A fourth consecutive year of economic growth would be remarkable, but a US slowdown could spoil the run.

Banks across the globe had bumper years in 2003 and 2004, bouncing back with record profits following the 9/11 attacks and the bursting of the technology bubble that had brought a profits slump in 2001 and 2002.

According to The Banker’s Top 1000 listings, aggregate pre-tax profits rose 65.4% in 2003 to $417.4bn and a further 30.3% in 2004 to a record $544.1bn. And analysts suggest banks are again in for a treat in 2005. Switzerland’s UBS and Deutsche Bank achieved their best Q3 results ever and rating agency Fitch expects full-year results for most major European banking groups to be “extremely strong”. Also, US banks look set to follow suit.

So if global bank profits for 2005 are strong, as expected, pushing the aggregate beyond a staggering $600bn, what are the prospects for even further growth in 2006? The answer is not so easy.

Given that the series of natural disasters in 2005 failed to derail the banks, it is fair to say that if the relatively benign economic environment continues then prospects could be good and 2006 could be the fourth straight year of significant profit growth.

End of the line

Economic forecasts seldom run smoothly though and, if history is any guide, in the past 15 years there have not been four consecutive years of significant profit growth. The current three-year run of growth is the best yet.

Will 2006 be a year of unwelcome change for banks? The UK’s Lloyds TSB is already preparing for rising consumer bad debt and increased provisioning. But, while most economists acknowledge a fragile and uncertain future, there is also a consensus that the driver of any major downturn in Europe or elsewhere would be a significant slowdown of the US economy.

Can the US continue to drive the world economy, or is it likely to stumble under the weight of massive deficits, poor political decisions or unexpected events?

Marvin Zonis, professor at the Graduate School of Business at the University of Chicago, notes: “American prosperity rests on the widespread belief by Americans that the system is fair and that everyone has a shot at upward mobility. If the American people lose faith in the system, our political stability and our prosperity will be threatened.”

And US president George W Bush’s leadership appears to be undermining that belief.

Economic crises, like natural disasters, are not necessarily predictable and can be triggered by various measures. Banks have been fortunate for the past three years but a crunch is coming. Be prepared for a downturn in 2006.

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