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By
Cliff D'Arcy
September 29, 2005
First of all, let me start by saying
that I'm not an economist and, indeed, I've never been
formally taught this subject. However, after eighteen years
in financial services, I'm confident that I have a good
understanding of what makes consumers tick when it comes to
money matters. Sadly, all the information that I've
collected leaves me worried about our nation's finances as a
whole.
Here are eleven warning signs which suggest
a bleak outlook for many households:
1. No trend continues forever
Every gambler knows that winning or losing
streaks are just that: streaks, with a beginning and an end.
US economist Herbert Stein phrased this as, "If something can't
go on forever, it will stop."
Since 1945, UK domestic property prices
have doubled, on average, every 8½ years. However, the average
house price doubled in the five years from the start of 2000
to the start of this year, an annual growth rate of almost 15%.
This is my first worry, because when trends deviate significantly
from their long-term average, they have a habit of correcting
themselves. This tendency, known as "reversion to the mean"
suggests that, after years of runaway house prices, we should
brace ourselves for a correction. Indeed, I was a homeowner
up until recently but I'm currently sitting out of the market
by renting.
2. We manage our money terribly
According to one financial watchdog, we
Brits spend around £110 for every £100 of take-home pay. Given
that our take-home pay will be around £825 billion this year,
we are over-spending to the tune of over £80 billion a year.
What's more, we've been funding this bender through borrowing.
Indeed, in 2004, we borrowed £51 billion
against our homes. However, the cooling housing market has put
the brakes on this bad habit, known as mortgage equity withdrawal,
so we'll have to cut back or find another way to keep subsidising
our lifestyle! If you can't make ends meet, or suffer from financial
mismanagement, learn to budget today!
3. Our bills are rising fast
Oil and gas prices have rocketed in the
last three years, which has pushed up domestic energy prices
and the cost of petrol and diesel. Hence, a bigger proportion
of our disposable income now goes on energy costs. What's more,
housing expenses (particularly council tax) have leapt, up about
6% in 2004/05, so homeowners are feeling the pinch.
The government's favourite measure of
inflation (rising prices, see What Inflation Means To You) recently
hit 2.4%, the highest figure since the start of 1997. Sadly,
our take-home pay is rising only slightly faster than this (it
crept up by a mere 3% in 2004), so our bills really are beginning
to bite!
4. We've become addicted to debt
According to Bank of England figures released
this morning, at the end of August, we owed over £56 billion
on our credit cards and a further £134 billion on personal loans,
overdrafts, etc., making our total unsecured lending £190 billion.
Just before this government took office
in May 1997, the total was £80 billion, so our non-mortgage
debt has increased by £110 billion in less than 8½ years. In
other words, our plastic and other debt has been rising by a
chunky 11% a year, which is a recipe for ruin for many borrowers!
5. Our mortgage burden is getting heavier
Today's Bank of England figures show that
we owe £932 billion to mortgage lenders. With the average mortgage
rate at about 5.5% a year, this mountain of secured debt is
costing us around £51 billion a year in interest. In June 2004,
the Bank of England's base rate was the same as it is now (4.5%
a year), but our mortgage debt was £827 billion. So, thanks
to our mortgage debt climbing by £105 billion over this period
(up 13%), even after the latest 0.25% cut to the base rate,
we are still paying much more in mortgage interest than we were
fifteen months ago.
6. Our economy is stumbling
Earlier this year, chancellor Gordon Brown
predicted that the UK economy would grow by 3% to 3½% in 2005.
However, this prediction has proved to be wildly optimistic,
thanks to a slowdown in spending as consumers begin to tighten
their belts. Several commentators (including me) have argued
for a long time that the chancellor's "economic miracle" has
been nothing more than one long borrowing binge.
For the record, the International Monetary
Fund expects the UK economy to grow by as little as 1.9% a year,
which would leave the Treasury far short of its income target.
Hence, falling tax takings and ever-rising public spending suggests
that tax increases could be on the cards next year. Indeed,
covering the expected shortfall of £10 billion in the governments'
spending plans would mean the basic rate of income tax rising
to from 22p in the pound to 25p. So, expect a whole raft of
stealth taxes and other trickery at the next Budget!
Learn more in How To Dodge The Financial
Hurricane
7. Unemployment is rising
According to the Office for National Statistics,
the number of people out of work and claiming benefit rose for
the seventh month in a row to hit 866,200 last month, up 52,400
during 2005. The government's preferred unemployment figure,
which measures the number of people out of work and seeking
employment, hit 1.42 million in August.
Although the level of unemployment is
low by historical standards, I expect it to begin rising, thanks
to tough conditions on the high street and in manufacturing.
8. Retailers are having a tough time
As consumers begin to curb their 'desire
to acquire', many retailers are struggling to hit their sales
and earnings targets. For example, the John Lewis group last
week warned that current trading conditions are the harshest
it's seen since 1990.
Sadly, falling sales and profits on the
high street usually lead to one of two outcomes: large-scale
redundancies or business failures. For example, retail group
B&Q announced 400 job cuts earlier this month, 1,700 jobs are
at risk at sportswear retailer Allsports, which went into administration
two days ago, and 500 jobs are under threat at Furnitureland,
which collapsed last week.
9. We don't have enough to fall back
on
Although UK residents have around £541
billion on deposit, this money is massively unevenly distributed,
with the rich and super-rich owning about three-quarters of
this pot. Sadly, three out of ten adults (30%) have £500 or
less in savings, and almost one in eight (12%) have no cash
cushion whatsoever. Ouch!
Without a few months' wages in the bank,
you're up the proverbial creek without a paddle if things take
a turn for the worse. If you fall ill, have an accident or lose
your job, you can't rely on the State, because the government
safety nets are practically non-existent! I warned how little
State support there is for homeowners in When Mortgages Turn
Nasty!
10. We're not investing enough
One bright spot is that stock-market investors
are having another great year, with the FTSE All-Share index
up about a seventh (14%) in the year to date, plus dividends
on top. The stock market has risen strongly since the blue-chip
FTSE 100 index hit a low of 3,287 on 12 March 2003. Now, 2½
years on, the Footsie is 5,488, up two-thirds (67%) from its
low, plus income on top. Yippee!
Although many of us have benefited from
this comeback, thanks to better returns from our pension funds,
savings plans and so on, we've not done as well as we could
have. That's because millions of investors were scared off by
three years of falling market from 2000 to 2002. For instance,
in the 2003/04 financial year, which ended on 5 April 2004,
investors pumped a total of £2.5 billion into tax-free shares
ISAs. In the 1999/2000 tax year, this figure was £16 billion,
more than six times higher.
Since 1918, the UK stock-market has produced
an average annual return of 11%, with income reinvested, beating
cash, bonds and property. Of course, it saves its greatest rewards
for the most patient investors, but I believe that the market
still has further to go, thanks to rising corporate profits.
11. Our saving
for retirement is pathetic
As we explained on Monday in Avert Your
Own Pension Crisis, around twenty million people of working
age are not currently contributing to a company or personal
pension. Indeed, only fifteen million people are saving for
retirement via pensions, which means that about five-ninths
(55%) of working-age adults have no pension planning in place.
This is an economic time bomb, since millions of people will
have to decide between buying a house and funding their retirement.
Whichever way they choose, financial hardship will follow. Aaargh!
If I've played my cards right, this article
will shock you into doing something to strengthen your personal
finances, and my cunning plan will have worked!
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