Recession, reason for cheer and mud

Financial journalists were all a-quiver this week with the news that the UK entered a ‘technical recession’ at the end of last year.

Lies, lies and damned statistics

Before we all pack our bags and head down into the bunker o’ misery, it’s not as bad as it could have been. The economy shrank by 0.1% between July and September, and by 0.3% from October to December. In part, retail sales were weak in the run-up to Christmas as we tightened our belts and resisted the shiny merch in the shops. And in part manufacturing and construction were weak.

So a technical recession, yes. That’s defined as two consecutive quarters of falling growth. But with news out today of stronger retail sales in January, there are other stronger indicators around and it’s not cause for untold doom.

Furthermore, inflation figures this week defied expectations and stayed at 4% in January, having fallen back from more than 10% a year ago.

If I worked for Labour, my headline would be ‘Economy in tatters as UK plunges into recession’. If I worked for the Tories, my headline would be ‘Economy resilient as inflation is tamed and confident Brits flock to the January sales’. Take your pick.

What will happen to interest rates?

This is the main question for most of us. I'm on the Bank of England’s Decision Maker Panel and answer questions they send me every month. The latest one is all about wages in my business – how much have they grown by and what do I see over the coming 12 months? And some of the questions are month by month. This suggests to me that their biggest concern right now is (or remains) wage inflation.

And when they feel they have tempered, if not conquered, this beast, they may lower rates. Which could be the summer but watch this space.

Reader questions – premium bonds and a tech fund

I’m going to tackle two reader questions this week which I know are shared by many of you.

First, Gary (hello) who wrote – “As retirees, with my pension and the majority of our investments locked into various stock markets, we keep a premium bond emergency fund of about £80k. I know that whatever shenanigans Messrs Putin, Trump & Jinping get up to, our PB money will be secure and available to ride out any turbulence”.

Gary, as you noticed last week, I’m not the biggest fan of premium bonds today. The average prize rate is falling to 4.4% from March. And you have a 1 in 21,000 chance of ‘winning’. Now, compare that to other deals on easy access cash – for example, I saw one from the Leeds Building Society today for 5.1% - which would bag you over £4,000 a year in interest. No maybes, no ifs and no buts. So I like the certainty of a good rate, rather than the chance of a ‘not bad’ rate.

I do understand the comfort of a brand like NS&I at a time of a mad world. But remember the Financial Services Compensation Scheme which covers the first £85,000 per eligible person, per bank, building society or credit union. That should give you the comfort you need to get the best possible rate on your cash. You may also like to consider locking at least some into a longer-term fix now, before rates start to come down.

Just remember you’ll pay tax on interest at your marginal rate – and you don’t pay tax on Premium Bonds. So if you are loaded Gary, or pay huge amounts of tax, do your reading. But for most of us, I think we can do better than premium bonds.

From premium bonds to tech. George wrote to me about the superb performance of the iShares S&P 500 Info and Tech ETF we mentioned in our January best-selling funds piece. “What was going on?”, he wondered. “What is the secret sauce and are ETFs a good idea – and what about investment trusts?” You can read my answer here, or whilst we’re on a theme, check out this new article on three good investment trusts for a pension today.

For what it’s worth, I think investors have a key question to answer right now. Do you think technology is still a sector? Or is it just everything? If it’s just a sector, then it’s expensive and regulation is of course a major threat. If it’s everything, then we’re at the beginning of a long-term revolution and not at the end of a cycle. How profound - that has made my pea brain hurt!

Have a great weekend everyone. Please God don’t rain any more because it’s getting to the point where I'm muttering at the mud like a mad old lady as I stomp through the fields. And enough is enough.

Holly

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