What Will The Next 5 Years Look Like For The UK Economy?

With the General Election just a matter of weeks away, many investors are viewing the outcome as being of major importance for the UK economy. After all, we could have a new Prime Minister who makes entirely different decisions to the current one, with there being potential impacts on people’s finances, job prospects and the strength of the UK economy.

The Last Five Years

Clearly, the last five years have been a hugely challenging period for hardworking families across the UK, but for the UK economy as a whole, it has been a relatively prosperous time. For example, the unemployment rate has tumbled, the UK economy has been transformed from one of the basket cases of the developed world to one of the fastest growing economies in the developed world, inflation has been kept low (despite various predictions to the contrary following quantitative easing) and the UK has a clear plan to reduce the budget deficit to zero in the next parliament.

Furthermore, UK house prices have soared following a period of decline, London has maintained its status as the top financial centre in the world, and the stock market has reached record levels, which is great news for investors and anyone with a pension.

The Next Five Years

Clearly, anyone predicting the next five years is bound to be wrong on something. In fact, if the aforementioned highlights of the last five years had been predicted at the General Election in 2010, most readers would have found them quite impossible to believe. However, the next five years are likely to be less stable than the last five, with there being major challenges ahead for the UK economy.

The chief challenge is spending cuts and their impact on the UK growth profile. Certainly, cuts have been made in the last five years, but they are set to bigger and more widely felt moving forward, which could hurt consumer confidence and cause economic growth to stall. In addition, tax rises (which seem inevitable whoever wins the election) could harm inward investment in the UK (especially if they are targeted at London or the finance sector), while the question of UK membership of the EU (if David Cameron remains as Prime Minister) is also likely to cause delayed investment spending by global companies in the UK.

Furthermore, there is likely to be a deflationary period ahead and, while this is expected to be a temporary phenomenon, history tells us that deflation can be a challenging problem to remedy. And, with household debt levels remaining relatively high, any increase in interest rates during the next five years could hurt disposable incomes and send the UK economy back to a lower growth rate.

A Period Of Opportunity

Despite these potential challenges, the UK economy is certainly in a much stronger position now than it was in 2010. The banking sector has largely recapitalised, consumer confidence is on the up, and asset prices are at or near all-time highs. And, looking ahead, there remain a number of opportunities for you to improve the outlook for your finances, with the stock market continuing to offer excellent growth potential, income prospects, and valuations compared to other asset classes.

And, with a sizeable chunk of the FTSE 100’s earnings being derived from outside of the UK, the clouds on the UK economic horizon may not be enough to stop the FTSE 100 from reaching even higher highs.

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