A very difficult few months ahead for the UK economy and why we won’t see negative interest rates in response.
In this blog and video, I’m looking at new comments from Bank of England governor Andrew Bailey and sharing my tips for weathering the economic storm ahead.
Andrew Bailey, governor of the Bank of England, has given an online speech to the Scottish Chambers of Commerce, where he shared some interesting forecasts about the economy.
He also played down suggestions that negative interest rates could come in response to the next downturn.
So let’s start by looking together at the comments from Bailey.
He spoke about a very difficult few months ahead for the UK economy as a result of rising levels of Covid-19 cases. This follows comments from Chancellor Rishi Sunak yesterday, who was warning that the economy is likely to get worse before it gets better.
Bailey said: “(We’re) in a very difficult period at the moment and there’s no question that it’s going to delay, probably, the trajectory,”
However, Bailey said that the economic recovery post-Covid is still likely to follow the shape set out in Bank forecasts last November.
We know things are bad out there. Yesterday, we had Professor Chris Whitty, England’s Chief Medical Officer, saying this is the most dangerous time of the pandemic.
And the next few weeks of the pandemic are expected to be the worst for the NHS, which is already struggling with capacity in many parts of the country.
At the weekend, the UK passed the grim milestone of 80,000 Covid-related deaths since the start of the pandemic. We appear to be in the eye of the storm right now.
Personally, I find it odd how much optimism there is about a fast exit from current lockdown measures. I know many people are desperate for this national lockdown to end at February half term, but I just can’t see it happening.
The lockdown is clearly having a significant economic impact.
Economists are widely predicting another recession – that’s two consecutive quarters of GDP contraction – for the UK, after the economy likely shrunk in the final quarter of last year.
While it won’t be as severe as the 25% contraction in the first lockdown last year, recession is still bad news for UK PLC.
Andrew Bailey shared his ‘best guess’ for GDP in the final quarter of last year, at flat or slightly down.
There was some slightly positive news on unemployment, with Bailey saying he no longer thinks it will peak at 7-8% in the middle of the year – that’s the Bank of England forecast from a couple of months ago – but likely at 6.5%, as a result of the government extending its jobs protection scheme, furlough, until April.
But what about negative interest rates?
We had a lot of speculation last year that the Bank rate would turn negative in response to the economic challenges of Covid. I’ve always maintained that’s unlikely to happen, and Andrew Bailey seems to be backing that up in his speech.
He said: “In simple economics and maths terms, there is nothing to stop it at all. However there are a lot of issues with it,”
According to Bailey, negative rates would make it complicated for banks to earn a rate of return, and possibly hurt their lending to businesses. Apparently, it’s not easy to draw a direct parallel with similar action taken in the euro zone.
And on Brexit, Bailey said there was anecdotal evidence of economic disruption as a result of the end of the transition period at the start of the year, and entering the new trade deal, but it’s too soon to tell whether the disruption will last.
He said: “It’s in many ways – in any systematic sense – too early to judge the impact of it, but the impact is both shorter term and longer term,”
So some interesting comments there from Andrew Bailey. A difficult few months ahead economically.
What steps can you take to protect yourself from the coming economic storm?
The best steps to take will depend a lot on your personal circumstances.
We know that the financial impact of the pandemic has been felt very differently by different groups of people. There’s some detailed research on this out this week, Pandemic Pressures, a collaboration between the Resolution Foundation and the Nuffield Foundation-funded Covid Realities research project at the University of York. They found that talk of saving money during the pandemic is “worlds away” from the experiences of many low-income parents and carers.
So, for some people and families, the pandemic has created an opportunity to stay home, continue working, continue earning, and save a great deal of money due to lower expenditure on all of the things we can’t currently do.
But for many across the country, the pandemic has already placed a great deal of burden on budgets.
According to the Pandemic Pressures report, higher-income households were the main beneficiaries of “enforced saving” during the lockdowns, and that’s because they spend 40% more of their income on leisure-related spending than the poorest 20% of households.
For low-income households with children, the pandemic has made the cost of living higher. 36% low-income households with children have increased their spending during the pandemic.
But the principles for protecting yourself during an economic turndown are broadly the same regardless.
If you think there will be tougher times ahead – and, spoiler alert, there are always tougher times ahead – then you need to act now to improve your financial resilience.
That means increasing the gap between what you spend and what you earn, it means repaying expensive unsecured debt so it’s not a drag on your monthly earnings, and it means diversifying your risks.
In economic terms, those risks primarily come from losing your job or source of income. So you need to make yourself highly employable, if you’re an employee. That means acquiring new skills, essentially making yourself invaluable to your employer.
Worst case scenario, and your current employer can’t afford to keep you on, another will want to snap you up because of how valuable you are to their business.
If you’re self-employed, that means having more than one source of income.
We’ve seen, haven’t we, during this pandemic just how quickly the ability to earn money can be snatched away from many trades, with government financial support providing a safety net for some and nothing at all for others.
The pandemic has prompted a lot of more entrepreneurial business owners to consider their streams of income, and make these more resilient too. It’s still not too late to take action in this respect, perhaps converting your knowledge and experience into online courses, or packing up what you do for home delivery. What’s worked in the past won’t necessarily work in the future.
Another area of diversification during tough economic times is your investment and pension portfolio. Please don’t keep all of your eggs in one basket.
I’ve shared a video recently explaining why the economy and the markets aren’t necessarily linked, and why we might see continued equity market growth during a global economic recession in 2021.
In diversifying your investments, please don’t go crazy and opt for non-mainstream assets like crypto. It’s not digital gold, it’s fool’s gold, and you can lose all of your money.
What are your tips for making it through challenging economic times?