After the shock result of the General Election, which saw the Conservatives ‘win’ but without the majority they needed, the economic and political outlook for the UK is looking anything but ‘strong and stable’.
In the week that followed – with Theresa May trying to forge an alliance with the DUP – the publication of key economic indicators did little to reassure households.
Rising costs, shrinking earnings
Inflation in May hit a four-year high of 2.9% - attributed to the rising cost of food, electricity, and toys and games.
Wage growth however is not keeping pace. Despite unemployment being at a record low of 4.6%, earnings only grew by 2.1% in the three months to April, and this figure drops to 1.7% when bonuses are excluded.
Ben Brettell, senior analyst at Hargreaves Lansdown, believes the data paints a depressing picture. He says: “The UK economy faces a dangerous cocktail of political uncertainty, slowing growth and shrinking real wages.”
He adds: “Households are being squeezed from both directions, with inflation rising faster than expected and wages rising more slowly. This doesn’t bode well for economic growth.”
So how can consumers protect themselves in the current climate?
Savings
The combination of low interest rates and rising inflation is a nightmare for savers. Unless your account pays a rate equivalent to or above the rate of inflation, your money will lose value in real terms.
Currently there are no universally available savings accounts which pay a rate in excess of 2.9% - the rate savers need to beat inflation.
However, you may be able to achieve that with a regular saving account from a high street bank – Nationwide, First Direct, HSBC, M&S Bank and Santander are all paying 5%. However, these accounts are only available to current account holders and savings limits are capped.
A good current account may also be a savvy choice – Tesco Bank and TSB both pay 3% - the former up to £3,000, the latter up to £1,000. Nationwide pays 5% on its Flexx Direct account but only for the first year (after which it drops to 1%).
Investments
Equity based investments offer a better hedge against inflation than cash. Yet with the economy looking shaky and increasing uncertainty around the form Brexit will take, markets are likely to be volatile.
Tom Stevenson, investment director for personal investing at Fidelity International says the election result provided a sage reminder of the need for good diversification. “Markets will likely remain on the back-foot while the difficult job of putting together a workable government is undertaken,” he says. “This is when a well-diversified portfolio, comes into play. The case for a well-balanced portfolio, geographically and by asset class, has never been stronger.”
Maike Currie, a fellow director at Fidelity adds that there may be specific assets classes that could make useful shields against inflation. “Real assets such as gold, agriculture and property are all good protectors against the wealth eroding effects of rising prices,” she says.
Breakout/ or tapped on end?
Pensions
Most people would benefit from setting more money aside for retirement, but as Moneywise went to press, one day ahead of the Queen’s speech, the policies that impact on retirement planning remained uncertain.
Question marks hung over key Tory proposals on the triple lock, state pension age, social care and the winter fuel allowance. Pension savers were also seeking clarification on rules that determine how much you can pay into your pot each year after you’ve accessed it (known as the Money Purchase Annual Allowance).
Steven Cameron, pensions director at Aegon says: “Without a clear majority the government is walking on egg shells as decides how to pursue manifesto policies.” Check Moneywise.co.uk for the latest updates.
Breakout:
The Brexit Bond:
Family Building Society is giving savers the opportunity to take a punt on the outcome of Brexit with two new Brexit bonds.
Brexiteers can select the optimist bond, which pays a 2% bonus if the pound strengthens against the Euro after the UK leaves the EU.
Remainers can opt for the pessimist bond which pays a 2% bonus if the pound weakens against the Euro.
With either bond no bonus is paid if the exchange rate doesn’t change and a 1% fixed rate is guaranteed for the term which finishes on 2nd May 2019.
The Moneywise verdict:
It’s a fun idea, but a bit of a gimmick. If you did make the right punt and earn the 2% bonus you’ll end up with a total of 3% which you won’t match anywhere else at the moment.
However, the minimum investment is high at £10,000 and if you pick the wrong bond 1% isn’t much to show for your money. Savers with Atom Bank could get a guaranteed 2% with its new two-year fixed account.
It’s also worth pointing out that many factors other than ‘Brexit’ will impact on exchange rates so you aren’t just taking a punt on the impact of the UK leaving the EU.
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