What’s Going On In The UK Economy Right Now

From fluctuating house prices to skyrocketing energy costs, changes are afoot in the British economy. We asked Paul Sedgwick, co-founder of Frank Investments, to cut to the chase and explain what’s going on.

The first thing to say is the global economy is expected to continue growing this year. And that’s good news – yes, interest rates could rise, and you may well see some restraint on spending power as a result of higher taxes and a higher cost of living, but wage growth should help mitigate this. People – by that I mean finance people – generally feel quite optimistic.

Last time I talked about the problems in the economy being caused by a supply and demand imbalance. There are now signs this is easing. Last year, the economy recovered quickly (perhaps more quickly than people expected) after the challenges of 2020 and this increased demand across the board. That’s what created this inflationary pressure – reflected in the form of rising prices in food, fuel and raw material costs. But analysts think this should start to ease in 2022, especially as we move into the second half of the year.

It’s my belief that a lot of the rise in the cost of living we’re seeing will ease. When prices rise, demand usually eases and therefore supply adjusts, as do prices. It all balances out in the end. The other good news is that a lot of people have been able to save money in the last couple years – lockdowns haven’t given us a huge reason to spend – so spending power has been largely protected.

A good indication of what’s to come will be the annual corporate reporting season. This is when companies release results for the year just gone – but crucially, they also offer their predictions for the year ahead. In the short term rather than focusing on central bank movements, analysts and stock market professionals will be paying close attention to how corporates view the outlook. Company reports – which span a broad range of sectors – often reveal a much more ‘on the ground’ picture of where the economy is going next.

Wages are likely to rise in 2022. Higher wage costs can impact company earnings and therefore share prices, but in real terms it should give consumers more spending power. If inflation stays high and the cost of living increases, higher wages will help offset the effect of  a higher cost of living. We’re already seeing signs of this in America.

Last time I talked about the problems in the economy being caused by a supply and demand imbalance. There are now signs this is easing.

As for house prices, London remains depressed. During the pandemic we saw a shift out of cities, and to some degree this is still the case – and probably will be for some time yet. Prices for country properties with land attached are good. Thankfully, schemes to help young people get on the property ladder have been protected and low interest rates have helped them get mortgages. Plus, with more savings, people have been able to stump up for fees and stamp duty.

But remember house prices tend to rise over the long term. That’s often irrespective of what else is going on in the economy. So, if you can afford to move and want to, it can be worth doing. You don’t want to push too far but getting up on the next rung of the property ladder is usually a good thing. Ultimately, buying and selling houses is such an individualistic game – it really depends on what you can afford, what you’re looking to buy or sell, and the advice you’re being given. There’s rarely a blueprint for anyone to follow.

There might be more volatility in the stock market on the way. If there is an interest rate rise, it could translate into bigger movements in company share prices as the market anticipates each economy update – in short, people will get nervous. It’s an important point to understand because it means ordinary people who invest need to be prepared for bigger changes in the value of their portfolios. It sounds obvious, but there will be factors which have affected some companies (and therefore their share prices) more than others over the last 12 months, and people should prepare to see that reflected in the value of their holdings.

Right now, investors need to realise there isn’t one particular asset class that looks particularly attractive. Bonds are running with inflation at 4%-5%, and are yielding about 1%, so real yields are about as negative as they ever have been. But you can’t spend your life putting your money into gold just to protect yourself. So, in my opinion, equities still look the most attractive option.

Remember, house prices tend to rise over the long term. That’s often irrespective of what else is going on in the economy.

For the long term, investors should invest in blue-chip stocks that pay a good dividend. They’re essentially paying you to wait for the capital to appreciate and it gives you a bit of income. Over a period of time, global equities have compounded around 8% since 1990 so that would have stood you in good stead – but only if you have money you’re willing to put away for some time.

If you want to do something with your money in the short term, the stock market isn’t necessarily the place to be. It is likely to get more volatile and you don’t want to have to sell at the wrong point in the cycle. If you think you’ll have short-term demands on your cash, don’t put it in equities. They only produce the best results over the long term. If you do choose to invest, those industries that are unexciting, but are exposed to the growth in the global economy and come with notable dividend yields – are worth considering. The return on your investment should be decent over time.

I always tell beginners to invest in companies they understand and are interested in. If you know a bit about the industry a business operates in, you’re likely to research it properly. Avoid the speculative stuff that you could lose all your money in. You need to see a track record and a consistent track record of growth. You need to be able to understand the dynamics of a company and how it operates in the market. It’s one way to get more confident when it comes to investing – don’t treat it like a casino. No one doubles their money overnight.

For the rest of this year, I’m cautiously optimistic about where the UK and global economy economy is going. And that’s one reason to remain optimistic about the prospects for stocks. But if there’s one thing people reading this piece should take away, it’s that greater volatility is a real possibility as a result of a rise in interest rates. You need to be prudent, but the stock market should continue to perform.

For more information, visit FrankInvestments.co.uk and sign up for Paul’s twice-weekly economic and market bulletin.

 
*DISCLAIMER: Anything written by SheerLuxe is not intended to constitute financial advice. The views expressed in this article reflect the opinions of the individuals, not the company. Always consult with an independent financial advisor or expert before making an investment or personal finance decisions.

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