trade and Industry, due to make public his conclusions on Interbrew's £2.3bn takeover of Bass's beer unit on Thursday.

Although he is not expected to block the deal completely, Mr Byers could force the disposal of a cluster of brands and distribution contracts, sparking a fresh round of consolidation across the industry.

Diageo and Allied Domecq, the UK's top two spirits companies, will start the year at loggerheads. Despite December's announcement that Diageo had clinched an $8.15bn (£5.4bn) deal to swallow Seagram's drinks assets with its French partner, Pernod Ricard, a legal wrangle over the ownership of Captain Morgan, the Puerto Rican rum, looks set to run and run.

In the travel industry, the pressure will be on Airtours and First Choice to consolidate or be consolidated, after their UK rivals, Thomson Travel and Thomas Cook, were swallowed last year by Germany's Preussag and C&N Touristic. Lucy Baker

Pharmaceuticals In pharmaceuticals, 2001 begins almost exactly as did 2000 - with the launch, this time formally, of GlaxoSmithKline. The founding companies, Glaxo Wellcome and SmithKline Beecham, suffered serious setbacks in the lab in 2000, so expect the combined group's first move to be in bolstering its drugs development pipeline. After months of delays, GlaxoSmithKline is now stripping out costs through redundancies, which is likely to distract attention in the near-term.

AstraZeneca, Britain's other drugs major, faces the expiry of its US patent on Losec, the blockbuster ulcer drug accounting for one-third of profits, in October. Will Nexium, a follow-up already launched in Europe, be good enough to persuade doctors not to prescribe cheap generic Losec?

The fate of Scotia Holdings, whose lead drug was rejected by regulators in September, should be clear by March, when it is expected to run out of money. It desperately needs to raise fresh equity. Chris Hughes

Retailers After a year of profit warnings, store closures and management shake-ups, will 2001 be any easier for the high street?

The likelihood of a spring general election will encourage the Government to massage the economy into a healthy state. There is also a chance that the two-year trend of retail price deflation may start to ease, though the increasing power of the discounters may make this little more than a pipe dream.

Other trends are likely to include a continuing imbalance between supply and demand, with most retailers still adding new space to an already crowded market. This will increase margin pressures as retailers compete for favour even though consumer spending is growing only slowly.

It will also lead to further consolidation as retailers seek greater scale to achieve improved efficiencies.

In supermarkets, the big question is whether Sir Peter Davis can begin a meaningful recovery at long-time struggler J Sainsbury.

Back on the high street another feature of the year will be the performance of the new management teams at M&S, Bhs and Arcadia.

At M&S the big question is whether Luc Vandevelde, chairman and chief executive, can start a fightback at the fallen high street giant. And if he can't, will he still be there in December? Nigel Cope, City Editor

Technology With no Santa Claus rally in technology stocks, some strategists now see renewed concerns about a global economic slowdown delaying a recovery in the sector until spring - unless there is a sudden cut in interest rates. Investors, however, show no sign of warming to new issues, implying that many young tech firms are destined to fail unless they can raise new funding from venture capitalists.

After the disappointment of B2C, WAP, and even B2B companies this year, it is hard to pinpoint any one field that will find favour in 2001. But as consumers demand more sophisticated communications services, perhaps companies in the infrastructure area of high-bandwidth fibre optics - such as the ailing Bookham Technology - will lead any revival.

The year ahead should reveal the full extent of the recent slowdown in spending by telecoms network operators on new infrastructure, and by business in general on information technology equipment and services. Lately, there has been plenty of anecdotal evidence that company finance departments are dawdling over signing new IT contracts.

Meanwhile, with many techs continuing to generate only minimal cashflow, we should expect to see additional deeply discounted rights issues. Chris Hughes

Manufacturing This year looks certain to bring manufacturing yet more of the bad news that served to mark the end of last year. The tone will be set this month when British Steel is expected to announce the closure of at least one integrated steel plant - probably Llanwern in south Wales - with the loss of more than 3,000 jobs. Unions also fear that Nissan will decide to switch production of the new Micra from Sunderland to one of two sites on the Continent, casting a shadow over the long-term prospects for the plant.

In both cases, a key factor weighing on management is the strength of sterling and Britain's absence from the euro. Of course, a May election, a Labour victory and a commitment to call an early referendum on the single currency would change the picture.

The Government has been urged by its own taskforce to appoint a special manufacturing adviser to promote the interests of industry across Whitehall. Of more benefit would be an expansionary Budget that offered bigger capital allowances and more tax breaks for research and development. Michael Harrison

Media Two broad forces are likely to sweep across the media sector in 2001. The first will be the impact of slowing economic growth on advertising revenue, the second will be further consolidation, particularly in the radio and regional newspaper markets.

For newspapers, slowing advertising revenue growth is likely to be coupled with rising newsprint prices. With profit margins squeezed, both investment in titles and in online expansion could be scaled back.

Radio, with the smallest part of the national advertising pie, should continue to gain market share. Anticipation of liberalised ownership rules emerging in new broadcasting legislation in 2002 is likely to drive consolidation.

Regional newspapers, already less encumbered by ownership limits, are likely to conjoin into fewer, bigger groups. Among national newspapers, the most interesting battle will pit Richard Desmond's Express against the tough tacticians at the Daily Mail. Bill McIntosh