Following on from the reasons to be cheerful or fearful post rather than offer one solution, I’m going to offer
four five thought experiments; ways in which world events might hit your finances. How would you feel if each played out, and how confident are you that it will or won’t?
Scenario 1: Deep Doom
Driven by cultural nostalgia for the 1920s, the world markets continue their growth into a new ‘roaring twenties’. After three further years fuelled by tech stocks and IPOs, consumer purchasing falters. The West stops buying new IPhones or leasing cars, as people attempt to control their debt. As global consumerism falls off, global economic output follows. Falls in Chinese production lead to an internal banking crisis, as companies are unable to service their debt and require huge bailots. Simultaneously, consecutive quarters of poor returns to the FAANG stocks leads their share price to collapse by 50%. Companies pull investment as they attempt to balance books, which leads to a spiral of decreased corporate spending, job losses, and decreased consumer spending. Over a period of a year global markets lose half their value. Central interest rates, already low, cannot provide stimulus. Reposessions lead to global property price falls. Bond prices collapse as once top-rated companies go under. Government tax receipts cannot cover half of spending, and radical steps are taken. In the UK, the pension is means-tested. The NHS is means-tested. Unemployment benefit is replaced by a ration system. Unemployment rises to 30%, homelessness to 10%. Shanty towns spring up across the country, and crime rates rise dramatically. The world experiences a new Great Depression.
Scenario 2: Local gloom
The UK population enjoys a period of honeymoon euphoria after Brexit occurs. The pound and FTSE100 rise to levels not seen since the mid-00s. People spend the cash they’ve hoarded. The government invests in building swathes on houses on the greenbelt and big infrastructure projects. The honeymoon cannot last, and the economic stimulus leads to inflation and increased government debt. Growth is not stimulated, and the Bank of England is forced to increase interest rates to reduce inflation. People, used to cheap loans and credit, struggle to pay their bills. Repossessions rise, and companies which were just about managing with their debt burden, go under. Tax receipts to the treasury fall, leading to swingeing cuts to the NHS, police and social services. The pension age rises to 70. Income tax goes up 5% across the board. The housing market is flooded with repossessed homes, leading to a 25% drop in prices and negative equity. Globally, markets experience a 20% correction, before continuing their march onwards fuelled by growth in tech and green technologies. The UK is unable to capitalise on this growth, and increasingly sidelined, only sees a return to stability by the end of the decade.
Scenario 3: Wiggle room
The UK population enjoys a period of honeymoon euphoria after Brexit occurs. The pound and FTSE100 rise to levels not seen since the mid-00s. This financial rebound coincides with a global slowdown, prompting the UK to become a counter-cyclical anomaly. Global companies, seeing it’s growth and position as a stepping stone to the EU without tight regulatory control, invest into the UK. UK companies on the back of a stronger pound, stretch abroad. Wages rise, whilst interest rates remain low, leading property to become more affordable. UK domestic stocks show strong growth over the decade – >10% a year, while global stocks hobble along <5%. UK bonds and property remain flat. Increased tax receipts enable the government to focus on reducing national debt.
Scenario 4: Global boom
Driven by cultural nostalgia for the 1920s, the world markets continue their growth into a new ‘roaring twenties’. Tech growth continues, and as new companies rise on the back of radical inventions, older established companies pivot their business models to capitalise on new areas of growth. Tobacco, oil, gas and pharmaceutical companies invest into clean energy and renewables. Mining companies see boosted returns as once-waste metals become sought after for manufacturing. The BRICS nations embrace the new green revolution, and increase their growth by spreading manufacturing into developing nations. Periodic <20% corrections do not dampen stock growth, with 10%+ yearly returns average, and some years seeing 20%. Interest rates gradually creep up, with global bonds achieving 5-10%. Strong wage growth also leads to increasing property prices, at least 5% a year. The world settles into a new normal, with a globally integrated industrial stream and international co-operation.
Late addition – Scenario 5: Wuhan Pandemic
The novel 2019 Coronavirus (one word people) continues it’s inexorable march across the globe. Following the Wuhan pattern, there is approximately a one month lag in each location before the true extent of spread is known, made up of incubation period and asymptomatic spread. By May 2020 the Wuhan virus has spread across the globe, and the numbers of infected in western counties is growing at an exponential rate. In June the number infected has crossed 100 million. The most severely affected are the old, weak and frail. 2% of those infected die. In the UK this numbers over half a million, mainly 1% of the UK population over 65 (18% of the general population). Nobody is spared. Everybody loses someone they know. The global economy staggers but continues, given that working aged people are predominantly spared. In the UK there is a glut of property put on the market, as empty homes are sold by bereaved relatives. Money concentrates into the hands of those left, reducing debt burden and leading to a surplus of cash. The government receives a windfall of inheritance tax receipts and reduced pension/ social care expenses. Society continues onwards, but never quite forgets the potential of a pandemic.