2006: the highs and lows of the year

Inflation rears its head* M&A breaks all records * Online gaming firms have a tough time

ECONOMY

For one aspect of the UK economy, at least, the past year has marked the end of an era - that of predictably low UK inflation. Previously, conditions had been so benignthe Bank of England dubbed them the Nice decade - non-inflationary consistent expansion.

A combination of a return to rising import prices from abroad, surging energy costs, and sharp increases in utility bills at home pushed inflation to record highs. The question of how high interest rates need to go has still not been answered with two hikes since August.

At the start of the year, the official CPI measure was 1.9 per cent, below the Government's target. It is now2.7 per cent, the highest since its 1997 launch. The RPI measure, which more closely reflects the cost of living, rose from 2.4 to 3.9 per cent, sparking fears of an inflationary pay round in the new year. But don't despair. Nobody expects a return to the hyper-inflation of the 1970s and 80s. Mervyn King, the Bank's governor who coined Nice, believes we are now in a "not-so-bad" decade - Not of the same order but also desirable.

House-price inflation also rose sharply. A continuing shortage of properties combined with growing numbers of buyers, particularly from aboard, and expectations of a bumper bonus season underwrote robust price rises.

Overseas, the headline-grabbing event was the sudden drop in the dollar, which awakened fears that the global imbalances could be about to unwind. The pound peaked at $1.98117 this month, delivering a windfall to transatlantic shoppers.

Overall the world eco-nomy remained robust, with continued strong growth in Asia counterbalancing a housing-led slowdown in the US. Most expect this to be the story next year, too.

MARKETS

With the FTSE 100 likely to close up higher than any broker forecast at the start of the year, 2006 has turned out better than many analysts dared to predict.

Much of the strength behind the blue-chip index's 10 per cent rise was down to takeover activity, real and imagined. It was a record year for M&A, easily surpassing the madness of the dotcom boom back in 2000. P&O, BAA, Corus - some of our best-known companies have been, or are being, snapped up. Even companies valued above £40bn no longer seem immune to foreign and private-equity predators.

Yet, unusually, it is the largest companies whose shares have been the laggards. BP, Shell and GlaxoSmithKline, between them more than 25 per cent of the FTSE 100, are all likely to finish the year in negative territory. The place to be invested was the mid-market - the FTSE 250 rose more than 24 per cent.

BANKING

Bid rumours lit a fire under the shares of Alliance & Leicester, Barclays and Lloyds TSB at various times. But while the French bank Credit Agricole admitted it was mulling an offer for A&L, there was no marriage and the rest of the rumours turned out to be so much hot air.

In the second half of the year, the focus switched to debt, and bad debt. Personal insolvencies hit all-time highs, bringing grim news for HSBC and Barclays. Matt Barrett finally left the latter and James Crosby handed over at HBOS in favour of the youthful Andy Hornby.

On the investment banking side of the Square Mile, it was all about bonuses as the M&A boom fed through to bankers' pockets.

EXCHANGES

Long talked about, consolidation of the world's stock exchanges actually started to happen in 2006. The Nasdaq had one bid for the London Stock Exchange rebuffed, but came back with another that it seems nobody but its chief executive, Bob Greifeld, wants. Deutsche Börse talked to lots of people, and blamed everyone but itself for being unable to pull off a deal, while, as usual, Jean-François Théodore at Euronext showed them all how it should be done by pulling off a merger with the New York Stock Exchange at a thumping price to boot.

OIL

This should have been a heavenly year for the oil sector, with record oil prices ensuring a profits gusher of unprecedented proportions. But for Britain's two oil majors, it has proved anything but. Royal Dutch Shell has had half its interest in the Sakhalin-2 oil and gas field in eastern Siberia sequestrated by the Russians, leaving a massive hole in its reserves, while BP's reputation as the company that could do no wrong has been comprehensively trashed. From corroding pipes in Alaska, to hurricanes in the gulf of Mexico, and the continued fallout from the Texas City oil refinery blast, it was a year of public relations disasters for BP, topped off by an unseemly row over Lord Browne's retirement date. The BP chief executive was unhappy about being made to go at the company's official retirement age of 60, and let it be known. He should have retired much sooner, unkind souls in the City now say.

PHARMA AND BIOTECH

Big pharmaceutical groups were hit by pipeline delays, competition from generic manufacturers and key drugs being scrapped. AstraZeneca lost £4.1bn off its stock market value in one day in October after astroke treatment drug failed in phase-three trials.

In the same week, Glaxo-SmithKline, the UK's largest drugs company, dropped a drug for sepsis and said it had disappointing data on its Redona treatment for diabetes. There were further woes this month when AstraZeneca's best-selling ulcer pill Nexium was revoked by the European Patent Office, potentially threatening more than $1bn (£511m) in annual sales.

To bolster shrinking pipelines, big pharma has been busy doing deals with biotech firms. In May, AstraZeneca snapped up Cambridge Antibody Technology for £702m. More recently, GSK acquired Domantis for £230m. As if to underline one of the big themes of the year - the rise of private equity - the artificial hip and knee maker Smith & Nephew was forced to drop plans to buy Biomet, a US rival, after it was outbid by financial buyers. It is a mark of the times that S&N is now itself seen as a private-equity target.

