Stagnating wages, climbing inflation, towering consumer debt, EU political strains and US-Russia tensions are casting storm clouds over the global economy.
The stock market may be close to all-time highs, but many Britons will be tempted to batten down the hatches as the turbulence menaces their personal finances. There may be trouble ahead.
Years of record low interest rates have distorted financial behaviour, punishing prudent savers and encouraging rampant consumer borrowing.
The average instant access savings account now pays a mere 0.1 per cent, excluding bonuses, rising to just 0.41 per cent on cash Isas, according to figures from The Money Charity.
Your cash savings are actually shrinking right now
Many have simply given up saving as a result, with the savings rate falling to the lowest level since the 1960s.
Worse, consumer price inflation stood at 2.3 per cent in March and is expected to climb even higher, further ravaging the return on savings.
Michelle Pearce, chief investment officer of Wealthify.com, says many fail to realise the damage this does: “The double whammy of rising inflation and pitiful savings rates mean that your cash savings are actually shrinking right now.”
At the same time, consumer indebtedness has spiralled, as people take advantage of cheap money to load up on credit. Britons collectively owed a mind-boggling £1.524 trillion in February, up from £1.476 trillion a year earlier.
That is an extra £964.45 for every adult. Credit card providers are the major beneficiaries, charging an average APR of 18.48 per cent, according to The Money Charity, more than 70 times the Bank of England’s base rate of 0.25 per cent and an astonishing 185 times the average return on cash.
Despite these distortions, AJ Bell investment director Russ Mould says the Bank of England is refusing to act: “It seems unlikely to change its unhurried approach to raising headline interest rates from today’s record low.”
Andy Knee, chief executive of conveyancing company LMS, says that despite mortgage rates also being at historic lows, servicing the loan is an increasing burden: “In January, the repayment as a percentage of total income rose month-on-month from 16.9 per cent to 17.8 per cent. This will concern homeowners who already face tightening purse strings.”
Cash-strapped households are racing to take advantage of today’s best-ever rates with remortgages at an eight-year high, according to LMS. Wage growth is now slowing, rising just 2.3 per cent over the past 12 months, in line with inflation, according to new official statistics.
Andrew Sentance, senior economic adviser at PwC, says this means earnings are no longer increasing in real terms: “With inflation expected to pick up further, this squeeze on consumer purchasing power is likely to intensify.”
He predicts slower economic growth this year and next as consumers rein in spending and Brexit uncertainty holds back investment.
There is still plenty of good news out there, with employment and vacancies at record highs, house prices holding steady, and confidence among UK small firms rising to the highest level in over a year, according to the Federation of Small Businesses.
Yet Britain is vulnerable to storms beyond its shores, as President Donald Trump adopts a more aggressive stance towards Syria, Russia and North Korea.
Joshua Mahoney, market analyst at IG, says Trump is playing a game of chicken with North Korea that could go wrong: “The decision to move naval ships into the region could enrage the unpredictable Kim Jong-un into an action that might see things escalate quickly.”
Investors are still pinning their hopes on Trump forcing through his aggressive tax cutting and stimulus programme, which will turbocharge the global economy. However, faith in “Trumpflation” is fading and stock markets have cooled in recent weeks, adding to the uncertainty.
Die-hard Remainers like to blame all the UK’s challenges on Brexit and while it is true sterling’s post-referendum drop has driven up the price of imported goods, fuelling inflation, the Bank of England must share the blame for last year’s overreaction when it slashed base rates and unleashed stimulus, which is what really sunk the pound.
Adrian Lowcock, investment director at wealth manager Architas, says: “The oil price rebound has also played a major role in pumping up prices.”
The decision to quit the EU could work in the UK’s favour, if the French presidential election delivers a shock on May 7.
It is increasingly possible that the final run-off will pit the political extremes of right and left against each other, in the shape of the populist Marie Le Pen and Marxist Jean-Luc Mélenchon. Both have threatened to pull out of the euro and a victory for either would throw the EU into disarray.
If that happens, Brexit could prove a blessed relief. There is little that Britons can do about global storms apart from keep a tight ship and resist the temptation to put yet more of their spending on tick.
The UK can withstand these storms and look forward to a brighter future, as Brexit sails ever closer.