Are we heading for another financial crash? It’s the ten year anniversary of the big crash of 2007/2008 which started in this country with the fall of Northern Rock (starting August 9th 2007). Into 2008 it really hit the Western world with the USA and Iceland leading the fall with the UK, Ireland and most other large economies.
If you haven’t yet seen The Big Short, watch it to see how it all happened (I had to watch it a few times to understand it properly – some of the events are quite complicated).
The question is, though, are we heading for another financial crash now, with the economy sluggish post-Article 50, borrowing at a worryingly high rate, wages stagnant and savings at dangerously low levels? Let’s take a look.
- Are we borrowing too much for our own good?
- What about our savings?
- Will wages go up to help us?
- What about the economy? Are there good signs for that?
- The stock market – is that about to crash?
- So, are we heading for another financial crash? Your thoughts.
See what The Money Charity’s statistics are for borrowing in the UK. It makes eye-popping reading. Our borrowing is increasing month-on-month, to the point where the Bank of England has announced that it’s worried we won’t be able to pay back our debts.
Here you can hear what I had to say on BBC Radio Scotland about personal debt being an actual danger to the economy.
Consumer borrowing is building up worryingly, and has now breached the £200 billion mark for the first time since 2008. Meanwhile the Financial Conduct Authority is warning that 2.2 million borrowers are in financial distress, despite ultra-low interest rates, which means tough decisions for the Bank of England about whether they can raise interest rates, as they would like to.
We are not saving anywhere near enough either for our futures or for a rainy day.
The immediate problem of low savings is what we will do if we have a crash. Will enough of us be able to continue to pay our bills? If too many of us can’t then that could bring down various companies, increasing unemployment and poverty.
Also, according to research by Drewberry Insurance we are staggeringly behind with our savings for the future.
They say that almost 1 in 5 (18.2%) of us have no pension of any kind while of those that do, just over half (50.2%) have no idea what their pension is worth.
Among those who know how much their pension is worth, 44% reported a pot worth less than £10,000 while 80% had less than £100,000. Only 5% reported a pension pot worth over £400,000.
The problem with that is that when living off your savings you will only really get about 5% (at the most) each year. If the pot is £10,000 then that’s about £500 a year – less than £50 a month.
Actually, it’s not so difficult to build up a decent retirement pot if you set up regular standing orders to go out of your account every month and just keep it going. The earlier you start the less you have to put aside but even if you’re in your 50s you can put money away for retirement.
It’s not looking like it.
Not only is wage growth pretty stagnant but in-work and other benefits have been cut, which means that those on benefits are less able to spend and help the economy keep going.
Economists say that average wage growth slowed to 1.9& in the year to May 2017, the weakest increase since early 2015, and a slowdown from 2.1% in the 12 months to April 2017.
When you factor in price rises (inflation has increased largely because our imported goods have become more expensive) this means that many of us are actually worse off in real terms, even if wages have gone upl a bit.
The economy has stood up fairly well in the face of all the uncertainty both at home and abroad but it has slowed markedly since the Referendum. The stock market is doing exceptionally well – largely thanks to the weak pound which makes our exports cheaper and more attractive to buyers.
But the ratings agency Moody’s has just announced that with household debts rising to worrying levels at a time of economic uncertainty, we could be heading for a fall.
They say the poorest families in the country are the most exposed to the risks as living costs rise more quickly than their income, leaving them less able to cope with any financial shocks.
As I said on BBC Radio London, here, the economy relies far too heavily on us spending, spending and spending – often with money that isn’t ours!.
The big problem with this overspending is not just that it’s putting us into expensive debt now, it’s that it’s also stopping us investing enough money to pay for our futures. As we spend on things we don’t need – or even want in many cases – and then pay for interest on the money we’ve borrowed and can’t immediately pay back, we’re not putting that cash into pensions, ISAs, property and other lovely investment ‘vehicles’ (as the City calls them) that will grow our money and give us rich retirements.
The banks are in a much better position than they were ten years ago. In fact HSBC just announced a 57% rise in profits and all the major banks (apart from RBS which has a question mark over its head still) have created enough cash reserves to withstand another big shock like the 2007/8 crash.
Also, the economy did surprisingly well in July 2017, thanks largely to an uplift in exports due to the weak pound. Paradoxically, our very weakness can be a huge strength when it comes to selling abroad!
It seems likely.
Many experienced investors are taking their money out now and putting into cash (savings accounts) until the expected crash happens, at which point they will go back into the market and buy up stocks cheaply.
The Dow Jones in America has now gone through the 22,000 mark, the FTSE is well above 7000 and it all looks generally over-heated.
We could just have what the analysts call a ‘correction’ (in other words the market just goes down to a position that is sensible rather than the over-inflated situation it is now in) or it could be a big crash that takes a few years to recover from. We don’t know yet.
A lot of the elements are there:
- Over-borrowing, including sky-high mortgage borrowing, although interest rates are historically low
- Very little in the way of savings safety nets
- An over-heating stock market
- A sluggish economy here and in America
- Uncertainty from Brexit which is stopping a lot of companies investing in the UK
- A housing market that is slowing down almost to a stop.
However, new businesses are coming into the country still, our exports are doing well (though they need to do better) and we still have a lot of immigrant workers helping the economy motor on.
There are lights in the darkness but are they enough to keep us going?
Let me know what you think in the comments below!