Now that life is slowly returning to something close to normal, the International Monetary Fund (IMF) has revised its forecast for economic growth in the UK.
Let’s take a look at what was in this announcement, who is impacted, and what all this means for you and your finances.
[top_pitch]
What do we mean by economic growth?
In this context, this term refers to the ability of a country to increase the size of its GDP.
GDP stands for ‘gross domestic product’. It’s just the total capacity of a country’s output, expenditure and income presented as a monetary figure.
Economic growth can be measured by comparing the percentage change in GDP between two different points. For example, comparing the GDP from today to the GDP from this time last year.
A country’s GDP doesn’t give you the full picture. But it is a decent indication of the overall health and size of an economy.
Why is economic growth important?
Growth means that the country is generating more money. This is good for businesses and good for jobs.
This extra money in the system usually trickles down to all corners, so everyone benefits in some way.
However, it’s important to remember that this potential growth is coming on the back of a pretty catastrophic year. So while it is good that things are growing from low levels, it doesn’t necessarily mean we are out of the woods just yet.
What is the forecast for growth in the UK?
According to the IMF, the UK’s new projected growth for 2021 is 7%.
This is an upgrade from their previous projection for the UK economy.
After lockdowns and business restrictions throughout most of the coronavirus pandemic, news of activity picking up again is definitely welcome.
[middle_pitch]
What about economic growth in other countries?
This is where the IMF report gets even more interesting. Successful vaccine rollouts amongst developed nations like the UK is a big reason why growth forecasts have been upgraded.
However, this isn’t the case with emerging market economies. Some developing nations have struggled to get a handle on vaccine programmes, and the virus is holding back the recovery of their economies.
Overall, the IMF has kept its global growth prediction at the same level of 6%. But this is just the balancing out of richer countries doing better than expected and poorer countries doing worse than expected.
How will this potential growth affect my finances?
Growth can be useful for economies, but too much growth can lead to higher levels of inflation. It’s something that is already starting to surface.
If levels of inflation remain as high as they are, then your money may lose value over time. This is called depreciation, and it means you can buy less with your pounds than you once could.
So, higher inflation can be bad for savers or those holding lots of cash. This is why it’s important to make sure you’re using a savings account that offers you the best rates to dampen the effect of inflation on your money.
Are there any investment opportunities that will come with more growth?
Economic growth in countries like the UK and the US can lead to more positivity in the markets. It will be interesting to keep an eye on key indexes like the FTSE 100 and the S&P 500 over the next year to see if this growth leads to decent investment returns.
The flip side of this report means that there may also be some good long-term investment opportunities in emerging markets. Investing in this area will likely not have great short-term prospects because of slower growth.
But this could also mean a better deal for investors who buy shares and funds at lower prices. This poor growth forecast, coupled with recent issues around Chinese stocks, could present some decent buying opportunities.
There are still many risks associated with investing in this area. No one knows how long the effects of the pandemic will roll on, or whether countries like China will allow businesses to flourish without heavy restrictions and regulations.
So, consider any investment seriously before diving in and understand that you may get out less than you put in.
