This year, whilst the economic news may have recently been encouraging, there are dark clouds on the horizon and they may have implications for Britain too.
In both Britain and America, the last five years of financial austerity has seen a great deal of economic pain for the squeezed middle and the working poor.
The boom of the late 1990’s and 2000s created huge debts and deficits that needed to be repaid and massive distortions in housing and financial markets which we are still feeling the after effects of now.
One of the encouraging things to emerge from all this economic hardship has been record growth from 2012 onwards on both sides of the Atlantic, giving rise to hopes that in Britain and America, our two heavily interlinked economies were both turning a corner.
These hopes might be premature in America’s case; in the first quarter of 2014 US GDP actually shrank, despite the 4.1 percent increase in output in the last quarter of 2013. Some onlookers have blamed the extremely harsh winter that America endured at the end of 2013, causing a downturn in consumer spending and an increased caution in US businesses in investment.
The old adage that when America sneezes, the rest of the world catches a cold is to some extent true, but to extend the analogy to breaking point, it really does depend on the health of other countries in the first place. The winter chills that have brought on America’s sneezing might not yet lead to a world pandemic.
Any downturn in the US, however temporary, will obviously impact on British exports to America and the relative value of the pound, but the economic ‘pain’ that the British economy has gone through in the last five years should have left it better able to weather financial shocks.
In the past five years Britain has undergone an enormous structural adjustment in her labor market, a reduced state sector and a surge in unemployment have been addressed (for better or worse) by a huge increase in freelance and zero hours employment.
Not all of these new jobs involve stacking the shelves in ASDA, and the fact that representatives of the new booming digital industries were recently invited to Buckingham Palace to meet the Queen gives a clue as to their new importance to Britain.
If there is any short term transmission of America’s problems it is unlikely to affect the British economy directly, but that does not mean that UK investors have no reason to be cautious.
In the short term, it is worth looking at the funds, shares and bonds you might hold in an investment portfolio to see what is directly issued by or related to the US economy.
If your fund has invested in US property, for example, or owns a portion of government debt, or is involved in higher risk ventures such as technology then it is worth considering in the next six months how much risk you wish to be exposed to.
All pundits seem to agree that the downturn is likely to be relatively short term and will correct itself later in the year, so if you are investing for the long haul (as most prudent investors tend to be), then it might be worth allowing your portfolio to take a temporary hit and to focus on the next quarter’s figures.