What 2006 holds for UK plc

Economics

Rate cuts and tax rises - will they or won't they? A majority of City analysts expect the nine members of the Bank of England's Monetary Policy Committee to cut interest rates, perhaps as soon as February.

But a sizeable minority say an improvement in growth and concerns about the longer-term outlook for inflation will keep the base rate on hold at 4.5 per cent for the foreseeable future.

The UK economy enters the new year with the same dynamics that have driven it over the second half of last year. Growth is running at its lowest pace for a decade while consumer spending is showing only hesitant signs of a pick-up.

On the other hand the labour market is showing signs of full employment, wages are rising at a healthy clip and there are signs of inflationary pressure across business. "The battle lines are being drawn," Geoffrey Dicks, the chief UK economist at Royal Bank of Scotland, said. "Our money remains on one final quarter-point cut timed for February."

Hopes of a rate cut were boosted this month by a lone call for lower rates by Stephen Nickell, one of the four external members of the MPC.

Fears of a March tax rise have faded after this month's pre-Budget report heralded a £2bn extra tax take that appeared to be enough to balance the books until the next big spending round.

The tight fiscal stance in the PBR will add to demands for a rate cut, which in turn could assist Gordon Brown's forecast of GDP growth of about 2.25 per cent this year.

Philip Thornton

Banks

Brimming with festive optimism, there are those that reckon 2006 will be the year the City finally takes the unloved banking sector out of the intensive care ward.

Since 2001 a succession of bogeymen - an imminent collapse of the housing market and/or the economy, worries that good money would be thrown after bad to win corporate business - has driven down ratings across the sector. By and large, these concerns proved unfounded. Bad debts are up but not crippling. Unemployment has ticked higher, but from a historical low. The health of the consumer - and the British economy he supports - will again drive the fortune of the banks next year.

Opinion has polarised on prospects. The Bank of England expects the economy to grow by 2.5 per cent in 2006.

That looks pretty optimistic, but should it prove the case those most focused on Britain - the leading personal lender Lloyds TSB and the biggest mortgage bank HBOS, first among them - can expect a rosy year.

But doom mongers are still forecasting recession. Should they have it right and the infection of rising bad debt spreads to small businesses, banks can expect a rough ride.

Bid speculation will rumble on too, with Lloyds TSB and the mortgage banks perennially touted as likely targets for a foreign predator.

Gary Parkinson

Retail

Any respite retailers receive over Christmas could turn out to be temporary. Crippling cost pressures, product inflation, price deflation and a strengthening dollar all mean profits will continue to go backwards until sales stop falling. But without another rate cut, chief executives believe consumers will remain wary of major spending sprees.

A continuing strike on the high street will hit companies in the home improvements arena hardest, from B&Q to MFI. Clothing retailers will continue to suffer from a sharp increase in competition at the value end of the market as Tesco pushes out fashion ranges and New Look continues to expand. Ever cheaper new technologies will cause further pain for the likes of Dixons, Jessops and Comet.

Expect more corporate takeover action as the better players capitalise on the polarisation between strong and weak. In food retailing all eyes will be on Asda as it continues to cede share to a resurgent J Sainsbury. Meanwhile Sir Ken Morrison has promised to put Wm Morrison watchers out of their misery on the vexed question of when he plans to retire. Until he makes up his mind, the supermarket group will struggle to find the right new chief executive to repair the damage wrought by the botched Safeway takeover.

Susie Mesure

Automotive

2006 could be the year when Toyota of Japan overtakes General Motors as the world's biggest car maker. It could also be the year when the unthinkable comes to pass and GM files for Chapter 11 bankruptcy protection.

GM has consistently denied the latter is a possibility but the former must rank as a probability. Toyota is already breathing down the neck of its US rival and in the coming 12 months it expects to increase production to 9 million cars.

