Financial Services Industry

Having grown by over 5 percent in 2005, the global economy is projected to continue expanding in 2006. Healthy corporate balance sheets, accommodative macroeconomic policies, and favorable financial market conditions are all helping to sustain the expansion.

With monetary tightening underway in most cyclically advanced countries, inflation expectations are generally well anchored. In addition to further increases in oil prices, however, one risk to this outlook in some countries is a significant rebound in unit labor costs as labor markets tighten, especially if productivity growth were to weaken. Without more exchange rate flexibility, these inflows will ultimately be monetized and result in higher inflation (Nanto, 1998).

The behavior of interest rates is a central issue in the current economic outlook. The current low level of long-term interest rates is contributing to a very favorable global financial environment. While the low level of long-term rates can be partly explained by a number of factors - including the confidence of financial markets in central banks' commitment to low inflation, excess capacity in labor and product markets, and continued strong demand for U.S. Treasury securities by the official sector, especially in Asia - rates can be expected to rise to more neutral levels, and spreads to increase, as the global economic upswing continues. A major concern is that the rise not be so abrupt as to cause disruptions in financial markets, or impact the overall global economic outlook.

Moreover oil prices have risen since their October peaks and continue to be volatile same token, this cautious attitude has helped to contain the risk of creating investment excesses in the recovery phase that, in the past, have contributed to sharp market corrections.

At the same time as financial institutions have improved their profitability, they have also strengthened their capital bases and risk management systems.