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Sorry to be the one to tell you, but it looks like we’re all going to have less money in our pocket this year and that has serious implications for the economy.
Despite the surprise news that the UK economy had grown 0.6% in the last three months of 2016 – ignoring fears that the impact of Brexit would have us stumbling backwards – the powers that be (economists!) believe that there’s a bigger problem that’s bubbling under the surface.
Of course, they’re happy that GDP (gross domestic product – which is used to measure whether the economy is going backwards or forwards) is up, they’re less happy about why it’s up.
That reason is you and me, and in particular our spending habits.
Andrew Goodwin of Oxford Economics said consumer spending in the second half of last year is what kept the economy afloat. We did our duty and hit the high street even though there was already a squeeze on our finances, thanks to falls in the value of the pound that meant our money didn’t stretch quite as far as imports became more expensive to buy.
When your money doesn’t go as far as it did, you’re feeling the effects of inflation: in other words, things cost you more.
The problem is that although you might already be feeling the pinch, things are going to get worse. According to Goodwin, when a currency falls as much as the pound did last year, then the impact of that takes a year to come through.
He warned that inflation could rise to 3% in the second half of this year, and to put this into context, it’s just 1.6% now (that is still below the Bank of England’s target of 2%, although no one seems to bother paying attention to that anymore!).
In short: things will get more expensive this year and this will have a huge impact on what we can afford to buy.
And we won’t be able to borrow more in order to spend more, as many people have got used to doing. We’ll all be too worried to borrow for fear of failing to pay the loans back (especially if interest rates rise), and the banks are unlikely to lend out more anyway.
It’s not good news so far, and there’s more dreariness to follow.
Even though the cost of living is going up thanks to inflation, wage growth is expected to remain in the doldrums.
It’s predicted to remain at around 2% to 3%, rather than hitting the pre-financial crisis levels of 4% or 5% a year. So not only will our spending money (or disposable income) be squeezed, so will wages.
It’s bad news for all of us and means we’ll all have to tighten our belts, look at our budgets and be more careful with our cash. And it’s definitely not a good idea to borrow money just to spend it on things that you don’t really need. Even if consumer spending is good for the economy, it’s going to be a hindrance to your household finances.
So what will the impact on the economy be? Well, it could mean lower growth for a substantial number of years, and Goodwin predicted as many as five ‘gloomy’ years.
You might be wondering what this has to do with you. If the economy doesn’t grow, then there’s a good chance your wages won’t either and companies are less inclined to invest and expand meaning there are fewer job opportunities. Worst case scenario sees companies laying people off as they try and cut costs.
It also makes it harder for the government to get the country’s finances back on track which could mean more spending cuts and even more austerity – as if the seven years we’ve already had isn’t enough.
There isn’t much you can do about economic slowdown, unless you’re spending an awful lot of cash satisfying a shoe addiction, but you can get your own finances in order.
Pay down debt, budget, put some money aside for an emergency (three months’ bills is a good start), and know that you’re prepared for when we all have less cash in the bank.