RETAIL

Despite the gloom heading into 2006, retailers had some cause to be thankful in a year marked by turnarounds. Talking of marks, top ones go to Marks & Spencer for cementing the recovery that started last Christmas.

The other big recovery stories were both in the food sector. J Sainsbury is winning back all those housewives forced to shop elsewhere when it had gaps on its shelves. Wm Morrison is also no longer the basket case it was in its bleakest post-Safeway days.

Meanwhile, the Tesco train just kept on rolling - even into the US. Neither turmoil in Thailand nor rejection in India could put Sir Terry Leahy off his stride.

It's fair to say Sir Philip Green's year was mixed, though a knighthood softened the blow of a collapse in sales and profits across his fashion empire.

LEISURE

The rise and fall of online gaming companies proved yet again the old adage that if something looks too good to be true, it generally is. Following the successful flotation on the London Stock Exchange of the biggest of them, Party-Gaming, a veritable torrent of me-too issues came flooding on to the market. With virtually no operating costs and huge revenues, they seemed a licence to print money. There was only one fly in the ointment: online gaming was illegal in the US, their biggest market.

This implicit spoiler was eventually made explicit by a new US law. Stocks plummeted as the online gamers, some already under house arrest in the US for conducting illegal activity, scrambled to close their US sites. But not before the founders of PartyGaming found a way around the lock-in and offloaded another lorry load of shares. All in all, not one of the City's most glorious moments.

INSURANCE

The sector's biggest event of the year came in March, when Aviva surprised the City with an audacious £17bn bid for Prudential. Although the merger was compelling to some, the Pru's new chief executive, Mark Tucker, was not about to give in to a speculative offer just months after getting his hands on the job. It was also a pivotal year for Lloyd's of London, with the new chief executive, Rich-ard Ward, arriving just as several of the market's largest players moved their focus to Bermuda. Standard Life dominated the headlines over the summer, as it successfully demutualised, while Resolution sewed up the £3.5bn acquisition of Abbey's £26.5bn of closed life funds in June.

TELECOMS

Telecoms proved a tough place to be during the first half, with Carphone Warehouse and Sky ruffling feathers in the broadband market and new technologies such as VoIP, wi-fi and wimax emerging as threats to fixed and mobile-voice revenues. NTL also loomed large after its purchase of Virgin Mobile had it bragging about "quad-play". Added to the mix was the threat of increased regulation after Viviane Reding, the European Commissioner, revealed a clampdown on roaming tariffs.

Yet telecoms providers fought back to exit 2006 with some of the highest share prices since the dotcom boom.

Vodafone's chief executive, Arun Sarin, survived a coup attempt and has since found support for his strategy to focus on emerging, growth markets. C&W re-entered the FTSE 100 after unveiling a big shake-up and a bumper executive incentive scheme. The biggest story of the year was perhaps the renaissance at BT. Sir Christopher Bland can enjoy some well- deserved plaudits. The group was virtually bust when be came on board. Today, it is even able to pay off its pensions deficit.

CONSUMER GOODS For Cadbury Schweppes, 2006 was best forgotten. The Dairy Milk maker had an annus horribilis after salmonella at one of its factories forced it to withdraw a million chocolate bars.

On the consumer goods front, it was a year of corporate action. Reckitt Benckiser attempted to get in to the big league with the over-the-counter medicine boys by swallowing Boots Healthcare International, the maker of Neurofen and Clearasil.

Meanwhile Unilever sold its frozen foods business, home to Birds Eye, while Premier Foods expanded with the acquisition of Campbell's UK and Irish businesses, including its soup and RHM, the Hovis bread maker.

MEDIA

It was the year that Google took more ad revenues in the UK than Channel 4 and the UK internet advertising sector became at least as big as national newspapers.

The ITV soap opera dominated the news, with another plunge in viewing figures and a double-digit decline in advertising revenues. Greg Dyke, the former director-general of the BBC, teamed up with Apax and Goldman Sachs for an unsuccessful bid in the spring.

By August, with the ITV shares below the 130p bid price, the chief executive, Charles Allen, was on his way out. But before a successor could be appointed, NTL made an approach, and then Rupert Murdoch's BSkyB took an 18 per cent stake in ITV, enough to block a bid.

At the end of November, there was another surprise when ITV poached the BBC's chairman, Michael Grade, as its new chairman and chief executive.

METALS AND MINING

Lakshmi Mittal emerged as the undisputed king of steel, securing a €26bn (£17.4bn) takeover of Arcelor in July after a five-month battle. Meanwhile, the once unloved Corus attracted two suitors - Tata Steel of India and CSN of Brazil.

The conservative Anglo American shocked the market by appointing an outsider and a woman - Alcan's Cynthia Carroll - as chief executive. She may not have long in the job: Xstrata and others are running the slide rule over the company.