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Spring statement and the economic outlook

I was speaking with someone recently about their financial planning and they were really concerned about Brexit. The media’s aim is to get you to buy their paper or stay on their website, and worry makes us do just that. If they told you everything was fine, you wouldn’t pay too much attention. But articles portraying the concerns around Brexit get people to focus… and worry.

It can be hard to see through the headlines; there’s an editorial slant on all the news we read, see and hear. Let’s try to take the emotion out of the subject – regardless of whether you feel Brexit is a good or bad thing – and look at what’s happening in the bigger picture.

The economy continues to grow

  • Where we used to have two full government Budget statements each year, nowadays the Chancellor’s Spring Statement simply provides an update of what’s been going on in the economy. It was easily missed in the recent melee over Brexit.
  • The economy as a whole is growing. The independent Office for Budget Responsibility published figures alongside the Spring Statement predicting growth of 1.4% this year, and continued growth in coming years.
  • That’s good news: we’re not in a recession, and we might not be running on full steam, but things are growing. Manufacturing has had its longest period of expansion for more than 50 years. That’s great news.
  • Would we be doing better without the confusion over Brexit? It’s not black and white. One of the reasons for the growth in manufacturing and other sectors is that sterling has weakened.
  • When an economy goes well the currency strengthens, which makes goods more expensive for overseas buyers.
  • When the economy isn’t doing as well, the currency weakens which makes things cheaper. Tourists coming over are getting a lot more pounds for their local currency than they would have done a few years ago; and UK companies selling things overseas are boosted because the goods are less expensive and therefore more attractive to buyers.
  • The economy is doing a little better than some of the headlines might have you believe. The OBR factors in a lot of variables to its forecasts – which is why they change so often – so it has looked at several scenarios to arrive at its projected growth figures.

Inflation is under control

  • As an economy grows, if it becomes too fast then we see inflation pick up, and when that happens interest rates also rise. But the predictions of around 1.5% growth shouldn’t see that happen; the OBR said it’s unlikely we’ll see big rises in inflation. They feel we have a healthy level of growth.
  • If we leave the EU without a deal, there will of course be an impact, with potential supply chain disruption and some price rises. But a lot of businesses have long since been stockpiling sufficient supplies in the event of no deal so that they can carry on with their operations until trade agreements are signed.

Interest rates remain extremely low

  • It might not be good news for the savers out there, but continued lows in interest rates is a positive for anyone trying to clear their debts.
  • I’ve said time and time again, the priority now should be to pay your debt down. You get a much bigger bang for your buck with interest rates being so low.
  • Maximise inflows by doing things like selling items online, and minimise outflows by reviewing all your spending. Try to get excited and passionate about raising whatever you can to pay off debt – particularly unsecured debt like credit cards and loans.
  • Use the free resources on the site to help you. Now is the time to reduce your debt.

UK debt is falling

  • Keeping on the debt theme, the amount of money the UK borrows is down three-quarters since 2010. We currently borrow £1 for every £18 we spend, whereas we were borrowing £1 for every £4 we were spending at the height of the financial crisis.
  • As a financial planner the model of borrowing to pay off debts is not one that I or any of my colleagues would recommend! But this is how the world works, and it’s good news that we’re borrowing a lot less each year than we were.
  • In the UK our national debt is around 85% of our GDP, the country’s national output, which is like our income. Globally, Japan’s debt stands at around 250% of its GDP; in the USA it’s approximately 105%; and in Canada, which is held up as one of the strongest developed economies, it’s still at 90%.
  • Forecasts are for our debt:GDP ratio to fall to around 78% in coming years, so things are moving in the right direction.

The bigger picture is important, but your own smaller picture is where you should focus

  • One of my mottos is that you should focus on the things you can control. We can’t as individuals control the country’s economy, but we can control our personal economy.
  • What’s always important is making sure your personal economy is as strong as you can make it, so that during harder times you can weather the storm with less impact. I appreciate that in some areas house prices are still struggling to get back to their previous levels, but asset prices have generally increased, including a long period of growth in the stock market.
  • By focusing on learning new skills, paying down debts and increasing cash inflows wherever possible during the ‘good’ times, you’ll be in a stronger position when things turn. You’ll also be building towards your retirement, even if right now that simply means chipping away at your borrowing.

Investors should stick to their strategy

  • People ask me whether they should hold off on investing because of the uncertainty and the news they read.
  • One of my favourite phrases when it comes to investing is that it’s the time in the market that matters, not timing the market.
  • What does that mean? Investing is for the long-term, and you should only have your money in the markets if you intend to leave it there for at least five years, and preferably seven or more. That’s time in the market.
  • If instead you try to ‘time the market’ by buying particular stocks or funds low and selling high, academic research has shown time and time and time again that while you may get lucky once in a while, your returns are less predictable over time.
  • Use a globally diversified portfolio, and a passive or index fund for your investment. The difference between that and active management – where people try to time the market on behalf of their clients – was perhaps best highlighted by Warren Buffett’s famous bet.
  • Buffett put out a 10-year challenge in 2007 to any individual in the world: use active fund management to beat my passive returns from the S&P 500, which is the US equivalent of the FTSE 100.
  • Only one person took the bet, which was for $500k, a hedge fund consultant named Ted Seides. In the first year, Seides did well and his investment returns had moved ahead. But it didn’t take long for the tables to turn.
  • A year before the challenge was due to end, Seideswas so far behind that he conceded he had lost the bet; there was no way his returns could catch up.
  • It’s a great reminder that ‘set and forget’ is your best strategy for investing. Choose an index portfolio that matches your risk appetite, put your money in it and leave it there to ride out the highs and lows that are inevitable. You can do this online easily, I have my own site Lexo.co.uk that lets you choose a portfolio according to your appetite for risk. Time in the market is your friend.

 

 
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