3rd June 2019
In the run-up to Brexit, we are being served up a mixed set of financial data, with GDP rising in the first quarter of 2019, interest rates speculated to rise, and slowing house prices. It can be tricky to translate what these macroeconomic trends mean to everyday investors and companies who just want to grow their net worth and businesses.
GDP
During the first quarter of 2019, GDP grew to 0.5% (up from 0.2% in December 2018). The main factor leading to this improvement was the performance of the manufacturing sector, with factory output growing by 2.2% over the same quarter, at its highest since 1988.
However, these figures alone do not tell the whole story, as much of the growth has been attributed to uncertainty around Brexit in the run-up to the original leaving date in Spring. This led to many manufacturers stockpiling due to fears of a no-deal Brexit. In this environment, businesses may seek investment to take advantage of increased demand from stockpiling and Brexit export opportunities.
Interest Rates
The interest rate in the UK is currently set at 0.75% and has been at historically low levels since the 2008 financial crisis. Set by the Bank of England to maintain inflation to a target level of around 2%, they impact businesses and consumers borrowing, spending and saving behaviours.
At the Bank of England’s last Monetary Policy Committee meeting in March, it was decided to hold rates at 0.75%, where they have been held since August last year, due to the uncertainty around Brexit. However, at the beginning of May, the Bank of England governor, Mark Carney, said that we should expect interest rates to rise after Brexit as further economic growth is predicted.
Rising interest rates should, in theory, mean banks increase the rates of return for cash deposits in their current and savings accounts, but this is not necessarily the case. When the last rate rise took place in August, many financial institutions did not pass on the full rate increase to their customers.
Investors should shop around to make sure they are getting the best returns on their capital. Meanwhile, businesses who know they will need extra capital in the foreseeable future could capitalise on these low rate, taking fixed-rate credit, before the rates go up.
Slowing House Prices and Buy To Let
Inflation was estimated in February to be 1.9%, the slowest rate since 2012. House price growth is a key measure used to calculate this and has been slowing down to a 6 year low, with average prices across the whole of the UK rising by 0.6% in the year to February 2019 but falling by 3.8% in London.
Until recently, buy-to-let investing was considered a relatively risk-free way to grow your net worth. However, data reveals that amateur landlords are continuing to withdraw from the buy-to-let market. The volume of buy-to-let mortgages issued has dropped from 16,000 a month in 2007 to 4,800 in February 2019. This drop of more than a third is due to reforms stripping away tax advantages of buy-to-let property investment, alongside the introduction of additional stamp duty for second homes.
As a result, these investments— once considered “safe as houses”— are unlikely to offer generous returns within the current economic cycle. Aspiring buy-to-let landlords may want to consider investing in more tax efficient assets such as the IFISA.
Overall, given the current uncertain outlook, it is more worthwhile than ever to follow the news to keep track of macroeconomic changes, the stories behind them, and how to best ensure that you act in the interest of your business or personal finances.
