It is a certainty that following the historic Leave vote, the UK economy (and that of Europe) has been negatively impacted upon. The other certainty is that the future of the UK economy is uncertain.
Not only did the pound fall dramatically, but political events that are even now unfolding have cast into question the stability of the UK economy, the world’s fifth largest. Efforts from the Treasury and the Bank of England have gone a long way to reassure the financial markets.
Amidst this uncertainty, savers and investors are doubtless concerned about their savings. Although the immediate outlook is admittedly not great – the surprise is that long term the outlook is actually not so bad. Prior to the vote, many were predicting another recession, high inflation, and a summary crash of the economy. That has failed to happen.
Early indications are not so bad regarding the long term. Already, both the pound and the FTSE100 have shown some recovery. Admittedly, billions was wiped off by the initial crash, and both have returned nowhere near to previous levels, but the slow recovery of both is already being seen.
For savers and investors, there is the matter of interest rates – which is another uncertainty all of its own. The other rates for investors to be concerned about are gilt rates. Gilt rates are the interest that are paid out on gilts – governemnt bonds. Upcoming weeks and months will see, according to economists, the interest British government bonds falling.
This is linked to the recent actions of international ratings agencies Fitch and S&P downgrading the UK’s credit rating. Fitch lowered the national credit rating from AA+ to AA, with S&P lowering the credit rating two notches from AAA to AA. What this means is that both agencies consider that lending money to the UK government is less safe now than it was last week.
It would be expected for that to mean that the government would ultimately have to pay more to borrow money ; according to the Office for Budget Responsibility, says an extra 1% on the government’s cost of any borrowing would cost the Treasury an extra £8bn in 2019-20.
The reality is that the yield (or return) on government bonds (which is traditionally a good indicator of the interest rate the British government would have to pay to borrow any money) has fallen. This is because in times of uncertainty people look for relatively safe investments – such as government bonds. This all leads to the suggestion that the interest paid on gilts will therefore fall. Such a fall will ultimately save the government money, although it is likely that inflation will also rise. This will increase the amount the British government has to pay on loans linked to the rate of inflation.
Paul Johnson, of the Institute for Fiscal Studies, points out that will also be offset by the government having to borrow more money as overall economic growth slows, continuing that “overall the public finances will be in worse state and so debt interest will be higher. And in the long run rates might rise. But for now economic weakness seems to be accompanied by a fall in gilt rates as people look for safer investments.”
Taken together – the outlook is again, uncertain. Although the economy is in a better shape than predicted, the reality is anything but pleasant. Although many trends indicate that over timeframe economy will record and improve – matters such as losing a top credit rating hardly helps. For investors, government bonds will usually always be a safe bet ; but a financial advisor should always be consulted prior to investing in them.
With the government seeking to calm and reassure the markets, and efforts to publicly show that Britain is still ‘open for business’, the assumption is that British government bonds are still a safe investment for savers and investors alike, despite the troubled economic times.