What economic growth means for my investments

Sam Jackson

February 5, 2014

November 13, 2018

What economic growth means for my investments

 

The return to growth is something that both politicians and ordinary people across the country have been hoping for since the crash of 2008. With 2014 bringing another fall in unemployment and revealing economic growth of an impressive 1.9% in 2013, it's time to start thinking about the knock on effect that all this good news could have on your investments.

Inflation

Inflation is one of those financial terms that raises both cheers and fears. Why? Because inflation means a simultaneous increase in cost and value. Whether you are better or worse off as a result will depend on how you've invested your money in the past.

Loans and mortgages

If you've been saving for years to buy a house or have a fixed-rate loan or mortgage due to expire, prepare to pay more. Even with the Bank of England keeping the base rate low and the Help to Buy scheme still running, City A.M. has already reported that banks are pushing up the cost of five-year fixed mortgages.

If you're looking to invest in property or assets (including a new car), consider acting soon before inflation kicks in. If you're currently enjoying low mortgage/loan rates, take advantage and pay off as much as possible now.

Savings

With the economy stagnant, interest rates on ISAs and savings accounts have been seriously suppressed. Economic growth should change that, but there are several things to remember.

Unlike debt costs, banks are cagier about raising their savings rates. The Telegraph was quick to point out that the annual 'ISA war', where providers compete for savers' cash before the financial year-end, hasn't materialised in 2014. And remember that rates need to be higher than inflation for you to benefit. Inflation pushes costs up, so don't jump in too quickly when rates do sound appealing.

Pensions

Annuity rates should also rise with inflation, so those on the cusp of retirement may soon find their potential income has risen (with the same caveats applied to a savings boost).

The switch from RPI to CPI (which is usually lower) as the inflation measure for public sector pensions, and for statutory revaluations of private sector pensions, looks to be a continuing thorn in savers' sides, and will reduce the benefits of inflation significantly.

Shares

Confidence is another investment buzzword with both a fuzzy meaning and an important effect. Institutional investors have already moved significant amounts of money away from recession commodities like gold and into equities, and that begins the process of pushing markets up. What's more, as employment rises and spending picks up, productivity improves and this generally means better returns for shareholders. With that in mind, now may be the perfect time to start thinking about entering the stock market.

Fixed-rate investments

The flip side of a share price boom is that fixed return investments like bonds lose their real value, because they won't rise to reflect the impact of inflation. So if you've locked in an interest rate to avoid deflation, your returns will suffer when inflation kicks in.

If you're currently considering your investment options, check out Money Dashboard, the free budgeting software that lets you view all your financial products, including current accounts, savings accounts and credit cards, in one place.

 

Sam Jackson

Money Dashboard

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