There may be a handful of small takeover deals in the sector but large-scale consolidation looks to have disappeared altogether from the agenda. A few years ago, the received wisdom was that the car industry would narrow down to a handful of giant companies. Now, no one talks about merging which does not bode well for the weak players in the market such as Fiat. At home, expect the Mini plant in Oxford to make further strides under BMW's ownership and Jaguar and Land Rover to remain in loss. Do not hold your breath for a resumption of car making at Longbridge. China's Nanjing Auto, which owns the site, may talk a good game but there is no sign of it delivering on its pledge to restart production.

Michael Harrison, Business Editor

Leisure

More pubs are set to change hands next year with Punch Taverns likely to sell off big chunks of the recently acquired Spirit estate.

Mitchells & Butlers, Greene King and Wolverhampton & Dudley are lining up for the larger managed pubs. The entrepreneur Robert Tchenguiz, who came second in the bidding for Spirit, also still has a strong appetite for further pub acquisitions. Punch, which has driven consolidation in recent years, can now sit back and focus on its existing estate, the largest in Britain.If Whitbread cannot turn around its underperforming pub restaurants it might come under pressure to sell them off.

The 2008 smoking ban should have a limited impact on residential pubs - bans in other countries suggest pub visitor numbers recover after the initial drop - though high street bars could suffer more as customers may move on to nightclubs early where they can smoke.

The gambling industry is set to capitalise on the recent scrapping of the 24-hour rule, which means punters no longer need to sign up 24 hours before gambling, and other new laws that permit casinos to install more slot machines with higher maximum payouts. Online poker companies such as PartyGaming will launch games to counter slowing growth in poker - it has already seen phenomenal success with Blackjack. It will be interesting to see how the legal dispute with its former partner Empire Online evolves.

Julia Kollewe

Aerospace

After a couple of near misses, will 2006 finally be the year when BAE Systems takes the plunge and forges a transatlantic merger with one of the US defence giants? Things certainly seem to be falling into place nicely. BAE is at last making money in its UK defence programmes division - once a massive drain on the group's finances. Meanwhile, the recent publication of the Government's Defence Industrial Strategy gives it certainty about procurement policy for the next 15 years. The £10bn deal to supply the Saudis with Eurofighters will provide predictable cash flow for the next decade. And if it wants to sell its Airbus stake - which it would have to do to merge with Boeing - then this year or next will be the time to do it as the civil aerospace sector reaches the top of the cycle.

Last, but by no means least, BAE has regained its rating, with the shares at a five-year high, which will make it easier to pull off a genuine merger of equals with one of its US counterparts.

The biggest fly in the ointment is the refusal of the US administration to agree to the transfer of its military technology, even to a friendly partner such as Britain. This is posing an increasing threat to existing collaborative programmes such as the Joint Strike Fighter. Without a resolution, a transatlantic merger remains out of the question.

Michael Harrison

Media

As Lionel Barber, the newly appointed editor of the Financial Times, makes a toast to the new year, he will surely be hoping that the newspaper's owners, Pearson, give him the chance to prove his worth.

The stock market is full of rumours that Pearson, now a group focused more on the education market than financial information, will eventually tire of its ownership of the Financial Times. The newspaper, in spite of growth in the US and also in Asia, is barely breaking even; it is seen by some as a drain on management time at Pearson and there is still uncertainty over strategy. Will 2006 be the moment when it finally goes to a new owner? Mr Barber, for one, will be hoping not.

The remainder of the newspaper market will be increasingly obsessed with the internet. How do newspaper groups cope with their readers migrating to news services (mainly ones that are free) on the internet, and to what extent should they go after internet businesses themselves? News Corporation, Daily Mail & General Trust and Trinity Mirror have all been investing heavily in acquiring internet businesses, but what will the new year bring for the Guardian Media Group, the Barclays, the new owners of the Telegraph, and The Independent's owners, Independent News & Media?

In the television market, much attention will focus on the next Premier League contract which will be up for grabs in the next 12 months. BSkyB will lose its monopoly on live broadcasts; but the big question will be whether it wins enough of the packages which are on offer to retain its customers who are increasingly being tempted by Freeview.

David Hellier